51625 The World Bank APRIL PREMnotes 2009 N U M B E R 135 TRADE The Crisis Resilience of Services Trade Ingo Borchert and Aaditya Mattoo, DECRG The current gloom and doom about goods The apparent resilience of services trade trade has obscured the quiet resilience of may be jeopardized by protectionism. Even services trade. Services account for over one- though few explicitly trade-restrictive mea- fifth of global cross-border trade, and for sures have so far been taken in services, the some countries such as India and the United changing political climate and the widening States close to a third of all exports. New data boundaries of the state in crisis countries on cross-border trade from the United States could introduce a national bias in firms' reveals that since mid-2008, trade in goods choices regarding procurement and the loca- declined drastically but trade in some services tion of economic activity. is holding up remarkably well.1 More aggre- gate data available for other OECD countries U.S. Services Imports also suggests that services trade has suffered and Exports less from the crisis than goods trade. Monthly U.S. imports and exports of goods Within services, trade in goods-related declined by about one-third in value terms transport services and crisis-related financial from peaks of $195 billion and $121 billion, services has shrunk, as has expenditure on respectively, in July 2008, to $122 billion and tourism abroad. But trade in a range of busi- $85 billion, respectively, in February 2009.3 ness, professional, and technical services is The corresponding decline in services im- still increasing. Hence, developing countries ports and exports was only by about one-tenth, like India, which are relatively specialized from $29 billion and $38 billion, respectively, in business process outsourcing and infor- in July 2008, to $26 billion and $33 billion, mation technology services, have suffered respectively, in February 2009 (figure 1).4 much smaller declines in total exports to the Within services trade, interesting pat- United States than countries like China or terns emerge (figures 2 and 3). Imports and regions like Africa, which are specialized in exports of goods-related services such as exports of goods, transport services, or tour- international transport have shrunk in the ism services. last quarter (year-on-year by about one-fifth) Initial evidence suggests that services as has expenditure on tourism abroad (by trade is buoyant relative to goods trade for about one-tenth). However, imports of "other two reasons: demand for a range of traded private services" have actually grown slightly services is less cyclical, and services trade and by 2 percent. production are less dependent on external There are contrasting trends within "oth- finance. If further investigation confirms er private services." On the one hand, trade that trade in certain services is inherently less in financial services has contracted in the last affected by crises, then these services could quarter (year-on-year imports by 12.5 percent play a more prominent role in developing and exports by an even higher 17 percent). countries' diversification strategies.2 On the other hand, trade in a range of other FROM THE POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK Figure 1: U.S. Monthly Imports and Exports of Goods and Services, January 2006­February 2009 250,000 200,000 US$ million 150,000 100,000 50,000 0 n l ct n l ct n l ct n r r r Ju Ju Ju Ap Ap Ap Ja Ja Ja Ja O O O 06 07 08 06 07 08 06 07 08 06 07 08 09 20 20 20 20 20 20 20 20 20 20 20 20 20 Goods imports Services imports Goods exports Services exports Source: U.S. Bureau of Economic Analysis (BEA), U.S. International Trade in Goods and Services, millions of dollars, months seasonally adjusted. Figure 2: Year-on-Year Growth Rates of U.S. Monthly Imports of Goods and Services, January 2007­February 2009 40 20 Growth rate (%) 0 ­20 Travel Transport Other private services Goods ­40 ay ay l l n n n ar ar p ov p ov Ju Ju Ja Ja Ja Se Se M M M M N N 07 08 07 08 09 07 08 07 07 07 08 08 08 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: BEA, U.S. International Trade in Goods and Services, months seasonally adjusted. 2 PREMNOTE APRIL 2009 Figure 3: Year-on-Year Growth Rates of U.S. Monthly Exports of Goods and Services, January 2007­February 2009 40 20 Growth rates (%) 0 Travel Transport ­20 Other private services Goods ­40 n ay l p ov n ay l p ov n ar ar Ju Ju Ja Se Ja Se Ja M M M N M N 07 08 07 08 09 07 08 07 07 08 08 07 08 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: BEA, U.S. International Trade in Goods and Services, months seasonally adjusted. services is growing, with U.S. exports grow- cept for Japan, for which the services import ing even faster than imports. This pattern is growth is positive. But interestingly, imports evident in insurance (imports by 3 percent, of goods are contracting faster for all coun- exports by 9 percent); telecommunications tries except Australia and Poland. Until more (imports by 2.5 percent, exports by 25 per- detailed data becomes available, we can only cent); and, in particular, a range of business, conclude that evidence from other OECD professional, and technical services (imports countries does not contradict the picture of by 7 percent and exports by 10 percent). the relative resilience of services trade emerg- ing from U.S. data. Trade of Other OECD Countries The United States accounts for 17 percent of The Impact on Developing all OECD imports of services