Post-2015 Consensus: Trade Perspective, Low

Perspective Paper

Summary

Overall, Anderson’s paper provides an excellent and comprehensive analytical review of contemporary trade policy issues in manufacturing and agriculture, and of the case for policy reform.  However, it pays limited attention to services, when it is becoming increasingly apparent that their contribution to the economy has been underestimated for a long time.

Services make up a dominant share of income in most economies, and account for about 70% of global GDP. On average, the lower a country’s income as measured by GDP, the less will services represent of national economic activity.  Unsurprisingly, the prominence of services as a source of income translates into jobs. Despite this importance to the economy, services have received relatively little attention from economists and policymakers. One reason for this is the long shadow cast by classical economic thought, starting with Adam Smith, who regarded services as having zero value because they did not result in something physical and storable. More recently, Baumol’s Cost Disease hypothesized a continual rise in the unit costs in service industries because productivity could not be improved.

In fact, changes to technology, particularly advances in ICT allow storability and the delivery of many services at a distance.  Moreover, services are frequently packaged with goods in production and consumption.  The only distinguishing feature of services is their intangibility. Meanwhile, services are becoming increasingly dominant in the world economy and integrated into global value chains. Notwithstanding methodological challenges, the use of total factor productivity rather than output for a given unit of labor shows that services can themselves contribute to productivity growth.

Since up to two-thirds of trade is in intermediate goods which may be imported and then re-exported after further processing, there is a strong argument for measuring trade in value-added terms and banishing the double-counting implicit in gross trade flow data. Several important consequences flow from this.  First, bilateral trade balances can look quite different.  Second, the technology content of particular trade flows may also vary significantly from what the gross trade values might suggest.  Third, the value-added numbers provide a much more accurate picture of the nature of trade dependency among countries. For example, studies on Apple products show that a high tech export from China, such as an iPhone, contains a small fraction of China-generated value, with the rest coming from other countries.

Using this approach shows services’ share of trade to go from around 23% measured by balance-of-payments statistics to nearly 50%. This all means that services are traded and tradable to a far greater degree than is generally realized, not least by policymakers. Services are more regulation-intensive than goods, yet we know much less about how policies affect the wide range of service activities in an economy. Inefficient supply or restricted access can seriously hobble economies.

Given the predominance of services in economic activity and the nature and range of service activities, they offer valuable opportunities for diversification and development in emerging economies. However, it is not easy to see how to incorporate trade in services into the post-2015 agenda in a comparatively data-starved environment. One option might be to produce a composite of the World Bank’s and the OECD’s service policy databases to derive key indicators which might help to enhance opportunities for participation by developing and emerging economies. Another approach might be to develop a metric for tracking developing country participation on global value chains.