Despite the growing importance of services in the global economy, Europe’s trade cooperation with Africa is almost exclusively focused on commodities and other primary goods. Services – which range from banking and insurance to transport – are largely missing from Europe’s trade and development cooperation agenda with Africa. Yet the services sector has outstripped the primary and secondary sectors in their contribution to African output, making up more than half of the continent’s gross domestic product (GDP). The rapid expansion of information and communication technology (ICT) and the digital economy, the ‘servicification’ of manufacturing, and the cross-border fragmentation of production processes make trade in services more important than ever before for industrialisation and integration processes.

Services not only enhance participation in trade and global supply chains, they also contribute to more equal and diversified growth. More women, young people, and micro enterprises operate in the services sector than in agriculture or manufacturing. Expanding opportunities in services is therefore particularly important for creating more inclusive employment. The high costs of energy, transport, logistics, and other backbone services across Africa make the production of goods and services expensive, impeding the competitiveness of firms across all sectors. Trade in services is a powerful tool to increase the efficiency and reliability of services, which in turn brings down production costs across the economy and facilitates diversification – and its importance goes beyond trade to offer possibilities for structural transformation.

A stronger services trade between the European Union and Africa would allow European multinationals to near-shore their production processes and diversify away from Asia-focused supply networks. As barriers to trade in services are embedded in domestic regulations, trade agreements covering services entail a degree of cooperation and shared understanding. Improved trade in services would also allow the EU to influence regulatory models across various sectors. China and other non-Western powers wield significant economic influence in Africa, which they can use to shape regulatory processes and influence standards in their favour. Faced with geopolitical competition with China, the EU should be wary of this influence. In this regard, trade cooperation on services could be a powerful means for the EU to nurture a shared understanding with African countries on economic, environmental, digital, and social goals.

No modern trade partnership can exclude services, which are central to the value of what businesses trade. While the so-called first-generation free trade agreements reached in the 1970s and 1980s only liberalised and addressed standards in the goods trade, services became an integral part of the ‘new generation’ agreements that emerged in the mid-1990s. These new agreements included goals for so-called deep integration, which covers a variety of issues beyond tariffs, including services, investment, competition, intellectual property rights, environmental standards, and other domestic policies that affect international competitiveness. More than 90 per cent of all free trade agreements signed in the 21^st century cover services, making it the most widespread area of deep integration.

The 2018 African Continental Free Trade Area (AfCFTA) agreement includes a protocol on trade in services, which aims to liberalise services markets and improve their domestic regulation. The agreement provides an unprecedented opportunity for African countries to strengthen their domestic regulations to support more open and efficient services markets. It also offers an occasion for the EU to encourage intra-regional trade by supporting the AfCFTA negotiations, and to build on the agreement to create new opportunities for diversifying EU-Africa trade.

This paper explores the implications of cooperation on trade in services for the Europe-Africa relationship. The first section sets out the complex nature of the services trade and addresses misconceptions around it. The second section analyses the importance of the services trade for the industrialisation and integration objectives set out in the African Union’s (AU) Agenda 2063. The third section discusses the EU-Africa trade relationship, including the benefits for Europe of a more efficient African services sector and the existing obstacles and policy frameworks that govern services trade between the EU and Africa. The fourth section explains how the AfCFTA offers new opportunities for promoting more open and effective regulation of services markets. The paper concludes with recommendations for how Europe and Africa can enhance their cooperation on trade in services.

To read the full policy brief, please click here. 

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Services constitute at least a quarter of total trade. Between 2009 and 2019 global services trade increased by nearly 50%, compared to 18% for goods trade. Yet it is rarely taken as seriously as goods in global trade policy discourse. This is a problem when making the case for trade.

