Are services traded differently?

Andrea Ariu

International trade is traditionally thought of as goods crossing borders. Trade in services, however, is becoming increasingly important for high-income countries. This column, using Belgian firm-level data from 1995-2005, argues that trade in goods and services differ deeply in key aspects such as firm participation rates, size and frequency of shipments, entry and exit rates in foreign markets and in growth strategies.

International trade is traditionally thought of as goods crossing borders. Trade in services, however, is becoming increasingly important for high-income countries and its role is likely to grow substantially over the next years (Francois and Hoekman 2010).

Trade in services and goods differ along several critical dimensions (WTO 2010).

Goods must physically cross borders, so the means of transportation matter.

Services are intangible and thus do not need to cross borders in a physical sense.

Goods’ characteristics are generally observable before purchase, and goods can be produced, moved, stored and consumed in different locations and time.

Typically, services are not storable, their characteristics are not observable before purchase, and production and consumption often coincide spatially and temporally.

Trade in goods is subject to tariffs that discriminate across countries.

Trade in services is not subject to any tariff, but rather to technical barriers1 that rarely discriminate across countries.

Why are trade patterns so similar when goods and services are so different?

Despite these differences, recent studies using firm-level trade data2 surprisingly find that both types of trade share many qualitative features and only few, if any, differences. In new research (Ariu 2012) I use a more detailed dataset on Belgian firms for the1995-2005 period to go deeper into the comparison of trade in goods and in services.

Trade is rare, even more so for services

It is a well-known fact in the literature that among all operating firms, only a tiny minority – around 4% - participate in international trade in goods (Bernard et al. 2007). This low percentage highlights that international trade is a very selective process and only very few firms can consider operating in foreign markets. In Ariu (2012) I find that among all operating firms, only 1% participate in international trade in services. This suggests that trade in services is even more elitist than trade in goods.

Our results point at higher fixed costs as the cause of this low participation rate for trade in services. A more severe selection process allows fewer, but bigger and more productive firms to enter the export market. This mechanism might be induced by the relatively higher restrictions that are still in place for trade in services, such as visa requirements, special national certifications or professional associations (Breinlich and Criscuolo 2011).

Another interesting aspect of trade participation is that 5% of exporters and 8% of importers trade both goods and services. Despite representing a small number of firms, these account for more than 30% of total trade. Therefore, even if firms have to pay higher fixed costs to start trading both goods and services, selling them together might generate more value than trading only one of them. This fact can be an indication that there can be complementarities in exporting them jointly. Examples of this phenomenon are vehicles and insurance, machinery and technical services such as repairs or maintenances.

Trade frequency and size

Firms trading goods tend to make a lot of shipments over one year, and the value of each tends to be relatively small. On the contrary, firms trading services make very few transactions and their size tends to be relatively big. This difference remains true even when we focus only on firms trading both goods and services. The difference in transaction size and frequency may be due to the fact that goods can be easily divided while services are not divisible. Therefore, firms exporting services tend to do it all at once, while firms trading goods divide the supply into different shipments and customise the process following customers’ needs.

Entry and exit in foreign markets

Every year, 43% of firms that export services are “new” exporting firms, i.e. firms that were not exporting services previously. The entry rate is thus very high. This percentage is only 31% for goods’ exporters. Yet, 36% of firms involved in export of services will not export the following year (this figure is 27% for trade in goods). Foreign markets thus seem to be more attractive for services but also more uncertain, with exit rates higher than for goods. Looking at the net effect of the turnover created by the entry and exit, I find that during the period examined, there is a positive net entry for both goods and services.

