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Aruba, July 3, 2015 - Emerging and developed markets alike can only get so much out of manufacturing.U.S. President Barack Obama lobbied hard for the authority to negotiate trade pacts that could not later be altered by U.S. Congress, and now he has his desired trade-promotion authority. As a result, the Trans-Pacific Partnership (TPP), a proposed treaty among 12 Pacific nations, is within reach. There are hopes that the Transatlantic Trade and Investment Partnership (TTIP) currently being negotiated between the U.S. and the European Union might follow soon.
If these two trade pacts are passed, trade in services will be one of the main beneficiaries, boosting economic growth in both developed and emerging countries. Projections from the Peterson Institute, for instance, suggest global trade could go up by nearly $500 billion, with $300 billion added to incomes.
While tariff reduction on goods was the main focus of trade deals in the 20th century, the new generation of pacts address “behind the border” obstacles such as restrictive or biased procurement policies, arcane investment rules and weak intellectual-property protection—all of which stand as barriers to trade in services.
According to the World Bank, such barriers remain widespread in many developed countries but are especially cumbersome in emerging markets. If they could be removed, trade in services could soar. The Peterson Institute believes U.S. service exports could more than double over time, especially if the TPP is expanded to include more nations. Which is why developed countries, increasingly reliant on services exports, are so anxious to address them.
There are benefits for emerging markets, too. So much of their manufacturing, especially low-wage manufacturing, adds little value and is under threat from automation and robotics. Services trade is central to economic progress, particularly when countries reach middle-income status, as China is doing now. Moving up the value chain sometimes means developing specialist manufacturing, but more often it means a greater focus on services such as design, brand development and improving sales services.
The importance of services trade is often underestimated. By conventional measures, services are less than 20% of exports globally. But when trade is measured in value-added terms, services account for 45%, which is more than trade in manufacturing (37%), with the remainder being raw materials and foodstuffs.
Services are also becoming more tradable in their own right as the cost of digital technology continues to come down, making it easier to export such services as business-process outsourcing, medical diagnostics or education. The TPP is the first free-trade agreement to include a separate chapter on e-commerce.
With a rise in services trade, productivity and growth in emerging as well as developed markets could see a boost.
The initial flurry of business-process outsourcing around the turn of the millennium was driven by plummeting telephony costs and the proliferation of the Internet. India has been the biggest beneficiary of this trend, and many other countries have followed its example, including Morocco, the Philippines, South Africa and Tunisia.
The new wave of digital technology, based on broadband and mobile, is giving outsourcing another lift and extending it into new areas. Video conferencing and virtual reality can help people feel like they’re interacting in the same space. Computer translation is another technology—still rudimentary, but improving rapidly—that will be important as it gains ground.
It’s not hard to see why services trade is high on everyone’s agenda.
While global manufacturing supply chains are under threat from rising wages in China and—in the longer term—from automation and technology such as 3-D printing, services trade is likely to become increasingly important, which is good news for the global economy.
The World Bank has drawn a connection between trade in services and higher wages, as well as a larger reduction in poverty compared to manufacturing. And service companies require less investment, making them easier to establish.
Many countries understand this, which is why promoting services and service exports has become a priority for so many. There’s a lot more focus on creating a business environment in which services can flourish—and more momentum behind trade deals like TPP and TTIP.
The path to a strong service sector requires infrastructure, such as reliable electricity and broadband, and also benefits from a well-educated population, with an emphasis on creativity. Promoting trade in services, to help generate competition and higher productivity, requires strong protection for intellectual property and a reduction in the favoritism often shown to state-owned enterprises or companies connected to the state.
TPP and TTIP can help pave the way by introducing new international rules in these areas.
And if the trade deals can be agreed to and ratified, they are likely to be the model for future agreements, expanding membership and giving the world another shot at trade-led growth.