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While global trade as a fraction of GDP may have peaked, trade in goods and services will continue to provide a substantial source of economic growth and welfare gains for both developed and developing countries in the years ahead. The research by Lewis et al. highlights the importance of structural change in influencing global openness, a factor that has been little studied in the literature thus far. The authors provide the important finding that the reduction in openness that has occurred since the global recession of 2008 can be attributed in part to ongoing structural change and the difficulty in reducing trade costs of goods further. Given their findings, the leveling off of global openness seen in the data does not necessarily point to increased trade protectionism.

To read the full report from the U.S. Federal Reserve Bank of Chicago, please click here.

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As new global supply chains are being constructed, this time for services, tasks are being divided more finely, opening new entry points for poorer countries’ services exports. Digitally enabled services are stabilizing global production networks, helping offset the reshoring thrust, and rejuvenating traditional exports across agriculture, fisheries, handicrafts, and tourism, including through better matching of sellers and buyers and finance access provision. New trade opportunities are emerging for developing and advanced economies alike.

Digitally enabled trade (henceforth “e-commerce”) has become the major global trade growth story. As the digital age takes hold, services (already dominant in most domestic economies) are growing in importance in international trade, both in their own right and as a support to trade in goods. Digitalization renders an ever-increasing range of services tradable across borders via digital networks1; roughly 50% of traded services are digitally enabled compared with 15% of traded goods.

Trade in digitally enabled services, in turn, depends crucially on cross-border data flows, which are growing exponentially and now contribute more to global GDP growth than trade in goods and services. The development of international rules on cross-border data flows and Internet-based activities is becoming critical to firm-level competitiveness, including for small and medium-sized enterprises (SMEs). These developments raise major new challenges for digital-age trade, investment, innovation, and industry policy settings. Harnessing the gains from digital technology in the realm of trade, especially in services, requires multilateral governance and regulatory frameworks geared for the 21st century.

The Group of Twenty (G20) must address these challenges and ensure the potential growth in international trade flows, so that consequent global gains in economic growth and development are facilitated rather than stymied.

As highlighted in the Appendix, the COVID-19 pandemic has impacted domestic economic activity and global value chains in both goods and services industries. Its most important short-run effect has been an intensive push toward digitalization. The adverse effects of widespread social distancing measures have been mitigated through a range of digital technologies and cross-border services (from online education to e-signatures and new modes of communication); many activities that would otherwise have been shut down have stayed afloat. While recent reliance on online interactions exposes new privacy threats that need to be addressed, the benefits of digitally enabled services, which rely on unimpeded cross-border data flows, for ensuring business continuity and agility, have been clearly proved. A push for international standards and disciplines regarding cross-border data flows would lock these benefits in and provide the ground for ongoing growth of digitized services.

Managing this transition to digital trade and fully realizing its benefits in a mutually beneficial way requires policy decisions that allow trade to flourish while achieving domestic public policy objectives. G20 members should assume leadership by implementing a best-practice policy and establishing interoperable regulatory settings so that every economy can reap the digital age’s productivity gains.

The following section presents our policy recommendations, which address challenges in the transition to digital trade and propose concerted action by the G20 on eight fronts.

Jane Drake-Brockman is an Industry Professor at the University of Adelaide and is an expert on international trade and regional integration and widely recognized as Australia’s foremost industry expert on services competitiveness and trade in services.

Ingo Borchert is a Senior Lecturer at the University of Sussex and a Fellow of the UK Trade Policy Observatory.

Nigel Cory is an associate director covering trade policy at the Information Technology and Innovation Foundation.

Ziyang Fan is the Head of Digital Trade at the World Economic Forum LLC.

Christopher Findlay is the Commissioner at South Australian Productivity Commission, and an Emeritus Professor at the University of Adelaide.

Fukunari Kimura is the Chief Economist at the Economic Research Institute for ASEAN and East Asia.

Hildegunn Kyvik Nordås is a Research Professor at NUPI where she works on trade and trade policy issues, focusing on the interaction between trade policy, trade, technology and labour market adjustments.

Magnus Lodefalk is an associate professor at Örebro University, Sweden, and affiliated to the Ratio research institute and the Global Labor Organization.