and 20 percent Countries of all OECD exports of services. How far Overall exports to the United States of devel- does its experience reflect that of the OECD oping countries that are relatively specialized countries more generally? Trade data for the in services, like India (38 percent share of ser- fourth quarter of 2008 has been released by vices in total exports), have declined less than a number of other OECD countries as well exports of countries and regions for which as two non-OECD countries (Brazil and services are less important, such as Brazil Indonesia). This data is only available at an (12 percent share), China (9 percent share) aggregate level, that is, for services trade as a and Africa (15 percent share) (figure 5). The whole and not for its subcomponents. Figure contractions in their total exports (goods and 4 shows for each country the quarterly growth services) to the United States in the fourth rate of goods imports (on the vertical axis) quarter were India (2.5 percent), Brazil (13 and services imports (on the horizontal axis). percent), China (9 percent), and Africa (36 Both rates are negative for all countries, ex- percent). This relatively positive outlook is APRIL 2009 PREMNOTE 3 Figure 4: Growth of Goods and Services Imports of 29 OECD and 2 Non-OECD Countries, Quarterly Growth Rates 10 Quarterly growth rates imports Growth rate goods imports (%) 45 degree line 0 ­10 Japan Brazil Canada Indonesia United States Mexico Switzerland ­20 Australia area EuroGermany France New Zealand Italy Poland NetherlandsKingdom United Portugal Spain Czech Republic Slovak Republic Hungary Denmark Greece Korea Luxembourg Belgium Ireland Finland Sweden ­30 Norway Turkey ­30 ­20 ­10 0 10 Growth rate services imports Source: OECD, Balance of Payments Statistics, Trade in Services by Partner Country, millions of dollars, seasonally adjusted. Iceland has been dropped. corroborated by Indian industry sources, disputes over the service rendered. Generally, which suggest that employment in the export- services-producing firms have even in normal oriented IT and business process outsourc- times tended to be less dependent on external ing services is expected to grow by about 5 finance than goods production because they percent (around 100,000 jobs) in 2009. Thus, have limited tangible collateral. For example, even during the crisis the industry continues two of India's largest exporters of software to be a net hirer. While growth rates of both and business-process services, Infosys and sales and employment are expected to be cut Tata Consultancy Services, have no external in half, this still leaves the sector with growth debt at all and rely completely on retained rates that would be considered buoyant in earnings for their operations. many manufacturing sectors. Second, demand for a range of services seems to have contracted less than demand Understanding the Resilience for goods. One reason is that services are of Services Trade not storable and so are less subject to the big Based on new evidence from Indian services declines in demand in downturns that affect exporters, we find that services trade is buoy- durable goods like shoes and televisions. This ant for two reasons. First, on the supply side, is because many services suffer neither from services trade has been less affected by the the "vintage effect" (that is, the willingness to crisis-induced scarcity of finance. Services wear an older pair of shoes or drive an older trade, especially in electronically delivered car) nor from the "inventory effect" (that is, business services, needs trade finance less the fact that cuts in final demand translate than goods trade. When external funds are into bigger immediate cuts in demand for needed, e.g. for working capital, small and factory output because of inventory adjust- large firms are able to raise finance against ment). Another reason for less contraction is orders placed. Moreover, receivables in that a larger part of international demand for business process outsourcing are fungible services--such as outsourced back-office ser- and easily factorized because they typically vices--is less discretionary than demand for involve a short-term transaction, a buyer goods such as computers. Many outsourced who is creditworthy, and a low incidence of services such as bookkeeping are "necessities" 4 PREMNOTE APRIL 2009 Figure 5: Change in the Value of Exports to the United States and Share of Services in Exports, Selected Countries and Regions 10 ARG 0 Change in total exports (%) IND JPN FRA HKG ­10 CHN AsiaPac TWN GER KORBEL SGP NLD MEX BRA Europe AUS GBR ITA ­20 SCAmerica CAN ­30 ZAF Middle East Africa ­40 Change in export value during crisis VEN Fitted values (slope = 0.42) ­50 0 10 20 30 40 50 Pre-crisis share of all services in total exports (%) Source: BEA, U.S. International Transactions Accounts Data, Tab.12: U.S. International Transactions by Area, millions of dollars, not seasonally adjusted. The slope coefficient in the graph is significant at the 2 percent level. for producers; demand for some of these ser- or contracting foreign services providers in vices is unrelated to the scale of production; specific areas (such as financial services) are and a larger part of services trade seems to not as costly for both host and source as the involve long-term relationships (for example, increasing social and political aversion to because of relationship-specific investments immigration. by buyers and sellers). There are also signs Another worry is the widening