“Commercial Presence” Abroad, but “Cross-Border Supply” and “Consumption Abroad” Matter for Some Subsectors

FIGURE 1.7 The Most Prominent Mode of Exporting Services Is Establishing “Commercial Presence” Abroad, but “Cross-Border Supply” and “Consumption Abroad” Matter for Some Subsectors

Decomposition of global services exports, by mode of supply and subsector, 2017

100

Share of world exports (%) 80

60

40

20

0 ICT Professional, scientific, and technicalFinance and insuranceAccommodation and foodArts, entertainment, and recreationTransportation and storageWholesale and retail Education Health Global innovators Low-skill tradable services Skill-intensive social services Cross-border (mode 1) Consumption abroad (mode 2) FDI (mode 3) Movement of persons (mode 4)

Source: Trade in Services by Mode of Supply (TiSMoS) database, World Trade Organization (WTO). Note: TiSMoS is an experimental dataset that relies on imputations or assumptions for the breakdown of services trade in most countries between modes 1 (cross-border supply), 2 (consumption abroad), and 4 (movement of persons). Mode 3 trade (commercial presence through foreign direct investment [FDI] that establishes company affiliates in consumers’ countries) is determined from the Foreign Affiliates Statistics (FATS) of the European Union’s statistical office, Eurostat, and can be identified separately for most countries. For further details, see Wettstein et al. (2019). ICT = information and communication technology.

In principle, all services—including low-skill domestic services that are predicated on face-to-face interactions between producers and consumers—can be exported through the movement of producers across borders. This, however, shifts the discussion from services trade using mode 4 to prospects for longer-term migration.

Among services that share linkages with other sectors, many are also “embodied” as inputs in the export of goods—a practice often dubbed “mode 5” trade. These services typically include R&D, engineering, design, software, and logistics services that add value during the production of manufactured goods and agricultural commodities and are therefore exported indirectly. For example, with 10 million lines of computer programming code, software-related services constituted 40 percent of the value of General Motors’ 2010 Chevy Volt model, compared with some 5 percent of the value of their cars in the 1980s. For most countries, these embodied services inputs represent about one-third of the total value of their manufactured exports (Antimiani and Cernat 2018). This “servicification” of manufacturing is discussed further in chapter 4.

“Innateness” of Scale, Innovation, Spillovers, and Low-Skill Jobs to a Subsector

The extent to which the scope for scale, innovation, spillovers, and jobs for low-skilled workers is innate to sectors—rather than reflecting policies, technology, or other trends— can be inferred from the extent to which they vary over time or across countries.

Changes in Characteristics over Time Based on data from the EU-15 and the United States, there is little evidence to suggest that the magnitude of these pro-development characteristics across services subsectors has changed dramatically over time. The share of low-skilled workers in different services subsectors remained largely constant between 2001 and 2018, with professional, scientific, and technical services; ICT; and finance remaining the most skill-intensive subsectors, and accommodation and food services the least (figure 1.8, panel a). Health services was the only subsector that experienced a discernible increase in the share of low-skilled workers, from about 30 percent in 2001 to 40 percent in 2018.

The physical capital intensity of a given services subsector similarly remained largely unchanged between 2010 and 2017 across all services subsectors, with wholesale and retail trade becoming relatively more labor intensive over the period (figure 1.8, panel b). The extent of linkages with other sectors also remained largely unchanged between 2005 and 2015 across all services subsectors. In this regard, the share of intermediate sales in total output remained the highest in professional, scientific, and technical services and the lowest in education services during this period (figure 1.8, panel c).

The increased trade intensity of certain services in international markets is one of the more significant changes in the set of pro-development characteristics. Finance; information and communication; and professional, scientific, and technical services saw large increases in the share of value added that was exported between 2005 and 2015. This reflects, at least in part, their increased international tradability owing to the ICT revolution that enabled market exchange without physical proximity. At the same time, traditional services such as transportation and wholesale and retail trade also increased their international trade intensity, reflecting the role of policy changes such as the relaxation of restrictions on FDI (figure 1.8, panel d).

Differences in Characteristics across Countries The characteristics of scale, innovation, and spillovers associated with a services subsector may also vary across countries, often reflecting differences in policies, skills, and technology use between high-income economies (such as the United States and Western European countries) and low- and middle-income economies.

Except in accommodation and food services, the export-to-output ratio is higher in high-income countries than in LMICs across all services subsectors (figure 1.9, panel a). Among low-skill tradable services, the lower export intensity of wholesale trade and