Dear participants in this Second Annual Global Trade Week, it’s a real pleasure to join you from Geneva.
Our hosts have asked me to talk about trade in services. That may seem like an odd choice, especially on this first day of Global Trade Week, which has been devoted to the theme of geopolitics and supply chains.
To listen to the supply-chain debate these days, services is rarely mentioned. We hear about semiconductors, not ICT services; about vaccines and pharmaceuticals, not health services; and about critical minerals and large capacity batteries, not transport or energy services.
And yet, services have become the most dynamic sector of world trade. In fact, just as services have come to dominate many of our national economies, they are playing a bigger role in the global economy too.
Which means that it is impossible to understand modern supply chains, let alone where they are heading or how geopolitics will affect them, without understanding trade in services.
So I very much welcome the opportunity to talk about trade in services.
Today I want to look at three stories: the first looks back at the past, the second is about the present and the third looks towards the future.
The story from the past is a story about progress and success, but also unrealized potential.
Starting in the 1980s and 1990s, we saw many countries embark on autonomous reforms to open up their services markets to competition.
Rudi Dornbusch, the late MIT economist, described this shift as “a broad swing of the pendulum” and said it had been driven by widespread disappointment with the results of market restrictions and by the poor performance of services activities in many economies.
As autonomous trade liberalization gained momentum across countries, so too did the Uruguay Round negotiations on a multilateral instrument to open up and facilitate trade in services.
These negotiations culminated in the General Agreement on Trade in Services. The GATS, as it is known, entered into force in 1995 and has been rightly hailed as a landmark in the history of the rules-based trading system.
The GATS has a lot going for it. It introduced what at the time was a novel definition of trade that captures different ways to supply services internationally. It has created legal certainty and has set a floor for the development of new rules and the pursuit of greater services trade liberalization. Importantly, the GATS has created a space where governments can monitor, benchmark and share knowledge on services trade.
The GATS was a big leap forward in the creation of an open and secure global policy framework for services trade. That framework made it possible to achieve ground-breaking liberalization of telecoms and financial services in the late 1990s.
Alas, the GATS has remained largely underused. With few exceptions, governments have not made use of one of its most powerful and valuable tools. That’s the possibility to lock in existing trading conditions and protect businesses against economically costly policy reversals.
For that, governments have turned to regional trade agreements instead. Over 130 WTO members – or some 80% of the WTO’s entire membership – are party to at least one RTA covering services. It’s in the context of those agreements, not the GATS, that governments have increasingly sought over the years to lock in their level of trade openness.
But note what has not happened. Most governments have largely refrained from using trade agreements – be it GATS or RTAs – to make further inroads into opening trade in services.
And that’s a big missed opportunity, as I will show in a moment.
There are many reasons why governments have made such limited use of GATS as a trade-opening tool.
One possible reason is that it’s complex to organize services negotiations under a multi-dimensional agreement like the GATS and with 164 WTO members across more than 160 services sectors and different ways of supplying services internationally.
Another reason is that the barriers that hinder trade in services are themselves very complex – and often politically sensitive to boot.
The reality is that measures affecting trade in services – such as professional standards, licensing requirements, investment restrictions or work visas are nowhere near as straightforward to deal with in a trade agreement as are the measures that affect trade in goods such as tariffs and quotas.
Services regulations can and often do restrict trade. But that is not necessarily their aim – in general, their aim is linked to the achievement of legitimate policy goals. Therein lies one of the big challenges of opening services trade.
That challenge is particularly acute in developing and least developed countries.
They face specific hurdles that impair their confidence and ability to participate in trade negotiations, from a lack of information about which domestic policies may be covered by trade commitments, to challenging coordination across ministries and agencies, to incomplete knowledge about export opportunities.
At the WTO, we are working with our partners to develop data tools that support developing and least developed countries in participating in services trade negotiations.
With all of this in mind, let’s now turn to my second story – the present of services trade. That’s a story about boundless opportunity, but also mounting challenges.
Services have already transformed national economies on a massive scale. Just think about logistics, finance, and informatics and how indispensable they have become to running our increasingly complex and sophisticated economies.
Services generate more than two-thirds of economic output, attract over two-thirds of foreign direct investment, and provide almost two-thirds of jobs in developing countries and four-fifths in developed ones. Services also play a prominent role in the participation of women in the workforce.
