Chapter 4. Services trade and policy supports inclusive growth
Chapter 4 provides a policy-oriented overview of the main findings set out in previous chapters, providing targeted recommendations on how co-ordinated government-wide strategies to improve services trade policies and regulatory frameworks can support inclusive economic growth, competitiveness, productivity and employment.
The ongoing structural transformation towards a services economy, across all countries and at all levels of development, has immense potential to improve well-being. This book synthesises the recent work of the OECD Trade and Agriculture Directorate to analyse services trade policies and to quantify their impacts on trade in goods and services, the performance of the goods and services sectors in the global economy, and how services trade restrictions influence the decisions and outcomes of firms engaged in international markets.
The complexity and dynamism of commercial activity in the 21st century has engendered a myriad of interlinkages across services sectors and the economy as a whole. Telecommunications, audio-visual and computer services constitute a digital network of services at the heart of the world trading system. Transportation, courier, logistics and distribution services form the backbone of global supply chains. Legal, accounting, insurance and banking services are essential enablers of trade and finance. Architectural, engineering and construction services are a fundamental foundation of physical infrastructure. Often, trade and regulatory policy in these individual services sectors are made with limited regard for economy-wide impacts.
In this context, the policy conclusions described below, and in preceding chapters, support the recommendation that national governments consider adopting whole-of-government strategies to capitalise on the demonstrated potential of co-ordinated services trade policy and regulatory reforms. The OECD Services Trade Restrictiveness Index (STRI), database and online policy tools provide comprehensive and comparable data and benchmarks relative to global best practices that can facilitate such efforts.
Open service markets are the gateway to global value chains
Open and well-regulated services markets ensure access to information, skills, technology, funding and markets in a modern, increasingly digital economy. For example, intermediate services inputs provide essential links in value chains. They move parts and components to the assembly line and final products to the end users; they design, engineer and innovate; they monitor demand and consumer tastes, and transmit such information to the product developers; they provide funding and insurance; and they facilitate compliance with laws and regulations in all the markets where the product is sold, to mention but a few functions. Depending on the position in the value chain, intermediate services help reduce costs, improve quality and match suppliers and customers around the world, as indicated in Figure 4.1.
Just as relative abundance of skilled labour is the basis for comparative advantage in skill-intensive sectors, a rich services supplier base forms the foundation for comparative advantage in services-intensive industries. The most services-intensive sectors also tend to be high-technology sectors. Moving up the value chain, therefore, depends on the presence of a local business services sector that is open to ideas, skills and investment from cutting edge firms wherever they may be found.
A competitive distribution sector is an important channel whereby firms, including SMEs, reach consumers. Reforms in this sector, particularly in emerging and developing countries, could help stimulate entrepreneurship in a host of goods-producing sectors including agriculture, and in addition benefit consumers.
Services reforms boost SMEs
Regulatory restrictions to services trade disproportionately discourage small firms and newer firms without export experience from competing in a market. These findings suggest that barriers to trade in services entrench the market shares not only of domestic firms, but even of large incumbent exporters. Deeper pockets, in-house legal expertise, broader existing networks of business partners at home and abroad, and the benefits of scale to absorb overhead costs are many reasons why larger firms are better equipped to succeed in complex and challenging regulatory environments.
Further evidence of this is the observation that the costs of services trade restrictions are generally lower for foreign-owned firms when exporting back to the home country of their multinational parent. This suggests that familiarity with the regulatory requirements of a market gives a decisive head start in dealing with restrictions, and that improving transparency would be a beneficial step towards reducing the costs associated with burdensome services regulations.
There are enough examples of services SMEs entering global markets, being “born global”, to inspire and to initiate policy responses to promote such activities. Nevertheless, the broad picture reveals that global SMEs are relatively rare. Most services-exporting firms, regardless of size, export sporadically to one or a few countries and most export relationships last for only a year or two. The lack of persistence of SMEs in international markets suggests that complying with regulation in unfamiliar markets, cultures and languages may overwhelm them.
The high rate of sporadic exports suggests that the difficulty with exports may not be so much the entry into foreign markets as establishing a customer base there. The root of the problem seems to be a declining rate of start-ups in the local economy in most OECD countries combined with obstacles to gaining scale in foreign markets. This raises complex policy issues for governments that aim to reconcile high standards of safety and consumer protection with encouraging SMEs to take benefit of the opportunities that technology and trade liberalisation have created for entering international markets. A significant rate of failure is inevitable when taking risks in an uncertain environment. Therefore, markets for venture capital are needed and any government program supporting SMEs’ internationalisation must deal with failures as a normal part of taking risks rather than as a failure of the program. Having said that, governments also need to identify the market failure as well as the policy options to address market distortions and evaluate the costs and benefits of taking action.
It is clear that the cost of services trade restrictions falls disproportionally on SMEs because of the high fixed-cost component. Therefore, lowering the regulatory burden where feasible would be more effective in making globalisation work for all. In addition, regulatory cooperation to minimise duplication of compliance costs and better use of technology to ease the burden of administrative procedures would also help SMEs. Exports are not an objective in itself, but in cases where opportunities in the home market are small they may represent an attractive strategy for successful start-ups to expand and gain scale quickly.
