Growing digital economy lifts trade in services but common ground yet to be reached

“This growth will be accelerated by the adoption of new technology and digitisation of working practices forced by the onset of the Covid-19 pandemic — which, combined with a shift in attitudes to online interactions, is likely to further fuel growth of cross-border trade in services in the coming five years,” says the report. This is a notable change in the global trade landscape — trade in services has historically been eclipsed by trade in goods. Yet according to the report, services accounted for 55% of all global trade flows with a value of US$13.7 trillion of cross-border transactions in 2019. The value of global trade in services grew by 50% across the past decade — double the pace of growth of global trade in merchandise — despite still consisting 24% of all global trade.

Svend Janssen, head of Asia at Western Union Business Solutions, is surprised by the sheer value of global trades in service. “I find the number of 55% immensely stunning...That the value of [trade in] services is already greater than that in goods was the biggest surprise to me,” he tells The Edge Singapore. A 2019 World Trade Organization (WTO) report found that services grew at 5.4% per year on average since 2005 vis-a-vis 4.6% annually for goods.

Much of this has been aided by the “servicification” of supply chains, says Alex Capri, visiting senior fellow at the NUS Business School and research fellow at the Hinrich Foundation. Growing technological advancement means significant supply chain organisation services taking place across borders via the internet.

Despite Covid-19, growth in global trade is likely to be resilient. The report estimates that the value of cross-border flows of business-to-business (B2B), ICT and financial services will decline by just 6% in 2020, while the value of goods trade will fall by around 13%. The exception to the growth in services trade will be tourism, which is seen to plunge by 40% this year because of the pandemic.

As a global trading hub with an increasingly service-based economy, Singapore stands to benefit disproportionately from this trend. Western Union predicts that Singapore will experience increasing total service exports that could reach US$88 billion by 2025, with B2B, financial and ICT contributing 70% of this growth. Still, the developed world remains the world’s biggest service exporters, with Europe the largest in the world right now.

And this growth is just getting started. Western Union believes that a broad, multilateral liberalisation of trade policies on services could boost the value of global service trade by 11% by 2025 — a figure worth US$890 billion. Such an estimate assumes the immediate, hypothetical reduction of trade barriers across all services sectors globally, except tourism.

But Michael McAdoo, partner and associate director of Boston Consulting Group in Montreal, urges caution when interpreting trade data. The definition of what constitutes a trade in services tends to be more ambiguous than those for goods. For example, a foreign organisation opening a physical office in a particular country with foreign staff — the complex payrolls and invoicing involved in such a transaction often make it difficult for this to be captured in trade data, he says.

New wineskins for new wine

Furthermore, there are no international frameworks yet governing such transactions. Existing WTO rules on trade in services were made before the advent of the internet, where the volume of trade in services was significantly lower and largely confined to mail and movement of people. It is therefore very difficult to tax, regulate or otherwise govern such transactions, says McAdoo.

“Digital trade was largely unregulated, or lightly addressed, in most places up until a few short years ago. With few exceptions, firms were free to do whatever they wanted in the digital space, as long as they did not violate existing non-digital rules,” writes Deborah Elms, executive director of the Asian Trade Centre in her Talking Trade blog.

Ironically, this lack of international regulation opens the door to greater barriers to digital trade, say Gary Clyde Hufbauer and Zhiyao (Lucy) Lu from the Peterson Institute for International Economics. “Existing WTO agreements cover certain aspects of e-commerce. However, they leave giant gaps, allowing countries to implement barriers such as data localisation requirements and digital taxes,” they argue.

To plug this gap, Singapore, Australia and Japan have jointly led efforts to pass the Joint Statement Initiative (JSI) on e-commerce. The agreement provides guiding principles underpinning governing frameworks vis-a-vis rapidly changing digital trade in services in view of developing a future regulatory regime covering such transactions. Surprisingly for a world apparently turning away from globalisation, 85 WTO Members representing over 90% of global trade have backed the statement, including both the US and China.

According to Bryan Tan, a partner at law firm Pinsent Masons, some of the areas covered under the JSI include cross-border data protection, AI and cybersecurity. In particular, Tan highlights taxation of e-commerce and digital services, forced data localisation and forced disclosure of source codes as key measures to be negotiated. Growing concerns about intellectual property and cybersecurity are likely to make debates for these policies especially contentious against the backdrop of a technology war between the US and China.

But Elms warns that for such an initiative to succeed, any framework created should be as broad as possible with strong protections for trade in digital services. The difficulty in building consensus among states will mean that such global regulations are instead likely to be both shallow and time-consuming. Only half the WTO’s membership are participating in the talks and no negotiation text has emerged despite a June deadline to deliver a draft document.

A fragmented global order

Still, there are doubts about the extent to which a broad, multilateral regime for trade in services can be feasible in the current political climate. The stalling of the Doha Round of the WTO and the US withdrawal from the Trans-Pacific Partnership, alongside a growing populist backlash against globalisation and growing concerns about the role of national security in trade has thrown the future of open markets into question.

As the value of the online economy gradually grows, international borders no longer matter as much. “If you perform a service, it is not difficult to export a service in general...A lot of these can be performed on a desk or from home,” says Janssen. The lack of physical presence in a foreign country and internet connectivity makes it relatively harder to erect barriers to entry against such methods of delivering services from abroad.

“If someone wants to protect and control [the domestic service industry], they can try. Regulating the internet of your country is a way to do that, but I believe that this will be against the will of the people in your country,” Janssen continues. While China has been able to protect social media services like QQ and WeChat in this way with some success, most other governments will likely find a similar policy politically and economically unfeasible.

Yet, Capri notes that rising techno-nationalism and data nationalism, as well as political conflicts over data privacy and freedom of speech, will see a more fragmented global trading order going forward. Regimes governing trade in services, he argues, will likely be developed by “coalitions of the willing” that govern only transactions between themselves. India, for example, has already banned Chinese apps such as WeChat and TikTok from being used within the country.

Elms believes that these regional deals will be the most useful steps so far in regulating digital trade. Regional initiatives such as Digital Economy Partnership Agreement and Digital Economy Agreement are being mooted between several members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to go ahead with e-commerce regulation. Such agreements could also form the basis for future digital trade regulations on a global scale going forward.

But McAdoo highlights an even more fundamental challenge to such attempts at liberalisation. “The currency of liberalisation in services is domestic regulation,” he says, which runs up against concerns about national sovereignty. While there are admitted benefits to unilateral liberalisation of trade in services, there are significant political pressures to protect the domestic service industry — especially as the world turns towards greater protectionism. He notes, however, that firms could take advantage of remote working arrangements to hire foreign labour remotely in non-regulated industries.

“The world is currently undergoing a paradigm shift, where the three decades or more of globalisation we have seen is coming to an end,” Capri warns. While this does not mean a complete stop in the growth of digital trade in services, it does mean that there will likely be some friction in such transactions between different regions. These barriers could take the wind out of the sails for trade in services growth within a more fragmented international trading order.

What can firms do to adapt to this changing trade landscape? While each firm will have different needs, McAdoo encourages firms to always assess and better understand their exposure to supply chain risk and opportunities. They should develop a playbook, he says, to better pursue these opportunities and mitigate those risks.

Better yet, firms should also seek to influence the trade environment around them rather than resign themselves to being the victims of circumstances. “You can wait and see what a policy change might be, but you can also shape that policy by understanding its impact on you and your industry,” he says, noting that firms should actively advocate for their interests with governments to improve their competitive situation.