Services trade represents a huge untapped potential for growth. Services account for two-thirds of global GDP and 6 out of 10 jobs. Globally, services grew twice as fast as goods trade from 2010 to 2019. Yet the costs of services trade are twice that of goods trade, and 40% of those costs come from opaque regulations and cumbersome procedures.
Such restrictions are disproportionately burdensome to small and medium-sized enterprises (SMEs). Fixed costs associated with meeting foreign regulations can represent up to 50% of total export revenue in the first year a business starts exporting services. Modest reductions in services trade restrictions can lower export costs for smaller firms by around 7.5% more than for larger firms.
Moreover, expanding services trade can help women in particular. More than two-thirds of women in upper-middle and high-income countries were employed in the services sector in 2017. In contrast, in more emerging markets, the level is less than two-fifths, indicating the potential for services to benefit more women in these markets if regulatory frameworks are improved.
Over the last few years, a lot of focus has been on facilitating trade in goods, and both barriers and costs to trade in goods have fallen, including through implementing the World Trade Organization (WTO) Trade Facilitation Agreement. However, the regulatory burden remains high in the area of services, hampering the competitiveness of economies as services inputs are key not only in the production of goods but also in the production of other services (for instance, there is a need for efficient financial and legal services as inputs into efficient transportation and logistics services).
Two new agreements as tools to address these challenges and help grow services trade
It is within this context, and to tackle these challenges, that governments have recently concluded two new agreements. On the one hand, a WTO Reference Paper on Services Domestic Regulation was agreed in December 2021 by 70 economies, including Saudi Arabia. The agreement covers more than 90% of world services trade, and is the first deliverable in the area of services trade in the WTO in more than 20 years. The agreement can help simplify unnecessarily complicated regulations and ease procedural hurdles faced by service suppliers. It covers areas such as transparency, legal certainty and predictability, regulatory quality and facilitation, as well as gender equality (see Five ways a new WTO agreement will remove barriers to trade in services).
The OECD and WTO have estimated that the implementation of this new agreement could lower barriers to trade by an average of 11% across participating economies for which data is available, or in monetary terms trade cost savings of around $135 billion. Substantial savings are expected to accrue in the most highly regulated sectors, including financial services ($47 billion), business services ($36 billion), as well as communications and transport services (each with $20 billion in savings).
At the same time, a second new agreement to improve services regulatory frameworks and grow services trade was recently agreed in Africa through the African Continental Free Trade Area (AfCFTA) Protocol on Trade in Services, launched in January 2021. Covering all economies in Africa but one, this creates a powerful commitment to streamlining services and improving regulatory frameworks in Africa.
Streamlining and improving regulations could unlock Saudi Arabia’s and African services sectors, help these economies diversify and grow, increase competitiveness, and grow two-way trade.
Launching ‘Streamlining Services’ to unlock new sources of growth
Within this context, the World Economic Forum and Saudi Arabia have just launched a new initiative called ‘Streamlining Services’. The aim is to work with firms and governments to strengthen services regulatory regimes and, in so doing, increase competitiveness, jobs, regional integration and growth.
Concretely, Streamlining Services will launch public-private projects in Saudi Arabia and three African economies to identify the top challenges to services trade and help address those challenges through supporting implementation of key provisions in the WTO and AfCFTA agreements.
There is great scope for complementarity in services trade between Africa and Saudi Arabia given Saudi Arabia’s strong potential in financial services and capital requirements in Africa; the need for efficient logistics services between neighbours to foster regional integration and with it stability and growth; and the importance of growing trade in ICT services to create larger, regional digital markets, which investors seek. There is also strong evidence of the potential and benefits of trade between regional neighbours before trade gradually expands to more distant markets.
These will be the first projects to focus on growing services trade through the implementation of the new WTO and AfCFTA agreements. Benefits are expected to spill over to other economies as streamlining services promotes trade in an efficient manner, growing global commerce.
The initiative is complementary and synergistic with the work of the Global Alliance for Trade Facilitation, which focuses on facilitating trade in goods, the work of the Global Investment Policy and Practice Initiative, which focuses on facilitating investment, and the work of the Forum’s Digital Trade Initiative, which focuses on facilitating e-commerce. These efforts are mutually dependent and reinforcing, but services has been the missing piece of the puzzle.
By facilitating trade in goods, services, investment, and e-commerce – through The World Economic Forum’s Facilitation Framework – we can help unlock new value and growth for the world.
Source: World Economic Forum