Thursday 5 October 2017

Who Underperforms in Digital Services Trade?

For the past 40 years or so, developments of information and communication technology (ICT) have transformed much of the way producers and consumers connect with each other. ICT reduces costs of distance between producers – and between producers and consumers. This has resulted in the fact that international trade has grown faster than before.

Only a short while ago, it was simply unimaginable to export services. Thanks to new technologies and ICT, services have become tradable and, moreover, have hugely expanded the scope of exports and imports. Nowadays, services represent around 23 percent of total cross-border trade. Moreover, the figure below illustrates that trade in total services has grown faster than trade in goods, particularly in the last 5 years.

Rapid growth rates of trade in services and digital services (1995-2016)
Source: World Development Indicators

However, the figure also shows that ICT finds its strongest effect on digital services trade. Indeed, a more impressive growth rate is observed for digital services. Since 1995, this type of digital flow grew with a factor of more than 5! With the current trend of digitalization, it is very likely that these trade patterns will not just continue but even accelerate.

Ultimately, this will rapidly change the way we perceive globalization. The digital economy is moving fast, and a large part of future trade and growth lies in this digital area. This development will favor the EU as traditionally, it has been a strong exporter in services. 

However, not all countries in the EU capitalize on the digital developments such as Germany and France. This is worrying as these two countries are the two largest economies after Brexit. In large part, Europe’s future growth based on digital services needs to come from these two countries, which includes digital services trade as well.

Moreover, one should bear in mind that digital technologies do more than enabling services to become tradable; services themselves are also becoming more and more digital-intense. The essence of this profound change is that any type of services is increasingly developed with the help of digital assets and means such as big data, internet-of-things and other ICTs.

A new Bertelsmann report performed by ECIPE finds that developing an attractive infrastructure for digital technologies to facilitate digital services trade is not a given. On the contrary, some countries are still lagging behind in some or many of these infrastructural “endowments” which enables digital services trade to happen in the first place.

The endowments specific to digital services trade will both relate to invested capital such as telecom infrastructure, network-access capacities and the skills among the workforce to use digital technologies. These are the factors that will determine a country’s future success in digital services trade and the next frontier of globalization.

The report compares the performance of European and OECD countries, against their own predicted capacity. It therefore enables us to understand if countries over or underperform in cross-border digital services trade over the internet. One takeaway point from this analysis is that precisely Germany and France underperform in digital services trade.

The report also sheds light on the potential for countries to trade digital services indirectly as an embodied item in other industries and sectors using digital services, which extends the scope of trade in digital services even further. Here too, France and Germany could be doing much better.

That begs the question: why?

The conclusion of this study is that while Germany for instance has great potential to increase digital trade in services, and along with that output and jobs connected to digital services, that potential can only be realized in the economy if German firms get better at utilizing existing digital endowments and capabilities, including digital services themselves.