The fast-paced world of services trade

30 Jan 2020

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  • Divya Skene

Many of us have unknowingly supported international services trade this year.  Services trade is ubiquitous even if not as obvious as buying or selling a physical ‘thing’.

If you’ve booked a trip overseas; welcomed foreign visitors; gained exposure to foreign financial markets through your super fund; designed an innovation incorporating a foreign patent; encouraged your friends overseas to watch an Australian production; or provided professional and technical advice to clients in other countries – you’ve engaged in or supported international services trade.

As technology and globalisation have reshaped the way people transact internationally, it is no wonder that the value of services trade has increased as a share of global economic activity, growing from 7% of world GDP in 1989 to 13% in 2018.

It is easy to imagine that global services trade is only set to grow larger.

Trends in services trade

According to research from the Reserve Bank of Australia (RBA), global growth in services trade has been driven by long-term trends within advanced economies - consumption of modern business services such as financial services and telecommunications - in addition to increased outbound tourists from emerging Asian markets.

Interestingly, travel-related services have played a large role in driving Australia’s services offerings to the world, with this category now accounting for 65% of our total services exports. 

  • This category includes services consumed by people who travel to Australia such as international students – with education now a leading services export for Australia.  It also includes spending by people visiting for leisure, to meet friends/family or undertake business.

The remaining 35% - non-travel services - is a broad area including financial services, insurance, legal, management consultancy, accounting and software activities, among others.

Newly available data allows us to better understand Australia’s non-travel services exports. 

  • In 2018, Australia’s non-travel services firms earned $32.5bn from non-residents in cross-border transactions. 
  • These exports represented 7.4 percent of our total exports in that year.

In this category, a small proportion of exporting firms contribute a large share of export value.   Firms delivering transport services, for example, benefit from Australia’s physical distance from global markets while firms in financial services benefit from Australia’s medium-sized open economy with strong trading links overseas. 

 

Services Export (excludes all travel-related spending such as leisure, business and education travel), 2017-18

services export

Source: ABS, Austrade customised data.

 

This new data gives us a better understanding of services trade that occurs across borders, but it still isn’t a complete picture.

The hidden services in goods trade

Many goods that we trade overseas have a services value-add component.

Consider Australian services that add value to the commodities we sell overseas, such as agricultural technologies or mining technologies.  Whilst the product leaving the port is recorded as a good, important inputs to this traditional goods trade are in fact services.

Such ‘embedded’ services are becoming increasingly important as digitisation transforms the manufacturing industry.  Cars, fridges and televisions, for example, have embedded software that result in the traded value of this ‘manufactured good’ reflecting a very important services value-add component.

Services trade by foreign affiliates – ‘the silent majority’

A large amount of Australian services sales also occur overseas, in foreign markets, and this data isn’t easily captured.  For example, you might imagine sales conducted through an ‘on the ground’ presence by an Australian firm would account for a significant share of the international earnings of companies offering financial services, health services, software, or advisory and consultancy services.  Having proximity to the consumer would seem to be important for these activities.

A new analytical model developed by WTO this year confirms that sales through a commercial presence overseas (such as a bank branch) is important –these type of sales accounted for around 60% of global services trade in 2017.

However services trade is in transformation and new research from WTO points out that digitisation is already having an impact on services trade.  For example, since the global financial crisis, cross–border trade in the lucrative financial sector has grown faster than trade conducted through a commercial presence. 

  • To sell financial services today, it seems you don’t necessarily need to be in the same market as your client.  You can just trade it across borders, digitally.
  • Australian fund manager Moelis Australia is an example of a company that attracts investment funds from non-residents for investment in specific asset classes in Australia, working predominantly through its Australian offices.

Consumer preferences, enabled by digital technology, are shaping business models in services trade.

In the fast-paced world of services trade, digitisation is already upending some of our traditional assumptions. And more work is needed to better understand what drives services trade and how best we can collect this data.