Services are becoming increasingly important in global trade. This column shows that strong growth in services trade was driven by a decline in non-tariff trade barriers amid technological progress that enabled a growing share of services to be delivered remotely. This trend has boosted euro area services exports more than those of other regions, reflecting that the euro area appears to effectively adopt communication technologies that facilitate the digital delivery of services abroad. The euro area is also the global leader in exports of information and communication technology services but has in recent years started to lose ground to international competitors.
Over the past decade, global trade in services has grown significantly faster than trade in manufacturing goods as technological progress has allowed for an increasing share of services to be delivered and consumed in a different location than their origin. Trade in services is hence seen as the key driver of a further evolution of globalisation (Lund and Bughin 2019, Baldwin et al. 2024). Non-tariff barriers to services trade are expected to continue to decline at an even faster pace in the future, largely driven by improvements in remote communication technologies, advanced machine translation, a wider use of platforms connecting freelancers with clients online and an increasing number of broadband subscriptions. The WTO projects trade costs for most services sub-sectors to decline by more than 40% until 2040 (World Trade Report 2019).
While exports in some services sub-sectors are likely not benefitting from the decline in non-tariff trade barriers, a substantial share of total euro area services exports are in sub-sectors that can potentially be delivered remotely. Other business services are accounting for the largest share of total euro area services exports (25%), followed by ICT (21%), transportation (14%) and travel (13%).
There have been increasing concerns that Europe may not be well placed to take advantage of the efficiency gains brought about by ICT meaning that it will fall behind in the provision of the fastest growing services sectors (see, for example, Draghi 2024 and Schnabel 2024). With services already now accounting for around one third of euro area exports and its manufacturing sector losing ground to international competitors (e.g. Altieri et al. 2024), services are becoming increasingly important for the future of the euro area’s competitiveness. In this column, we quantify the role that declining non-tariff trade barriers have been playing for the strong growth in services trade and assess its implications for euro area competitiveness.
The reduction in non-tariff barriers to services trade
We use a gravity model to estimate the effects of changes in services trade costs that often take hard-to-measure forms such as restrictions on cross-border data transfers or visa conditions for contractual services suppliers. Gravity models assume that the level of trade between two countries is determined by their economic mass and relative trade frictions, which can be a function of both tariff and non-tariff barriers to trade.
We identify non-tariff barriers by estimating the effects of international borders and distance on bilateral trade flows. We allow for time-varying and exporter-specific coefficients and track their evolution from 2012 to 2019 for 62 countries. To control for tariff barriers, the regressions include importer-exporter fixed effects, a dummy variable for intra-EU trade and preferential trade agreements. We also control for exporter-time and importer-time fixed effects that capture a variety of country-specific factors such as macroeconomic shocks, business cycle fluctuations and divergent productivity dynamics as well as inflation across source and destination countries. The inclusion of these fixed effects allows to derive estimates of the effect of trade costs on services trade volumes, which would hardly be feasible with other approaches due to the sparsity of data on services trade prices.
To quantify the importance of changes in non-tariff barriers for the growth in services exports, we simulate exports in a counterfactual scenario in which the coefficients on international borders and distance are held constant at their 2012 level. We translate partial into general equilibrium effects that are consistent with a wide variety of trade models (Allen et al. 2020). For comparison, we estimate the same gravity model for trade in manufacturing goods.
The results suggest that the decline in non-tariff barriers can explain the increase in services trade. In the counterfactual scenario in which non-tariff barriers of all bilateral trade flows remained at their 2012 level, services exports would have stagnated, both in the euro area and globally (Figure 1, Panel A). The results are primarily driven by changes in the estimated impact of distance, rather than by changing effects of international borders. The findings are in line with the notion that technological progress has allowed for an increasing share of services to be delivered and consumed in a different location than their origin, making them more tradable across space. Most of the long-run trend in manufacturing goods exports, in contrast, cannot be explained by changes in non-tariff barriers (Figure 1, Panel B).
Figure 1 The effects of non-tariff trade barriers on exports – euro area (solid lines) and global (dashed lines)
Notes: Index 2012 = 100. The solid lines refer to extra-euro area exports and dashed lines to global exports, with the left panel showing services and the right panel showing goods trade. Global services exports exclude intra-euro area exports but include extra-euro area exports. The red lines show the estimated counterfactuals in which non-tariff barriers of all bilateral trade flows stay at their 2012 level.
