Unlocking trade potential in services through digitalization

ADB
Cyn-Young Park, Fahad Khan, Cindy Justo

Asia’s upsurge in services trade has been facilitated by digital technology.

The services sector contributes more than 70% of global GDP, and employs 60% of the world’s workforce and over 70% of female workers. More importantly, services are key inputs to many, if not all, businesses.

Information and communication technology (ICT) services can enhance productivity and competitiveness. Financial services play an important role in channeling savings for productive investment and innovation. Transport and logistics services are vital for moving goods and people, and good health and education services help improve human capital.

Recent ADB research shows that services trade is growing more rapidly than merchandise trade in Asia and the Pacific, jumping nearly fivefold from $437.8 billion in 2002 to $1.977 trillion in 2015. Asian economies were also among the major services traders globally, accounting collectively for more than two-thirds of global services trade between 2002 and 2015.

Asia’s digital services trade will slow unless we expand access to ICT infrastructure

The steady and rapid growth of services trade illustrates the sector’s significant potential to boost economic performance as well as generate new business and employment opportunities.

The upsurge in services trade has been facilitated by the rise of digital technology. This has led to greater connectivity and participation in global value chains, especially for small and medium-sized enterprises, and has transformed the growth and tradability of services themselves.

But it’s only a matter of time before this growth starts to slow, unless countries find ways to expand access to ICT infrastructure.

Digital divide

Much progress has been made on digital connectivity in terms of mobile/cellular, fixed broadband, and internet penetration. But it has not been uniform across the region and within countries, nor between urban and rural populations. Smaller businesses are still significantly lagging. A digital divide may be emerging.

Economies in Asia and the Pacific can consider the following three broad policy actions to shore up digital trade in services for inclusive growth.

First, bridge information and infrastructure gaps by improving ICT infrastructure. This means expanding access and reducing the cost of accessing ICT devices and services, as well as encouraging cross-border data flows. Closing any information and infrastructure gaps also enhances the transparency and accountability of both public and private services delivery.

ICT-enabled trade not exempt from traditional trade barriers

Second, establish a robust regulatory and legal environment. ICT-enabled trade is not exempt from traditional trade barriers such as tariff and non-tariff barriers. In fact, barriers to services trade are generally higher than for merchandise trade. For digital trade in services to thrive, lowering entry barriers and eliminating market access restrictions are paramount.

A regulatory framework that fosters greater competition among services providers and a legal framework that encompasses legislation on e-transactions, consumer protection, data protection/privacy, and cybercrime can jointly promote innovation and expanded access to services, encourage transparency and reduce online transaction risks, and strengthen national e-commerce laws.

Third, review/update existing trade agreements on services and/or advance new services trade rules to address existing and emerging digital trade restrictions. For example, the General Agreement on Trade in Services rules already cover some disciplines that support digital trade, but there are emerging challenges in digital trade that require new rules. Government restrictions on the free flow of data can hamper the potential of online platforms.

Revolution to evolution

In this context, ongoing free trade agreement negotiations provide opportunities for developing a more robust digital trade agenda. The Association of Southeast Asian Nations (ASEAN) has come up with the e-ASEAN Initiative, while the ASEAN-Australia-New Zealand Free Trade Area covers provisions on transparency and online consumer protection.

Negotiations on the Regional Comprehensive Economic Partnership are addressing intellectual property rights and other areas of e-commerce. Strengthening regional efforts and the robust commitment of governments and participating stakeholders on these rights is vital.

Already, ICT is transforming the services sector. Developing Asia’s total trade in ICT and ICT-enabled services increased from $284.7 billion in 2005 to $772.3 billion in 2016 with exports growing faster than imports. In India and the Philippines, ICT accounts for 67.3% and 74.6%, respectively, of total service exports.

3 ways to deliver on potential of digital services trade for developing Asia

ICT is enabling access to information and inputs for business services such as telecommunications, finance, and professional/technical services. This creates more efficient and cost-effective ways to deliver goods and services through reduced transaction costs and better logistics networks.

Ultimately, the ICT revolution will help trigger the evolution of services trade in the region from basic call centers, software coding, and digital content to more complex business processes such as system design, research and development, human resources, sales and marketing, and finance.

But that evolution is not inevitable, unless economies improve ICT infrastructure, establish robust regulations, and update trade arrangements to reflect digital priorities.