Regulatory co-operation reduces trade frictions
Regulatory heterogeneity has a negative impact on services trade flows, over and above the impact of services trade restrictions. Conversely, countries trade more with partners that have similar regulation. The trade effect of regulatory heterogeneity is higher the less trade restrictive the countries are: harmonising at a low level of restrictiveness is associated with a large boost to services trade, whereas harmonising at higher levels of restrictions would not produce any benefits. Trade agreements are likely to have the largest effect on trade when i) the parties are relatively similar in terms of approaches to regulation and the regulatory framework, ii) the first step is to reduce the level of trade restrictiveness, iii) reducing the level of restrictions goes hand in hand with forward-looking regulatory cooperation, iv) regulatory cooperation becomes more prominent as the level of trade-restricting regulations comes down, and v) regulatory cooperation successfully eliminates duplication of regulatory compliance costs for exporters.
Movement of people is part of trade in services and trade agreements
Movement of people may not account for a large share of services trade, but it is still essential for international business operations. Mobility of natural persons across international borders is crucial, particularly for trade in business services, which in turn is an important channel for knowledge transfer. In addition, OECD analysis shows that restrictions on the movement of people are negatively associated with foreign affiliate sales.
To attract foreign services multinationals, countries need to liberalise rules governing the movement of people for the purpose of providing a service on a temporary basis. Business travel could be facilitated through effective and inexpensive visa processing facilities such as electronic visas. Flexible arrangements such as temporary licensing of professionals for specific tasks or shorter time periods would also help in areas where licenses are needed. International trade agreements like the General Agreement on Trade in Services (GATS) have provisions for the movement of natural persons providing services, as a category distinct from migrants and job seekers. Few countries make that distinction in the migration laws and regulation, however.
The digital economy depends on services, and brings new services to global markets
Telecommunications are not only crucial for the co-ordination and synchronisation of manufacturing supply chains. Broadband also constitutes the infrastructure that makes knowledge-intensive business services tradeable, facilitating knowledge transfers across borders. OECD analysis shows that liberalisation and pro-competitive reforms in the telecommunications sector are associated with a substantial reduction in the trade costs for business services. Furthermore, the services that gain the most from access to better and less costly telecommunications networks are specialised, high-end or customised services.
High-capacity networks at competitive prices are a necessary but not sufficient condition for a digital transformation of knowledge-intensive services. Access to the professions and the services they provide is also essential. Licensing by self-regulated bodies creates entry barriers, limits supply and raises prices of the regulated professions. Furthermore, since qualification requirements differ across countries, states and territories, mutual recognition agreements can be complex to negotiate and even more difficult to enforce. The recent agreement between the European Union and Canada (CETA), for example, includes a framework for regulatory bodies to negotiate mutual recognition agreements for professions that are “regulated in each Party, including in all or some Member States of the European Union and in all or some provinces and territories of Canada [article 11.2]”. Thus, despite the existence of a comprehensive trade agreement, there are still potential hurdles to overcome before professionals can provide their services across the CETA membership.
Digitisation and standardisation of tasks are rapidly eating into the reserved areas of licenced professionals. To ensure that manufacturers and SMEs everywhere have access to knowledge-intensive professional services, there is a need to review which activities need to be licensed, whether licencing could be vested with an independent body, and deepening international regulatory co-operation. Examples of such co-operation are international accounting standards and the APEC agreement recognising “substantial equivalence” of professional competence in engineering. For the market for knowledge-intensive services to function properly, professionals must be allowed to deploy staff to their clients as needed and to accumulate, transfer, store and analyse data to help clients in the most cost-effective way.
Open and well-regulated services markets support inclusive growth
A deeper understanding of the role of services trade and policy in national economies and the global trading system is particularly important at a time of uncertainty regarding the role of globalisation and technology in the context of growing income and wealth inequality. Widening income inequality is to a larger or lesser degree observed universally, but countries differ substantially in their ability to make growth inclusive.
In the long run, the main source of economic growth is technological progress. The ongoing ICT technology revolution goes hand in hand with openness to trade, investment, information and ideas, and one would not be possible without the other. Thus, technological development and globalisation are two sides of the same coin. Technological development relies on global access to knowledge and to the networks, goods and services that carry the knowledge around the world. Furthermore, the scale that open markets offer often enhances the returns to innovation. Conversely, technology has brought down trade and transaction costs substantially, in many cases more than the liberalisation of policy-induced barriers to trade.
The ICT technology/globalisation nexus, like technological revolutions before it spurs on new business models and products. In this context, education reforms are essential for better matching of workers with jobs. Adult education and training, as well as giving more space for entrepreneurship training in vocational education, are important elements of such reforms (OECD, 2016). Finally, well-designed basic safety nets such as health, pensions and unemployment insurance improve labour mobility and encourage entrepreneurship. With such safety nets in place, restructuring of firms, changing jobs and starting a business all become more attractive and less risky.
References
OECD (2013), “OECD guidelines on the protection of privacy and transborder flows of personal data”, www.oecd.org/sti/ieconomy/oecdguidelinesontheprotectionofprivacyandtransborderflowsofpersonaldata.htm.
OECD (2016), Skills matter: Further results from the survey of adult skills, OECD Skills Studies, OECD Publishing, Paris, www.oecd.org/skills/piaac/skills-matter-9789264258051-en.htm.