Shin-yi Peng is a Professor of Law at National Tsing Hua University in Taiwan.

Dr. Hein Roelfsema is an Associate Professor International Entrepreneurship, the Coordinator Master International Management, and the Coordinator Master Science and Business Management (Business Economics) at Utrecht University.

Yose Rizal Damuri is the Head of the Department of Economics at the Center for Strategic and International Studies in Indonesia.

Sherry Stephenson is a Senior Fellow at the World Economic Forum, and Member of the Services Network of the Pacific Economic Cooperation Council (PECC).

Dr. TU Xinquan is a Senior Fellow at the Center for China and Globalization. He is also a Professor and Dean of China Institute for WTO Studies, University of International Business and Economics.

Erik van der Marel is a Senior Economist at ECIPE.

Mustafa Yagci is a researcher for the Islamic Development Bank.

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• International tourist arrivals (overnight visitors) declined 65% in the first half of 2020 over the same period last year, with arrivals in June down 93%, according to data reported by destinations.
• Despite the gradual reopening of an increasing number of destinations during the second half of May and the month of June, ahead of the Northern Hemisphere summer season, the expected improvement in June was almost unperceived compared to May.
• The massive fall in international travel demand during the first half of 2020 translates into a loss of 440 million international arrivals and about USD 460 billion in export revenues from international tourism. This represents over five times the loss in receipts recorded in 2009 amid the global economic and financial crisis.
• The contraction in international demand is also reflected in double–digit declines in international tourism expenditure. Major outbound markets such as the United States and China continue to be at a standstill, though some markets such as France and Germany have shown some improvement in demand for international travel in June.
• While the recovery of international tourism remains sluggish, demand for domestic tourism is rising in many large markets such as China where air capacity in July rebounded to around 90% the level of 2019. In Russia air capacity has also been underpinned by rising domestic travel.
• Based on the three UNWTO scenarios published in May 2020 pointing to declines of 58% to 78% in international tourist arrivals in 2020, current trends suggest a decline in international arrivals closer to 70% for 2020.
• Extended scenarios for 2021-2024 point to a strong rebound in the year 2021 based on the assumption of a reversal in the evolution of the pandemic, significant improvement in traveller confidence and major lifting of travel restrictions by the middle of the year. Nonetheless, the return to 2019 levels in terms of international arrivals would take 2½ to 4 years.

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The shortages of medical personal protective equipment (PPE) encountered around the world in the early phase of the pandemic have eased, as production and trade have expanded to meet the unparalleled demand spike.

Initial data for 41 countries suggests that trade in medical goods grew by 38.7 per cent in the first half of 2020. Certain specific products remain subject to periodic shortages, with sourcing a particular challenge for some developing countries.

Political commitments have been made to keep markets open. The statements made by G20 leaders and trade ministers have been buttressed by some 17 other statements and proposals issued by other WTO members and groups of members.

Members are sharing information with the WTO about their COVID-19 trade measures as notifications and for inclusion in WTO trade monitoring reports. Transparency is essential to keep markets open, and is an area in which some members are calling for further action.

Duties, taxes and charges on COVID-19-critical medical goods and other essential supplies have been temporarily removed or deferred by 40 WTO members, including 12 G20 members. These actions help reduce the cost of the goods needed to fight the pandemic, both for the health sector and for the general public. Measures to reduce or eliminate of import tariffs made up around two-thirds of the import trade facilitating measures reported to the WTO.

Customs procedures and border clearance for COVID-19-critical medical goods have been expedited by cutting back red tape. Actions taken by members include establishing priority clearance channels, lessening and simplifying documentary requirements and electronic processing, and improving border agency cooperation. Expedited transit procedures have also helped landlocked countries improve their access to essential supplies.

Steps have been taken to enhance regulatory approval and cooperation on standards for traded goods, including measures to expedite regulatory assessments, recognizing the results of foreign regulators and allowing remote or electronic conformity assessment procedures.

