Trading in Goods or Services?

During these days of heated controversies about international trade, we often hear that country A has a deficit with country B, or that country C is less competitive than country D. Unfortunately, these disputes are mostly based on partial analyses, as they rarely take into account trade in services.

There are multiple causes for this omission, including convenience, and a sort of inertia associated with the old-fashioned notion that countries mostly buy and sell goods. This inertia is also encouraged in academia, which still sees goods as a core subject in teaching and research in international trade.

The problem is that the service sector has become pivotal in the modern economy. In fact, services already account for the largest part of virtually every economy in the world; nine of the ten largest companies in US stock markets are in the service sector; and new metrics and data bases show that services already dominate trade flows.

Services are mostly exported as a complement to goods and about 75% of international trade in services consists of intermediate inputs. Because of new business models and new production and management technologies, goods and services have become highly interdependent. Thus, the alleged dichotomy between trade in goods and trade in services has lost its meaning.

But there are other reasons why we should not ignore services, including the evidence that trade in services grows at a higher rate and is substantially less volatile than trade in goods. Service business models tend to be much more sophisticated and dynamic than those of goods. Service companies became the principal driver of new technologies; export of services encourages the implementation of technical and regulatory standards that lead to an involuntary process of customer loyalty. The sector is undergoing an unprecedented concentration process at a global scale; and services are already adding most value to global production chains. Think of cancer treatment by immunotherapy: each dose costs tens of thousands of dollars because of intellectual property.

About 70% of global trade in services comes from developed countries, but this share might be underestimated because many digital services and operations between companies are not accurately reported. Developed countries operate at a multi-trillion dollar surplus in services and the trend shows that imbalance worsening in the future.

Consider the cases of the United States and United Kingdom, which have an annual surplus in the domestic sector of around US$300 billion and $150 billion, respectively. This helps to explain why the sector has become the main target of foreign direct investment and M&A operations worldwide. It also explains the priority given by advanced economies to the area of services, and their activity in favor of the total liberalization of the sector, as shown by recent discussions on the reform of the WTO and the current bitter trade disputes.

We are witnessing a growing dichotomy between producers, managers and distributors of services on the one hand, and consumers of those services on the other. This includes digital services, which would help explain the differences between job creation and economic growth perspectives between countries.

Robert Lucas of the University of Chicago, one of the most influential contemporary economists, said: “Once you have begun to think about economic growth, it is hard to think about anything else.” But, in view of the characteristics, evolution and implications of the service sector, it does not seem unreasonable to say that once you start thinking about the intangible economy, it is hard to think about anything else.

For Latin America, which needs to find a more sustainable growth model, the issue of services is vital, and should not be viewed as a secondary agenda. Although the share of the sector in the region’s GDP is higher than in other developing regions, the regional share in the global trade in services is disproportionately low and trade shows a large deficit, which is unsustainable.

This is partly explained by the fact that services tend to focus mainly on consumption, due to the lack of strategy and because the productivity of a Latin American worker in the service sector is scarcely 18% that of one in the U.S. There is therefore an urgent need of investment and modernization of the sector.

Costa Rica, Panama and Uruguay are some of the countries with the best commercial services. However, we should take into account that new technologies are beginning to replace labor-intensive services, which are mostly exported by emerging countries. With the advent of 5G technology and the expansion of remote services to areas such as education, health, finance, production and maintenance, the challenges for Latin American countries are even greater.

The region needs to include the service sector on the public policy agenda; otherwise, we might miss out on a tremendous opportunity for growth. It is not a trivial task, but we can draw inspiration from some successful local service companies and from the positive experiences of other emerging countries. To move forward, we will need ambition, pragmatism and a fresh look at the sources of economic dynamism in the 21st century.