Empirical analysis reveals that the costs of services trade barriers are high, and largely exceed the average tariff on traded goods. In the case of services trade directly across borders, for example, regulatory barriers impose trade costs that can be up to 60% of the total trade value for communication and transport services and 250% for financial services. Regulatory barriers also affect services supplied through foreign affiliates established abroad, with effects of a similar magnitude as those for cross-border services trade. This shows an important economic potential for advancing multilateral, plurilateral and unilateral services trade liberalisation.
Services trade in the global economy
Open markets and pro-competitive reforms in services have the potential to improve business dynamism, to foster competition, and to boost the attractiveness of foreign direct investment. Yet services trade face barriers that can adversely affect trade with significant economic consequences for domestic firms and consumers.
Key messages
Fewer barriers contribute to raising services trade flows with benefits increasing over time. For example, average services reforms (in the magnitude of a 0.05 point reduction in the OECD STRI) are associated with services trade growth of up to 10% in the short term, and 20% to 50% in the medium to long term. Designing ambitious reforms with a long-term perspective is therefore important if the benefits of such reforms are to be felt across the economy.
Lowering trade barriers in upstream services sectors can also have a positive effect on the economic performance across the global supply chain. For example, ambitious reforms in air transport – the most restrictive sector across countries – could increase downstream manufacturing productivity by 8.4% on average across manufacturing industries. In telecommunications services – a sector that is fundamental to the well-functioning of the digital economy – productivity could improve by 6.5% on average.
Improving the integration of services into the global economy creates fresh opportunities for small- and medium-sized enterprises (SMEs) to expand their customer base in new markets. The challenges of navigating regulatory obstacles and adhering to different regulations in each market can, however, disproportionately impact smaller and less-experienced exporters who lack the resources to adjust production methods and thus ensure compliance.
The costs of dealing with divergent regulations in different markets can amount to an additional tariff of up to 14% on SME exports when compared to larger competitors with bigger resources to absorb additional trade costs. As such, reducing the costs of services market entry would primarily benefit SMEs, and support the creation of new jobs.
Context
The road to lowering trade costs
It is common to quantify the effects of trade policies by converting indicators such as the STRI into ad valorem trade cost equivalents. In simpler terms, this means estimating the level of a tariff-like measure that would have a comparable impact on trade as a restriction. Ad valorem equivalents are expressed as a percentage of the value of services provided abroad and provide an easy way to understand the quantification of restrictiveness.
The chart below presents the trade costs implications of a hypothetical scenario where countries would reduce their STRI index by half compared to the best performer in each sector. It shows that benefits would accrue across all countries, but would be highest in emerging market economies. The average trade costs reductions for OECD countries are estimated at -13%, and for non-OECD economies the benefits would be in the range of a -17% reduction on average.
Opening up of services markets is important to reduce trade costs, but attention should be given to reviewing sectoral regulations as well as the efficiency of administrative and licensing procedures to ensure these do not place an undue burden on new competitors.
Services and employment
Close to three out of four workers are employed in the services sector in OECD countries, underscoring the importance of service trade policies for income and job creation.
The capacity to tap into foreign demand enables companies to increase their sales. As services exporters scale up production, their demand for workers grows. OECD research shows that growth in services exports is linked to a reduced risk of job losses, and as such renewed efforts to dismantle barriers would likely result in economic benefits for workers.
Skills play a pivotal role in the delivery of services. Improving the availability of training programmes and aligning curricula with the needs of exporters are therefore important for workers if they are to switch to sectors where there is employment growth. Active labour market policies that support matching employers with skilled employees, and policies that promote the inclusion of women can also boost the resilience of labour markets.
Related data
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