Boosting Trade in Services in the Digitalisation Era

How well is your country realising its potential in digital services trade? This question is answered by a ranking which is part of the new GED study together with ECIPE. The study shows that Ireland is best at realising its potential while Germany finishes only 19^th out of 28^th. The study is also looking at explanations for this performance: Germany would need better digital infrastructure but also better adoption of businesses and consumers to realise its potential.

Trade in goods has been stagnating for years – but trade in services, especially digital services, is growing at solid rates (cf. Figure 1). Presently, trade in services accounts for 23 percent of world trade and it is forecast to increase further. This is a sign of a significant structural change. For Europe, this can mean a great trade potential, since most European countries generate a large share of their value added in the services sector. Even for a country with a comparatively large manufacturing sector as Germany, the share of value added generated in the services sector is as high as 70 percent. But harnessing the benefits of growing trade in services critically requires European economies to perform well in digital services as this is set to be one of the most important future growth markets, and as they are important for the operations of manufacturing industries as well. But are the European economies prepared for this? Are they realising their potential in this area? Or, if not, what obstacles are holding them back?

These questions are addressed by a study of the European Centre of International Political Economy (ECIPE), commissioned by the Bertelsmann Stiftung. This Focus Paper summarises the main results. The study has a particular focus on assessing Germany’s performance in digital trade. This paper, however, mainly presents the results for European countries.

Digital services are services largely delivered by making use of information and communication technology (ICT), most significantly of course the internet. Based on the Trade in Services database (TIS) of the World Bank, the authors identify those service sectors that are particularly digital intensive.[1] Once the 10 most digital-intensive sectors have been identified, these have been isolated and used as the basis for the report. Among these, telecommunications, IT services, publishing, travel services and business services are in the lead as the most digitally intensive sectors. The authors assess to what extent European economies possess the necessary endowments to succeed in the growth market of international digital services trade.

In comparison with other studies on digital services trade, the specific advantage of this ECIPE study is that it does not only assess the current positioning of European economies in international competition but it also the extent to which they realise their trading potential. Germany here does not perform very well; in a ranking based on how much of their potential countries employ Germany only makes 19^th position out of 28 EU and OECD countries. Other European economies are clearly out-performing it, with Ireland for example leading in most categories of digital trade assessed in this paper. In order to explain the good or bad performance of individual countries, the authors subsequently engage in a frontier analysis that shows how wide the gaps between the leading nations in the EU, the OECD and the BRICS in endowments are.

Analysis of Trading Potential: Making Use of Market Opportunities

Using a gravity model, the study computes a theoretical trade potential in digital services for 28 countries and then contrasts it with observed values. Based on the difference between observed values and theoretically possible ones, a ranking is established. It shows to what extent countries make use of their potential in trade with digital services. This can also be broken down into several key sectors in digital trade.

Ireland clearly outperforms the other countries in the ranking by trade well above its potential. It not only comes top in the overall ranking, it also leads in three of the six sectors detailed in the ranking. Belgium is also among the consistently strong performers. The ranking shows that several European countries compete on the same level as the USA and Korea. However, it remains true that among those countries performing less well than their predicted potential, almost all are EU countries, including the large economies of France, Germany and Italy. It seems to be a general trend, that small economies with a large services sector seem to be performing better in line with their capabilities. One reason for this observation is that those countries are more agile in swiftly implementing new technologies that enhance their comparative advantage in this area. Also, it might be easier to provide infrastructure more swiftly in small economies than in large, decentralised countries.

Comparative Analysis: What are the Main Obstacles?

While the overall performance of EU countries is mixed, it is important to understand where the group as a whole is lagging behind – and where the group is in a leading position. A frontier analysis provides this data, showing the performance of the best country per group in comparison to best countries in the other groups. This allows one to see how large the gap across key indicators for the use of modern ICT is – which in turn enables one to understand where the greatest potential for improvement lies.

Figure 4 provides an overview over several more general indicators. While the EU frontier is close to the international leader, there is a significant gap in the category of internet bandwidth. Similarly, in the area of of mobile broadband subscriptions the EU frontier is inferior to the OECD one. While firms possess the knowledge of modern technologies, which is reflected in the above graph, there is a gap in putting these technologies to use, as the study shows. Herein lies a great potential for productivity improvements. Similarly, while consumers are well endowed with technological capabilities, the study finds that their use of them is relatively restrained.

Conclusion

The ECIPE study shows that some countries in the EU have adapted well to the technological challenges in the field of digital services. However, this is not true for all countries of the Union; the disparities can be large and especially Europe’s largest economies are lagging behind. To reap the potential of this critical and growing market, many countries need to up their performance substantially. This accounts for trade in services directly over the internet, as well as digital services traded indirectly as an embodied item in other goods which are exported in the supply chain.

As far as best practices in Europe are concerned, the areas in which the gap of the EU leader to the OECD leader are largest are the availability of broadband internet, both landline and mobile. More important than mere infrastructure is, however, the adoption of new technologies in businesses as this is where the gap is at its widest. Here, it is important that relevant policies for removing obstacles and adopting incentives are put in place. This means fostering competition, updating the regulatory environment and providing better access to finance, especially for small and medium companies. It would also be a good approach to copy – where possible – best practices of EU member countries in others so as to address disparities and exploit proven solutions to the challenges of the digital transformation.

An internationally competitive digital services sector is of huge importance to the EU economy as a whole. If this sector has high productivity levels, this will help other sectors improve their productivity as well and in turn enhances economic growth. A competitive and sustainable services sector is vital to ensuring that Europe’s skills- and knowledge-based economy can continue to rely on high value-added from the digital services sector in future.

Bibliography

Erixon, F., van der Marel, E., Lamprecht, P., & Deringer, H. (2017). Boosting Services Trade in the Age of Digitalization: What is the Potential, What are the Obstacles? Gütersloh: Bertelsmann Stiftung.

Sáez, S., Taglioni, D., van der Marel, E., C, H., & Zavacka, V. (2015). Valuing Services in Trade: A Diagnostic Toolkit for Services Trade Competitiveness. Washington D.C.: World Bank.

 van der Marel, E., Kren, J. and Iootty, M. (2016), Services in the European Union: What Kinds of Regulatory Policies Enhance Productivity?”, World Bank Policy Research Paper Series, No. 7919, Washington DC: The World Bank.

[1] (Van der Marel et al., 2016)