Measures related to intellectual property (IP) rights are being used to facilitate innovation in and access to COVID-19-related technologies. Actions include sharing IP to develop treatments and allow the wider use of existing technologies, providing free access to relevant patent databases and COVID-19-specific search facilities, making available reports on COVID-19-related patents, and facilitating the exchange of clinical trial data. By end-July 2020, WTO trade monitoring activities had recorded some 47 COVID-19 related measures regarding trade-related IP rights taken by 24 members.

Access to COVID-19-critical medical services has been improved. The international movement of health workers has been facilitated, together with new (temporary) rules on telemedicine.

Expedited procurement procedures, including limited tendering and expedited payments for contractors, are among the government procurement actions notified by some members.

To download the full report, please click here.

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“From logistics, to finance, to informatics, services have become the indispensable backbone of our economies. Services generate more than two-thirds of economic output.  They account for more than two thirds of jobs in developing countries, and four-fifths of employment in developed ones.

“But services also play an increasingly important role in international trade. Global value chains for merchandise could not function without logistics and communications services. And thanks to digitalization, services that once had to be delivered face-to-face, like education, can now be delivered remotely.Yet services are often overlooked in discussions on global trade, and the extent of their contributions to global trade is not always fully appreciated. This report attempts to remedy this oversight.”, said DG Azevêdo in his opening remarks.

His full speech is available here.

The report underlines that trade in services – ranging from distribution to financial services -can help countries boost economic growth, enhance domestic firms’ competitiveness and promote inclusiveness. It illustrates how the share of services in international trade has continued to grow, and how technology, climate change, rising incomes and demographic changes will have an impact on services trade in the future. It also suggests ways to maximize the potential of services trade globally in the years to come.

On average, services account for about half of GDP worldwide. For developed economies, they account for around three-quarters of GDP and their proportion is increasing rapidly in developing economies.

According to the report, services trade has grown 5.4 per cent per year since 2005, while trade in goods has grown at 4.6 per cent on average. Trade in computer services and research and development have recorded the most rapid annual growth over the past decade. According to the WTO Global Trade Model, a new quantitative trade model used by the WTO to make projections about global trade, the share of services in global trade could increase by 50 per cent by 2040. This is thanks to lower trade costs and the reduced need for face-to-face interaction due to digitalization. It is also dependent on policy barriers to services trade being lowered.  

Many developing economies are becoming increasingly services-based and their share of world services trade has grown by over 10 percentage points since 2005. However, services trade is concentrated in five developing economies – China; Hong-Kong China; India; the Republic of Korea and Singapore – accounting for over 50 per cent of developing economies’ services trade in 2017.

The report says that services trade may help women and micro, small and medium-sized enterprises (MSMEs) play a more active role in world trade, particularly in developing economies, helping to reduce economic inequality. When MSMEs in developing countries start exporting services, they are on average two years younger than manufacturing firms. However, they export less than 5 per cent of total sales. Services are the main source of employment for women. However, the service sectors that account for most women employment have been so far among the least traded.

Despite their decline by 9 per cent between 2000 and 2017, barriers to trade in services remain much higher than in goods trade. This is largely due to the limited possibilities to supply certain services across the border and the regulatory intensity of many service sectors.

Technologies are key drivers of services trade, enabling cross-border trade of services that have traditionally needed face-to-face interaction. Digital technologies are also reducing the cost of trading services. The report finds that if developing countries are able to adopt digital technologies, their share in world services trade could increase by about 15 per cent by 2040.

The report notes that policy barriers to services trade – mainly regulatory measures –are much more complex than in goods trade. The authors of the report note that for services trade to be a powerful engine of economic growth, development and poverty reduction international cooperation will need to be intensified and new pathways will need to be found to advance global trade cooperation and make services a central element of trade policy.  

The report can be downloaded from the WTO website and printed copies are available through the WTO Online Bookshop.