Trade volumes and growth strategies

While a few firms exporting several different products in several countries dominate goods’ flows (Bernard et al. 2012 and Mayer et al. 2010), we observe a less skewed distribution for trade in services. Differences across firms in terms of exported and imported values for services are less remarkable than for goods. The lack of big exporters and importers of services might be the consequence of the high barriers still in place for trade in services which are hampering them to become as big as their goods counterparts. However, by looking at the growth paths of exporting and importing firms, we observe that services exporters are smaller than goods exporters in their first year in foreign markets, but their growth is higher and more persistent, and after ten years they become bigger than their goods counterparts. Therefore, the absence of very big exporters and importers for services seem to be driven more by the fact that trade in services is a relatively young form of trade than to higher trade barriers. In a scenario where trade barriers for services go down and services trade acquires more maturity, services and goods trade shares should converge, and eventually services might also become the main component of world trade in the near future.

Conclusions and policy implications

Goods and services deeply differ in some key aspects such as participation rates, size and frequency of shipments, in entry and exit rates in foreign markets and in growth strategies. These differences highlight the need for more firm-level research to understand the causes and provide tailored trade policies.

A low participation in exports and imports suggests that trade barriers for services are still very high, and only the biggest and most productive firms are able to overcome them. Therefore the abatement of trade barriers for services would allow more firms to participate to trade, providing them with the opportunity to exploit new markets.

Services are frequently bundled with products, therefore, services’ trade liberalisation could induce positive effects for trade in goods, but also vice-versa. Therefore, governments, when negotiating the reduction of trade barriers, should also take into account these positive side effects.

We find that exporting and importing services represents an appealing opportunity that attracts many firms, but also a risky one since only a few survive. Therefore, a more detailed analysis of entry and exit determinants would provide useful evidence to understand the reasons behind the high turnover and eventually provide policymakers with possible policy responses.

Services’ trade growth is higher and more persistent than goods’ trade growth. This means that demand for goods and services follows different paths and services are gaining more and more importance. In the near future services can possibly become the main component of world trade. Hence, governments should provide firms with the appropriate environment to exploit this new opportunity of growth.

References

Andrea Ariu (2012) "Services Versus Goods Trade: Are They the Same?" CEPR Discussion Paper 9036.

Bernard, A. B., Jensen, B. J., Redding, S. J., and Shott, P. K. (2011). "The Empirics of Firm Heterogeneneity and International Trade". Annual Review of Economics, forthcoming.

Bernard, A. B., Jensen, B. J., Redding, S. J., and Shott, P. K. (2007). "Firms in International Trade". Journal of Economic Perspectives, 21(3):105–130.

Breinlich, H. and Criscuolo, C. (2011). "International Trade in Services: a Portrait of Importers and Exporters". Journal of International Economics, Elsevier, 84 (2) p. 188– 206.

Federico, S. and Tosti, E. (2010). "Exporters and importers of services: Firm-level evidence on italy". mimeograph.

Francois, J. and Hoekman, B. (2010), "Services Trade and Policy" , Journal of Economic Literature, Vol. 48, p. 642-692.

Gaulier, G., Mirza, D., and Milet, E. (2011). "French Firms in International Trade in Services". Économie et Statistiques, n.435-436, p. 125-147

Kelle, M. and Kleinert, J. (2010). "German firms in service trade". Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, 56(1) pag. 51–72.

Thierry Mayer and Marc J. Melitz and Gianmarco I.P. Ottaviano, 2010. "Market size, competition and the product mix of exporters," Working Paper Research 202, National Bank of Belgium.

Walter, P. and Dell’mour, R. (2010). "Firm-Level Analysis of International Trade in Services". IFC Working Papers 4.

World Trade Organization, (2010), Measuring Trade in Services

Technical barriers refer to the legislation or the technical barriers that hamper or impede the provision of services in a country. Examples are visa restrictions, special regulation that limit the exercise of particular jobs like doctors or physical barriers that limit the provision of telecommunication services.

2 Breinlich and Criscuolo (2011) for the UK; Kelle and Kleinert (2010) for Germany; Walter and Dell’mour (2010) for Austria; Gaulier et al. (2010) for France; and Federico and Tosti (2010) for Italy.

