Decomposing International Trade in Commercial Services
| Author | Xianjia Ye,Hein Roelfsema,Christopher Findlay |
| DOI | 10.1177/00157325211018890 |
| Published date | 01 August 2021 |
| Date | 01 August 2021 |
Decomposing
International Trade in
Commercial Services*
Hein Roelfsema1, Christopher Findlay2
and Xianjia Ye3
Abstract
To delve deeper into the rise of trade in commercial services as the most
important determinant of the recent increase in digital trade, this article offers a
decomposition of international service trade using the latest release of the Inter-
Country Input–Output (ICIO) tables. The analysis decomposes international ser-
vice trade into a split between (a) direct services exports and services embodied
in goods, (b) advanced economies and the major emerging markets, and (c)
the major commercial services industries. We show that overall direct service
exports have become more important relative to services embodied in goods,
especially in advanced economies (the ‘cross-border’ effect). Further, we show
that for emerging markets, the rise of the exports of services comes from the
increase in volume of export of goods, which embed services and not because
of an increased share of services embodied in the domestic value of exported
goods (the ‘embodied volume’ effect). Finally, we show that the increase in ser-
vices trade can be attributed to the increase in traded information technology
(IT) services and not so much to that in financial and business services that are
increasingly traded digitally across borders (the ‘plain vanilla digitalisation’ effect).
JEL Codes: F14, F15, G20
Article
*This article is part of the work of the Jean Monnet Network of Trade and Investment in Services
Associates (TIISA), funded by the European Commission.
1 Universiteit Utrecht, Utrecht, Netherland.
2 Australian National University, Canberra, Australia.
3 Rijksuniversiteit Groningen, Groningen, Netherland.
Corresponding author:
Hein Roelfsema, Universiteit Utrecht, 3584 CS Utrecht, Netherland.
E-mail: h.j.roelfsema@uu.nl
Foreign Trade Review
56(3) 238–256, 2021
© 2021 Indian Institute of
Foreign Trade
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DOI: 10.1177/00157325211018890
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Roelfsema et al. 239
Keywords
Input–output tables, international economics, services, value added
Introduction
Both the stagnation of trade in industrial products and the gradual increase
in trade in services are among the most signicant trends in world trade over
the past 10 years. Another trend is the attention to trade through global value
chains—see, for example, the World Development Report 2020 that focuses
on this topic from a development perspective (World Bank, 2020)—which
so far has paid limited analytical attention to the increased role of services in
global value chains (GVCs). The rise of cross-border trade in services is espe-
cially observed in commercial services (Media, Telecom, information technol-
ogy—IT, Finance and Other Business Services, which mainly relate to business
consultancy) in which digitalisation plays an important role. As a case in point,
the World Trade Organization (WTO) World Trade Report 2019 focuses exclu-
sively on the increased importance of trade in services (WTO, 2019). In addi-
tion, digital operating platforms have enabled a further slicing up of the value
chain over countries, increasing the number of traded goods and services between
afliates and afliated outsourcing partners (Hummels et al., 2018). Although
such digitalisation enables within the rm specialisation in headquarter services
in developed economies, which are associated with knowledge capabilities, re-
cently, there is a signicant ‘Mathew effect’, where rms in emerging markets
link, leverage and learn to become leaders in specialised services: India in busi-
ness processes and China in articial intelligence (AI) are eye-catching examples.
In this article, we analyse the drivers of the rise in trade in commercial services
and thus comment on the underlying digitalisation of international trade. To do so,
we draw on three trends in the analysis of trade flows. The first is to look at the
domestic value-added components of trade instead of its gross value. Since gross
trade flows do not consider the real value created in a country or industry, a focus
on value-added trade would more clearly isolate the elements of comparative
advantage and the income effects of international trade (Johnson & Noguera,
2017). The second trend is to make a distinction between services that are directly
exported and services that are embodied in traded products and services. The lat-
ter is central to the extensive literature on global sourcing, which states that much
of the trade we observe takes place within companies or is caused by the outsourc-
ing of globally sliced production processes (Antras & Helpman, 2004; Antras
et al., 2017; Grossman & Rossi-Hansberg, 2008). Not considering that services
are used as inputs abroad and possibly exported again embodied in goods would
exaggerate the ultimate effect of trade flows in supply and demand because of
double counting. Therefore, when analysing trends in services trade flows, it is
interesting to look at the difference between services that are consumed as an end
product and services that are used as input. The third trend is the increased role of
firms from emerging markets in global services trade, especially from Asia.
Although much of the policy attention is on service liberalisation among
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