Industry the April 2012 issue

Minority Rule

A majority of world trade today is in services, yet trade progress talk focuses on manufacturing. It’s time we recognize the obvious.
Posted on April 11, 2012

Both goods and services are a critical part of any economy. They depend on each other and make the other more efficient. Services are fast eclipsing goods as the world’s economic driver. Services account for 70% of world GDP, up from 59% in 1990.

The numbers don’t differ much from country to country, rich or poor. While some emerging countries lag behind the developed economies, services still play a big role, accounting for 50% or more of output in most markets.

Services Trade Liberalization: Foundation of Recovery by Edward Gresser, the director of Progressive Economy, was written for the Coalition of Service Industries (CSI). Gresser argues services trade reform can lead us out of economic crisis.

According to the white paper governments should examine the service economy closely as they develop strategies for economic growth. Not only is it a big contributor to the world’s economy, it is a major employer. Of the 3.2 billion workers in the world’s labor force, about 60% of men and 70% of women work in services. Jobs range from restaurant and hotel workers to skilled professionals, such as engineers and insurance brokers.

Services complement other industries. To manufacture and deliver a product today requires a sophisticated global system of services—telecommunications, delivery, insurance, finance, accounting and more.

To put it into perspective, Gresser notes, “The modern world is linked by 5,000 communications satellites, fiber-optic cables to every continent, thousands of daily air-cargo flights, and a shipping industry moving 14 million containers every day.”

Services help raise living standards and promote development. Even the smallest business owners use modern technology and services to operate their businesses. For example, farmers and fishermen use PDAs to track weather conditions and market their products—and they take out insurance on their boats and farm equipment to protect themselves from the unexpected.

Governments also use services to improve public service and safety. Individuals are able to comparison shop with a flick of a button and find the best prices and deals available from suppliers around the world.

Gresser thinks the economic potential for services is tremendous. Many services are highly tradable in world markets. World exports of business services rose from 8.3% of total exports to 10.9% in 2010. Although service exports are growing, they still lag far behind exports of goods. An increase in service exports would translate into a huge boost in jobs in many parts of the world.

According to CSI, trade in services has not lived up to its full potential as a driver of growth because of the relatively weak services trade policy over the last two decades. Although “pioneering” agreements on services were put into place in the 1990s—the WTO’s General Agreement on Trade in Services, Financial Services and Basic Telecommunications—they “stopped well short of a broad opening of the services markets,” according to Gresser’s paper. Compared with trade agreements for goods, Gresser wrote, the service agreements left in place “modest and flimsy” rules.

Gresser says despite inroads, barriers to services trade and foreign investment remain largely in place in many countries. A recent World Bank study looking at five sectors, including financial services, found the most common barrier was in the area of direct foreign investment. The barriers include outright bans on foreign investment, restricted ownership (India, for example, restricts foreign investment for insurance to 26%) or geographical limits.

“Substantially reducing barriers to both cross-border digital-based trade, and to direct foreign investment, would help services trade realize its potential to be a powerful support for growth in the aftermath of the financial crisis,” says Bob Vastine, president of CSI.

With the WTO Doha Round at a standstill, there is growing interest in pursuing an international services agreement. CSI says it supports an ambitious services agenda that “embraces all the regional and bilateral efforts to create open and fair services markets.” An International Services Agreement, CSI contends, would be the “next generation” and a “powerful advance” in the global trading system.

Improving cross-border trade for large multinational insurance placements is a priority for The Council. Brokers play a vital role in helping businesses of all sizes expand and grow in the global market through insurance and risk management programs. Barriers that prevent the efficient use of master policies for multinational risks slow down economic growth and exports. The Council supports efforts to move services trade into the future.

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