The defining transformation of the 21st century will be the shift of global trade from goods to services.
For most of the past five decades, trade in goods between countries has been the chassis of globalisation, the benchmark of economic competency where the rules were written by the manufacturing powers of the West, and absorbed by the developing countries. In 2016, total trade in all goods (e.g. machinery, chemicals, electronics, agri-produce, and crude oil) stood at $16 trillion.[1]
But now, riding on this growth in goods, is the extra-ordinary rise of trade in services. The most recognisable example is the outsourcing of business processing to India or the software development exports from India. This form of trade, $5 trillion in 2016, is already 25% of the global trade. If the service components of goods such as research, design and delivery are included, global services trade is 45%[2].
For business – especially Indian business which has been a laggard in goods trade -services is a vital new, competitive avenue to global trade. Services already account for around 25% of India’s trade, and is a major, if not dominant, share of the economies of most developing countries and emerging markets whose primary resource is human capital.
According to the WTO’s General Agreement on Trade in Services (GATS), 1994, which is the global framework for services, there are 12 categories of services that are tradable. These include financial services, telecom services, professional services such as legal, accounting and engineering, and less-known sectors such as education, healthcare, logistics, transport and retail.
A key distinction between trade in good and trade in service is that the service can be delivered in multiple ways by the supplier to the consumer. The WTO recognises four approaches. TMode 1: Cross-Border Supply (e.g. software export for use abroad) Mode 2: Consumption abroad (e.g. consumption by tourists abroad) Mode 3: Commercial Presence (e.g. McDonalds), and Mode 4: Presence of Natural Persons (e.g. Boeing repair engineers in India to service planes).
Of the $108.5 billion of India’s total trade in software services, cross-border supply of services from India to other countries (Mode 1) accounts for 65% of the trade[3]. Therefore, barriers to Mode 1 are particularly detrimental to India for receiving off-shored work. A necessary requirement for processing work off-shored to India is the transfer of data. This explains India’s hectic lobbying with the EU to secure “data adequate” status which is required for European companies to outsource work to India.
Trade in services through the presence of commercial presence abroad (Mode 3) is also becoming important for India as its own companies expand overseas (e.g. Pharmaceutical: Ranbaxy, Dr. Reddy, Technology: Infosys, TCS, Tech Mahindra, etc.). The US and UK accounted for 64.6% and 9.2% respectively of the India’s service exports provided through foreign affiliates. For developed countries, this form of services trade accounts for 60%[4] of services trade for developed countries. The retail, hospitality, construction and healthcare industries typically require a commercial presence via a subsidiary, branch office or joint venture in the foreign country as their services cannot often be provided from a remote location. This is also the reason why some countries are pushing for “investment facilitation” to be included in free trade agreements.
Since a service cannot be monitored or measured before it is consumed (an intangible delivered directly to the consumer), the only option is to enforce regulations on the service providers and on the quality of the services itself.
Therefore, regulators become key stakeholders in enabling trade in services. In India and globally, financial regulators are the most endowed and experienced in managing cross-border interactions (e.g. foreign bank licensing requirements, foreign investment limits). Telecomm regulators are also empowered domestically but have a limited history of foreign engagement.
The remaining sectors that are covered under trade in services lack regulators and currently depend on industry standards (e.g. Accounting – International Accounting Standards Board). Some simply depend on national industry associations to represent their views (e.g. IT/BPO). This has to change.
India must look beyond the one-dimensional battle for H1-B visas for software exports to be a truly competitive force in the new era of trade in services. It is necessary for new domestic regulatory bodies to be established and empowered to prepare for the practice of “regulatory diplomacy” that is required for all the services sectors.
Globally, India is party to GATS but remains side-lined by some of the newer trade agreements on services because our requirements and limited capacity to negotiate is considered a hindrance by the established trading powers. The most advanced plurilateral agreement, the Trade in Services Agreement (TiSA), launched in 2013, only includes developed countries. The impetus for TiSA came from the eroding competence of developed countries as goods export giants. It was also fuelled with slow progress with Doha Development Round at the WTO and hectic lobbying from services-based industry chambers such as the Global Service Coalition that demanded legally binding commitments from governments for free trade in services.
What handicaps negotiations for trade in services acute lack of data, particularly by partner country or by company. Even where data by partner country is available, it does not accurately reflect the “ultimate” source or destination country or company. No global database effectively captures this.
A joint committee of the UN, Eurostat, IMF, OECD, UNCTAD, World Tourism Organisation and WTO have published the Manual on Statistics of International Trade in Services 2010 (MSITS 2010) to establish a new framework for measuring trade in services. It calls for measuring the value of trade in services by extrapolating data from two sources – the balance-of-payments data (for Mode 1, 2 and 4), and an annual survey (for Mode 3) – both managed by central banks. But both approaches have limitations.
When the services trade first became popular in the public domain, there was hope that manufacturing giants such as the US, EU, Japan, and China will give way to service economies such as India to set the global trade agenda. But this has not happened.
India has tabled its own proposal at the WTO, the Trade Facilitation Agreement (TFA) in services, and has aggressively pursued services trade negotiations with ASEAN, Japan, South Korea, Malaysia and Singapore.
Yet, to establish India as a formidable services exporter, we first need to develop a better understanding of how services are traded, measured, and regulated.
Akshay Mathur is former Director, Research and Analysis & Fellow, Geoeconomic Studies, Gateway House.
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References
[1] World Trade Organization, World Trade Statistical Review 2016, (Geneva: World Trade Organization, 2016), <https://www.wto.org/english/res_e/statis_e/wts2016_e/wts2016_e.pdf>
[2] Suave, Pierre and Martin Roy, eds., Research Handbook on Trade in Services, (Cheltenham: Edward Elgar Publishing, 2016), pg. 26.
[3] Reserve Bank of India, Survey on Computer Software & Information Technology Enabled Services (ITES) Exports: 2015-16, (Mumbai: Reserve Bank of India, 2016), <https://m.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=16565>
[4] Facilitating Trade in Services: Mode 3 considerations, Workshop on Trade Facilitation in Services, Delhi, 23-24 March 2017, Pierre Sauvé, Trade and Competitiveness Global Practice, World Bank Group