Why services matter to digital trade 

The role of open services in supporting digital trade is not fully appreciated. In general, the importance of the various ways in which services support production and trade is still overlooked. 

Services are increasingly important as inputs to the production of other traded goods and services, and as a source of foreign direct investment.  They comprise the larger part of GDP in developed economies (over 60 per cent) and a growing share in APEC developing economies. Services can now be traded in multiple ways, for example, as final services; as inputs in other goods or services; or fragmented, bundled and delivered via digital platforms through physical devices. This means they impact on the movement across borders of goods, services and data.

Services provide the basic infrastructure for digital transactions. They are key enablers of global value chains for e-commerce. For example, telecommunications, including internet, mobile telephony, and data transmission services create the platform for services to be provided over digital networks.  Financial services enable users to pay for the traded services they consume over the internet, chiefly through online payments (eg: PayPal or Alipay). Computer, software, research and development, advertising, and professional services, for example, are inputs for the production and electronic supply of most other services. 

The range of services involved in moving services electronically across borders is mind boggling. For example, production of an electronic game includes design, audiovisual and entertainment, gaming, publishing, information and research, advertising, e-retail, telecommunications, software applications, publishing and financial payment services to name a few, not including the digital hardware for end users.

Why liberal services trade policy matters

Services need to be competitive and efficient to support and grow digital trade. While regulation of data is important for enabling digital trade flows, equally so are the systems for improving the functioning and accessibility of services industries upon which this trade depends. 

Regulatory barriers to services remain in some APEC economies. This is particularly so in ‘backbone’ industries, such as telecommunications, financial services, and ‘input’ industries such as professional and transport services. They include, for example, restrictions on foreign investment (FDI equity limits; joint venture requirements); local content requirements (for manufacture of products or use of technology); controls on temporary entry and movement of people (professional and skilled workers); non-recognition of professional qualifications, and in general, policies which discriminate against foreign providers to the advantage of local firms. OECD estimates reveal that the trade-cost equivalent of services trade barriers largely exceed the average tariff on traded goods. Services barriers are twice as trade restrictive as traditional tariff barriers and account for the majority of trade barriers in place among countries today.   

Restrictive services impede productivity and performance.  This constrains investment and cross border trade and services that are supplied over digital networks. 

Regulations which restrict services raise costs  for foreign exporters thereby impeding cross border trade of digital products and services. They also constrain services exports of the country imposing the measures by limiting competition, reducing the incentive to innovate and the capacity to compete in international markets. Restrictions also result in lower sales by foreign affiliates (eg, of technology or software companies) established in the host country   and their exports of services.

Restricting trade in services also impedes investment. Research suggests barriers to entry and restrictions on competition in service sectors discourage foreign investment. This reduces the incentive for suppliers to invest in digital technologies (such as use of cloud facilities by transport companies, supply of online services by professional services firms, and use of the internet by retailers). It can curb competition and limit the availability of high quality, low cost services - vital inputs for trade and value chains.

Services trade policy can help grow digital trade 

The potential benefit from reducing barriers to services is large. More competitive and efficient services can lower costs, expand trade and investment and enhance connectivity across the economy. For example, the United Nations’ International Telecommunication Union (ITU) notes that countries that have introduced regulation for more open markets in telecommunications have had greater success than others in facilitating market growth and developing their digital economy. 

Trade policy plays a crucial role in shaping regulatory environments that support this. Modern FTAs include legally binding commitments to liberalise services and, increasingly, provisions governing e-commerce. While these agreements have seen some advances in measures to reduce barriers to electronic cross border trade, generally they have not resulted in significant liberalisation of services across the board. There are some exceptions where FTAs have deepened the level of services liberalisation (for example, the CPTPP, as well as recent FTAs of Japan, Korea and Australia) but more can still be done to reduce regulatory barriers in key service industries.

 
Towards a more holistic approach

Regulatory responses need to expand beyond e-commerce and controls on data flows to address barriers to services across the internet economy value chain.

Greater awareness of the role services play in supporting digital trade and in turn how this builds a more coherent approach to liberalisation is required.

APEC is playing a constructive role in shaping this. By engaging policymakers, business and the research community it can widen regional understanding on the policy responses needed in domestic economies and across international fora (including the WTO, regional FTAs, APEC, OECD, ASEAN) to do so.