And they are poised to transform global trade in similar ways. In fact, that transformation is already underway.
Before the pandemic, trade in services had been growing at a faster pace than trade in goods for several years. The share of services in world trade has more than doubled since 1970. That rapid growth is expected to continue despite the steep fall in services trade caused by the pandemic-induced slump in travel and tourism services.
If we use statistics based on trade in value-added instead of just gross statistics, we find that services play an even bigger role in international trade. According to this more sophisticated analysis, services represent almost half of the value of world trade today.
This is a greater share than either manufacturing or agriculture – sectors which are more traditionally associated with trade.
This closer analysis also highlights how services are catalysts for global value chains. Without services criss-crossing the world, it would be impossible to coordinate the complex, multi-country production networks that have come to define production and trade in the 21st century.
Many factors are driving the emergence of a globalized services market. Those factors include the growing demand for online services, investment in physical and digital infrastructures and policy reform in many countries.
But the game-changer is technology, which has turned the non-tradeable into the hyper-tradable.
Services that were once difficult to trade remotely, because they could only be delivered in person, are becoming far easier to trade, because they can be delivered digitally.
COVID-19 sent this transformation into overdrive. It’s not just ICT services trade that has experienced a pandemic boom, as people were suddenly forced into remote work, and became heavily dependent on the internet for entertainment and social contact.
Other services, too, are becoming more globalized as a result of rapid technological developments and COVID-19. Take telemedicine. The pandemic led to a boom in practitioner-to-practitioner services using audiovisual tools, along with the emergence of new digital platforms connecting health professionals and patients.
Cross-border trade in medical services rose by 14% in 2020, even as other forms of medical services trade decreased or remained unchanged.
And yet, we find that new services activities are often subject to inexistent, outdated or inchoate regulations. And that can quickly lead to trade-restrictive outcomes.
Nationality or residency requirements for health professionals are a case in point. Such requirements render cross-border supply impossible. At the WTO, we have found that in their commitments, roughly 1 in every 10 members identify cross-border supply of health services as not possible. And even when it is allowed, it is difficult to identify what is actually permitted.
Cross-border health services are also affected by restrictions on cross-border data flows and data localization requirements. I will return to this issue later in my remarks.
The situation with telemedicine regulation illustrates a broader point. It is this: When it comes to services, trade policies and international cooperation efforts are lagging behind the growing role of services in the global economy.
Barriers to services trade today are roughly as high as those to trade in goods a half century ago.
And that has inflated trade costs in services, to the detriment of all businesses, especially small businesses which are least able to overcome the initial cost of breaking into global value chains.
The cost of trading services internationally is about 4 times the cost of trading services domestically. That’s twice the cost of trading goods.
This imbalance is keeping us from reaping the benefits of an increasingly globalized services market.
The benefits of services trade are significant, because services share unique features which amplify the traditional gains from trade. For one thing, services are essential enablers of trade, development, and economic growth, from transport, logistics and information technology, to finance, healthcare and education.
Which means that allowing greater access to the most efficient, affordable and innovative services in the global market will have an outsize positive impact on the competitiveness of domestic firms, the productivity of the economy, and the welfare of consumers.
Evidence is mounting that a services-led growth strategy can be as crucial as a manufacturing-led growth strategy, and that the ability to access and export services will be a game-changer for development.
Richard Newfarmer, formerly at the World Bank, coined the phrase “industries without smokestacks” to underscore the point that not just manufacturing but services, too, offer a path to development for poor countries, and an opportunity to leap-frog into more high-value-added exports and to diversify their economies.
To grasp the benefits of services trade, we need to bring domestic and global policies up to speed with the reality of the global services economy. For trade policymakers, that means intensifying cooperation to overcome the obstacles that hinder trade in services.
And for the broader group of economic policymakers, it means working on the supply side, not least to equip workers and businesses with the tools they need to succeed in a more services-oriented, knowledge-based global economy.
This brings me to the story about the future – a story that’s hopeful, but also clouded by uncertainty.
For many years, WTO members have sought to advance negotiations under the GATS to open up services trade. But a result has eluded them, for some of the reasons I alluded to earlier.
While work on services trade continues at the multilateral level, groups of WTO members have decided to pursue work on several services and services-related topics at the plurilateral level. Not all WTO members are part of these plurilateral initiatives. But they are conducted in a transparent and inclusive manner and are open to anyone who wants to join.