boundary that the crisis is itself generating new tasks to of the state as a result of increased govern- be outsourced, such as legal process outsourc- ment ownership of firms during the crisis. ing or debt processing, as well as creating Even though there is as yet no concrete pressure generally to reduce costs through evidence, there is a fear that state ownership outsourcing.5 will induce a national bias in firms' choices on procurement and location of economic The Subtle Threat of activity. In the longer term, subsidies to banks Protectionism are probably less damaging than financial The relative buoyancy of services trade can- protectionism. The former are temporarily not be taken for granted. Over it too hangs necessary to ensure the stability of the finan- the Damocles sword of protectionism. But cial system. The latter seriously erode the case protection is taking a subtle form, perhaps for openness. Inducing national banks to lend in deference to the invisibility of services and domestically in a crisis deprives developing the fact that they are increasingly delivered countries in particular of capital when they electronically. First, explicit discrimination most need it and greatly strengthens the case through preferential procurement seems at for financial self-sufficiency. this stage less damaging than the implicit so- cial and political disapproval of outsourcing. Conclusion Developing country service exporters argue A key area for future research is to under- that it is the latter that has had a chilling effect stand the reasons for the resilience of services on demand for their services. Similarly, the trade. One possibility is that this resilience few visible explicit restrictions on employing reflects delayed adjustment, both domesti- APRIL 2009 PREMNOTE 5 cally and internationally. While some services for communications, transport, financial, industries like construction are affected more distribution, and other business services. A quickly in a recession, other services indus- retreat from openness in services in industrial tries tend to adjust more slowly. Alternatively, countries could undermine reform efforts as we have conjectured, resilience could be a in developing countries, and even trigger a consequence of certain features of services costly spiral of retaliatory protection. or services trade itself: demand for a range of traded services is less cyclical, and services Acknowledgments trade and production are less dependent This research project was supported in part on external finance. Clearly we need more by the governments of Norway, Sweden, and thorough investigation of these hypotheses. the United Kingdom through the Multidonor If services trade is inherently less affected by Trust Fund for Trade and Development, and crises, then there may be additional benefits by the UK Department for International De- to diversifying a country's export structure velopment (DFID). towards services activities. We have also argued that even though few Endnotes protectionist measures have so far been taken 1. This data also includes consumption of in services, the growing political and social services abroad (in the category "travel") but aversion to outsourcing is a threat to trade. does not encompass sales through foreign affili- ates or through the presence of foreign natural This aversion is obscuring the economic persons. stake that all countries have in open global 2. For a discussion of export diversification, services markets. While developing countries see Shaw, Newfarmer, and Walkenhorst, eds., like India have seen rapid export growth, 2009, Breaking Into New Markets: Emerging Les- by far the largest exporters of these services sons for Export Diversification, Washington, DC, World Bank. are the United States and the countries of 3. Part of the decline in the value of goods the European Union. The EU and United imports could be due to the fall in commodity States account for 65 percent of world services prices. But note that U.S. goods exports also de- exports; China and India for 6 percent. The clined over the last seven months by one-third. United States and EU have both consistently 4. In terms of year-on-year growth rates, the run a huge annual surplus on services trade, decline in the value of goods imports was 33 percent in February 2009 while the decline in currently nearly $160 billion for the United the value of services imports was only 7 per cent. States and $220 billion for the EU countries. U.S. exports present a similar picture of year-on- While U.S. services imports from India and year declines: a decline in goods exports by 21 China have indeed grown to around $22 bil- percent by February, and in services exports by lion in 2008, U.S. exports to these countries 6.5 percent. 5. Combinations of these factors may also lead have expanded even faster, to over $26 bil- to dynamic effects. Say, for example, the pressure lion. Even during the crisis U.S. exports of key to reduce costs during the crisis induces outsourc- services are growing faster than its imports. ing. Once a firm incurs sunk costs in establishing The United States and EU have been the new arrangement and relationship, it does powerful advocates of open services markets not make sense to reverse the arrangement even all over the world. Many developing coun- after the crisis has passed. The temporary shock might thus permanently ratchet up outsourcing tries have begun to reform their markets activity. 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