The APEC Services Competitiveness Roadmap (ASCR) 2016 – 2025 identifies a range of actions across key service industries which, if implemented, would create favourable conditions to support digital trade.  Similarly, the APEC Internet and Digital Economy Roadmap  focuses on the ‘development of holistic government policy frameworks for the Internet and Digital Economy’ and encourages cross sectoral involvement of government agencies in the development of regulatory frameworks. 

In a policy environment where the risk of imposition of new trade barriers to goods is rapidly escalating, APEC economies would benefit from action to reduce controls on services. Further research on the role of services liberalisation in the digital economy, as well as targeted capacity building programs would complement and underpin these goals.

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1. WTO (2017) Chapter 4, Services Trade Policies and their Contribution to Connectivity and Development, in Aid for Trade at a Glance: Promoting Trade, Inclusiveness and Connectivity for Sustainable Development,  accessed at https://www.wto.org/english/res_e/booksp_e/aid4trade17_chap4_e.pdf 

2. See WTO, note 1.

3. Huwawei (October, 2017) Trade Rules and the Digital Economy, A White Paper, accessed at https://huawei.eu/sites/default/files/17.11.30%20White%20Paper%20Trade%20Rules%20and%20the%20Digital%20Economy%20Full%20EN%20Final.pdf

4. AT Kearney (2010) broke down the internet value chain into five main segments: 1) creation of content rights, 2) online services, 3) enabling technology-services, 4) connectivity, and 5) user interface (see Figure 1). See APEC PSU, Facilitating Digital Trade for Inclusive Growth Key Issues in Promoting Digital Trade in APEC, 2017 accessed at https://www.apec.org/Publications/2017/04/Facilitating-Digital-Trade-for-Inclusive-Growth-Key-Issues-in-Promoting-Digital-Trade-in-APEC

5. See APEC, 2016 CTI Report to Ministers, Appendix 6 Collective Strategic Study on Issues Related to the Realization of the FTAAP, November 2016, accessed at https://www.apec.org/Publications/2016/11/2016-CTI-Report-to-Ministers..

6. The OECD STRI finds that services trade restrictions are negatively associated with performance in a number of important services sectors (as measures by comparable indicators across a broad range of countries).

7. Restrictive policies can raise the cost of inputs drawn from services industries which are needed for exports. See Roy, Martin The Contribution of Services Trade Policies to Connectivity in the Context of Aid for Trade, September 2017, WTO Staff Working Paper ERSD-2017-12, accessed at https://www.researchgate.net/publication/319703205_The_Contribution_of_Services_Trade_Policies_to_Connectivity_in_the_Context_of_Aid_for_Trade

8. Ibid.

9. Roy (2017) notes that the World Bank has found a negative correlation between entry barriers and regulatory restrictiveness in services on the one hand, and investments in digital technologies and ICT on the other. See World Bank, World Development Report 2016: Digital Dividends, accessed at http://www.worldbank.org/en/publication/wdr2016

10. ITU (2017) Chapter 5, Spanning the Digital Divide to Drive Development, in Aid for Trade at a Glance: Promoting Trade, Inclusiveness and Connectivity for Sustainable Development, accessed at https://www.wto.org/english/res_e/booksp_e/aid4trade17_chap5_e.pdf accessed at https://www.wto.org/english/res_e/booksp_e/aid4trade17_chap5_e.pdf 

11. For example, the Roadmap seeks to develop good practice principles on domestic regulations in the services sector; support cross-border mobility for professionals; progressively liberalize manufacturing-related services; facilitate cross-border provision of financial services and effective financial markets. See 2016 APEC Leaders' Declaration, Lima, Peru 20 November 2016, Annex B: APEC Services Competitiveness Roadmap (2016-2025 and APEC Services Competitiveness Roadmap Implementation Plan (2016 – 2025) 2016/AMM/012), accessed at https://www.apec.org/Meeting-Papers/Leaders-Declarations/2016/2016_aelm/2016_Annex-B     

12. Agenda Item: 2.2, accessed at http://mddb.apec.org/Documents/2016/MM/AMM/16_amm_012.pdf

13. APEC (2017) Internet and Digital Economy Roadmap, 2017/CSOM/006  It states that ‘Given the cross-cutting nature of the Internet and Digital Economy, government policy frameworks should be developed holistically including agencies that are not traditionally seen as ‘tech’ agencies such as agriculture and fisheries, manufacturing, competition, manpower, and so on’.

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