The decision to work among groups of like-minded WTO members is hardly a break from the past. Plurilateral initiatives have been part and parcel of the global trading system since its inception more than seven decades ago. The GATS itself foresees the possibility that liberalization be advanced through plurilateral negotiations.
Plurilateral initiatives have enormous value. They are pro-multilateral in nature, complement multilateral agreements and are arguably a big part of the future of the global trading system.
And most importantly, plurilateral approaches have delivered tangible results in the past, and they continue to deliver tangible results in the present.
Take our state-of-the-art agreement on domestic regulation in services, the first outcome on services trade in the WTO since the negotiations on telecoms and financial services in the late 1990s.
The agreement focuses on slashing unnecessary red tape, enhancing transparency and predictability and improving the business climate. It has been hailed by the global business community as a deal that affirms the WTO’s ability to bring commercially meaningful negotiations to a conclusion and a deal that facilitates smoother flows of global services trade and reduces market barriers. So far, 67 WTO members representing 90% of world services trade have taken on commitments under the new agreement.
That will bring down trade costs, especially in critically important backbone services like transport, finance and telecoms. Our estimates point to trade cost savings of 150 billion dollars per year once the agreement is fully implemented.
Small businesses will benefit the most, because they often lack the information, financial resources and technical and managerial skills required to break into global value chains.
The disciplines in the agreement not only set a gold standard for government licensing and other requirements on service suppliers. They also break new ground in preventing that services regulation discriminates against women, a first in a WTO agreement.
This is an important achievement, both for services and for the WTO. And there is more in the pipeline.
Let me briefly describe two additional initiatives that are hugely significant for services trade.
First, the negotiations on investment facilitation. These negotiations bring together a large majority of WTO members – over two-thirds of them.
An outcome here would deliver a set of global best practices to establish a transparent and predictable investment climate that attracts, retains and expands sustainable investment. And that would have a direct beneficial impact on services trade, since over two-thirds of global foreign direct investment flows into services sectors.
The focus of the negotiations is on improving transparency, streamlining administrative procedures, promoting responsible business conduct and preventing corruption. All of this will improve the business climate for domestic and foreign investors alike, helping to mobilize not just more but also better investment.
Participants in the investment facilitation talks have been making steady progress and aim to finalize negotiations by the end of this year. So stay tuned.
The second initiative I want to highlight is on electronic commerce. A group of 86 WTO members, including China, the European Union and the United States, is working on global rules in this area.
Negotiators are working on developing common principles and disciplines to facilitate remote transactions and strengthen trust in digital markets, from e-signatures and paperless trade to e-contracts and online consumer protection.
Negotiators are also considering a prohibition on the imposition of customs duties on electronic transmissions across borders. This is a topic of fundamental importance. Business associations and other stakeholders from around the world have consistently told me that applying custom duties on electronic transmissions would be a serious blow to the prospect of an inclusive digital economy that creates opportunities for all, especially small businesses.
The e-commerce negotiations would also deliver ground rules on data issues. And that includes the challenging issues of cross-border data flows and data privacy. An agreement on these issues could help ensure that government-imposed requirements on data do not act as unnecessary digital trade barriers.
And that’s important for services trade, given the disproportionately negative impact of digital trade barriers on digital services.
A WTO outcome on e-commerce would bring down trade costs and help more firms in more countries import and export digital services.
But to grasp the benefits of enhanced global rules on digital trade, we must complement efforts on trade with investments to bridge the digital divide and to strengthen digital skills everywhere.
In conclusion, the global economy of tomorrow is one where trade in services will offer growing opportunities to create jobs, raise living standards and transform our economies.
But to turn the potential of services trade into tangible benefits, we must urgently bring domestic and global policies and rules on services up to speed with the rise of a more services-oriented, knowledge-based global economy.
The WTO can and must contribute to open, secure and inclusive services trade. But the WTO cannot do this alone. Advancing services negotiations is far too complex, far too important and far too urgent to be left to trade negotiators alone.
We need more dialogue, more cooperation, and more coherence between trade and non-trade actors, between the public and the private sectors, and with academics, workers and other parts of civil society.
So let us join forces to make services trade a driver of prosperity of the 21st century in the same way that we worked to make goods trade a driver of prosperity in the 20th century.
Thank you.
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