About Trade in Services

What is a Service?

Why are Services Important?

What is Trade in Services?

Why is Trade in Services Important?

 

What is a Service?

A ‘service’ has several characteristics:

  • A service is a type of economic activity;
  • A service is an idea or action expressed in different ways;
  • A service is intangible;
  • A service does not result in ownership;
  • A service is consumed at point of sale and therefore cannot be stored;
  • The service provider and service consumer are inseparable from service delivery;
  • A service is one-time generated, rendered and consumed and is therefore unique.

Why are services important?

The services sector plays an integral role in economic development.  From the important social role health and education services play in affecting the quality of life and skills of the labour force, to the basic infrastructure created by construction and telecommunication services essential to all businesses, to the role financial and transportation services play in supporting the traditional manufacturing and agricultural sectors, to the value professional services impart in enhancing the competitiveness of any business – the services sector is the cornerstone of all economic activity.

What is Trade in Services?

A service is exported when a local service provider is being paid by a foreign consumer no matter where the service is actually provided.

The World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS) notes four ways of trading services:

Mode 1 – Cross-Border Trade: where the trade takes place from one country into the other, however, only the service itself crosses the border, and not the service provider or consumer.

Mode 2 – Consumption Abroad: where the consumer travels to the country where the service is supplied for consumption.

Mode 3 – Commercial Presence: where the supplier establishes a commercial presence abroad.

Mode 4 – Movement of Natural Persons: where the service provider travels to another country, on a temporary basis, to provide a service.

Why is Trade in Services Important?

Trading in services offers significant opportunities both in terms of increased exports and imports, aimed together at enhancing competitiveness, stimulating economic development and ultimately, improving welfare and reducing poverty.

On the import side, the potential competition-driven benefits of expanding the range of services available to consumers, decreasing costs and increasing quality, including through the attraction of FDI, is an oft-cited benefit from greater services imports.

On the export side of trade in services, apart from the obvious benefit of generating income/foreign exchange, there are many other benefits to developing an internationally competitive services export sector.  For one, a successful services company does not necessarily require large start-up capital, numerous employees or large financial investments to export successfully.  Therefore the potential for micro services companies to develop and trade successfully is quite feasible – a particularly important consideration in developing countries, where firms tend to be smaller and more capital scarce.  This possibility can lead to the establishment of new businesses, the development of specialty services, employment opportunities and potentially reduce the ‘brain drain’ that is often associated with developing country service professionals.

Furthermore, readily available local, high quality services will not only add value to businesses across all sectors, it will reduce the need of having to import these services from elsewhere, and correspondingly lower import expenses.  The availability of local high quality services is an attraction in securing foreign direct investment as well, as this will also reduce investors’ needs to import the necessary services to maintain international competitiveness.

Lastly, services are often more ‘green’ – in that they have a comparatively smaller ecological footprint than either the agricultural or manufacturing sector (though IT-based services have raised increasing concern surrounding energy consumption).