An executive summary of the report is available here.

Read more about services trade in the WTO here.

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Every year, the US-China Business Council undertakes a comprehensive, econometric analysis of US goods and export data to China, broken down by states and voting districts. As in previous years, our data finds that China continues to be a critical export market for American manufacturers and service providers. However, rising uncertainty and bilateral tensions are negatively impacting the commercial opportunities China presents for American companies. Trade tensions with China hit US goods exports in 2018, down 7 percent from the previous year. Services exports increased, but at a slower pace than in previous years. Despite these challenges, trade with China continued to contribute to US economic growth, with US exports to China supporting more than 1.1 million American jobs.

• China is the third-largest market for US goods and services exports. Despite trade friction and punitive tariffs, China remained a top market for US goods exports in 2018, with only NAFTA partners Canada and Mexico buying more goods. It was also the third-largest market for US services exports, after the United Kingdom and Canada.
• Trade tensions continue to weigh on the economy. Punitive tariffs contribute to an unpredictable business environment and are measurably harming US exporters and exacerbating the trade deficit with China.
• Most congressional districts have seen significant increases in exports of goods and services to China in the past decade, though exports in the last year were down—in some cases, significantly. All but eight congressional districts saw triple-digit growth in service exports to China over the last decade of available data, but the picture is not so rosy for goods exports. Only 104 districts saw triple-digit growth in goods exports from 2009 to 2018.

US Exports and US Jobs

• Exports to China support over 1.1 million American jobs. Districts across the country have jobs that are supported thanks to US exports to China, making trade important to not only US companies and consumers, but also US workers. US goods exports to China come from a wide range of industries including transportation equipment, semiconductors, and oil and gas, sustaining logistics jobs in America’s ports and throughout the country. US services exports to China included travel and education, industrial processes, and management services, among other industries.

Goods Exports

•  US goods exports to China declined in 2018, after posting a record high the previous year. The United States exported $118.3 billion in goods to China in 2018, compared with an alltime high of $127.8 billion in 2017. The 7 percent, or $9 billion, decline is likely due to the trade conflict between the United States and China which resulted in retaliatory tariffs on an estimated 85 percent of US goods, including most agricultural products.
• Despite the decline, goods exports to China still outpaced export growth to the rest of the world over the last decade. US exports of goods to China increased 72 percent over the last decade, while exports to the rest of the world grew only 57 percent.

Services Exports

• Compared with previous years, US services exports to China grew more slowly in 2017, the latest year of full data, though they still outpaced services exports to other major markets. Services export growth to the rest of the world grew 2.7 percent faster than China that year. Over the last decade, however, US services exports to China grew significantly faster than those to the rest of the world–258 percent versus 49 percent.

Districts across the country feel the effects of the trade dispute

• Growth in exports to China slowed due to trade disputes between the United States and China. Two hundred and sixty-five congressional districts saw lower goods export volumes in 2018 than in 2017, and another 61 districts saw less than $10 million dollars in export growth in the same period. Midwestern and Plains districts that export significant quantities of soybeans and other agricultural products were hit particularly hard. In services, 100 districts exported less to China in 2017 than they did in 2016, and only 23 districts had double-digit growth in services exports. Compare that to 2015 to 2016, when only eight districts saw a decline in services exports and 380 saw double-digit or higher growth.
• Trade disputes also affected the overall value of exports to China. In 2017, 12 districts exported more than $1 billion in goods to China and 34 more exported over $500 million; in 2018, those numbers fell to 10 and 25, respectively. The export of services remained relatively stable from 2016 to 2017, with 192 districts exporting more than $100 million in both years. Continued growth in services may be the result of services exports not being subject to tariffs.
• China is a top goods and services export market for most districts. China was a top three goods export market for 240 districts in 2018, and among the top five for 357 districts. China was a top three services export market in 2015 for 305 congressional districts and a top five market for 396 districts.

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