Sources: WTO, ADB, Eurostat, TDM and ECB staff calculations.
Data across sub-sectors support the finding that reductions in non-tariff trade barriers are important to understand developments in services trade. The OECD statistical office provides a classification of services exports into those that can be delivered remotely (such as management consulting, financial services and insurance) and those that cannot be delivered remotely (such as transport services and construction). Services exports in remotely deliverable sub-sectors have grown more strongly than exports in other sub-sectors, accounting in 2021 for 48% of euro area services exports (compared to 30% in 2012) and for 61% of global services exports (compared to 47% in 2012).
Euro area competitiveness
The euro area is highly competitive in services. Its global export market share has been stable above 20%, surpassing all international competitors, including the US and the UK. Indeed, while the euro area has lost market shares in goods trade, it has gained shares in global markets for services (Figure 2, Panel A).
Compared to international competitors, the euro area has benefitted more strongly from the decline in barriers to services trade. The increasing tradability of services appears to have boosted euro area exports more than exports of other regions, suggesting that the euro area effectively adopts communication technologies that facilitate the digital delivery of services abroad. In the absence of global changes in non-tariff barriers from 2012 to 2019, the euro area’s global export market share in services would stand in 2019 at less than 20%, 3 percentage points lower than in the data (Figure 2, Panel B).
Figure 2 Global export market shares in services
Notes: Percentages. The blue lines depicted in Panel A refer to extra-euro area export market shares in services (solid), services excluding Ireland’s ICT exports (dotted) and manufacturing goods excluding energy (dashed). The blue line shown in Panel B refers to the observed extra-euro area export market share in services. The solid red line shows the estimated counterfactual in which non-tariff barriers of all bilateral trade flows stay at their 2012 level. The dashed red line refers to the counterfactual in which non-tariff barriers of all countries stay at their 2012 level, while non-tariff barriers of Ireland change as in the data.
Sources: WTO, ADB, ECB (Balance of Payments), WEO and ECB staff calculations.
Many economists and policymakers have expressed concerns of Europe not being able to take advantage of the rising global demand for digital technologies, highlighting a productivity gap with international competitors (see, for example, Caffarra and Lane 2024, Draghi 2024, and Schnabel 2024). Such gap has only in recent years started to become evident in data on global exports of ICT services. The euro area is the global leader in ICT services and had expanded its global export market share even further, before it started to lose ground to international competitors in 2022 and 2023, the most recent data points (Figure 3).
Figure 3 Global ICT export market shares
Notes: Percentages. The blue lines refer to extra-euro area export market shares.
Sources: World Bank, ECB (Balance of Payments) and ECB staff calculations.
Yet, the euro area’s performance in global markets for services is largely affected by Ireland: euro area ICT exports excluding Ireland have increased significantly less than global ICT trade – reflected in a declining export market share of the euro area excluding Ireland (Figure 3). ICT exports of Ireland have also contributed largely to the euro area’s increase in global export market shares of total services (Figure 2, Panel A). Ireland stands out as a country in which activities of multinational enterprises, potentially related to the relocation of intellectual property products, have visible impacts on euro area GDP and its components (see Andersson et al. 2023). Yet, the empirical results are not driven by Ireland (Figure 2, Panel B), suggesting that the euro area’s competitiveness gain from the decline in non-tariff barriers was not due to the activities of multinational enterprises.
Looking ahead, there are indeed challenges to the euro area’s competitiveness in services trade. The euro area seems to be benefitting from the decline in non-tariff barriers to services trade but its innovation activity in the fastest growing sectors lags international competitors. According to the 2024 EU Industrial R&D Investment Scoreboard, US firms accounted in 2023 for 70% of global R&D spending in ICT performed by the business sector, while euro area firms accounted for only 7%. In terms of telecommunication services, the euro area outperformed the US, but the euro area lags badly in computer services and software. This lag in innovation may reflect dependencies on technologies of foreign suppliers that are essential for the digitalisation of the economy. Moving forward, closing the gap in R&D spending and fostering innovation will be key for the euro area to avoid strategic dependencies and to remain competitive, by taking advantage of the global shift toward services trade and capitalising on advancements in digital technologies.
Source : VOXeu
