October 01, 2019, 00:53 / Opinions

Why develop export of services

The total value added of services in the global economy already exceeds the value added of goods and is growing faster

Ruben Enikolopov , Rector of the Russian Economic School As technological development progresses, it is the export of intangible services, and not the movement of physical goods, that becomes the basis of world trade

Last week, news appeared that Economic Development Minister Maxim Oreshkin proposed to allocate almost 245 billion rubles in the coming years. to develop the export of services. The proposal to increase funding under this article by more than forty times was met with a fair amount of skepticism, but in fact, the rate on the export of services fully fits into global trends that may soon significantly change our ideas about international trade and global value chains.

We still associate international trade with oil tankers plying the oceans and millions of containers of goods made in China. If trade in services is remembered at all, it is in the last place. And if you look at the figures of official statistics, then such a view would seem to have a right to life. According to the UN, services account for less than a quarter of all global trade, which contrasts sharply with the share of services in GDP. In Russia, services account for almost two-thirds of total GDP, and in developed countries such as the USA, their share reaches 80%. Traditionally, this has led to the conclusion that most services are non-tradable goods and their contribution to international trade is very limited.

But a more detailed analysis shows that this conclusion is incorrect. With technological development, it is the export of intangible services, and not the movement of physical goods, that becomes the basis of world trade. And the underestimation of the role of services is associated with the peculiarities of statistical accounting. Recent research from the McKinsey Global Institute shows how vastly underestimated the contribution of services to global trade is compared to trade in goods. Over the past decade, international trade in services has grown at a rate 60 times faster than trade in goods, and already in 2017, services accounted for more than half of all value added in global trade chains.

The reason for underestimating the share of services in world trade is that not all such trade is directly reflected in statistics. First of all, it makes sense to focus not on total trade volume, but on value added, since this is what is important for economic development - and this is $5.1 trillion. Examples of “officially recognized” trade in services would be the outsourcing of IT application development to other countries or the provision of financial services to foreign firms.

But this is only the smallest part of the iceberg. Another $4.3 trillion comes from trade in services included in the price of goods. This is, for example, the cost of R&D and marketing services in the pharmaceutical trade. The physical production of most of these drugs itself constitutes a negligible share of their price, which is determined primarily by investments in the development and branding of new drugs. Therefore, every time pharmaceutical companies sell their products to other countries, the lion's share of the added value comes from the services of researchers and marketers, and not from physical tablets.

Another $3.2 trillion comes from cross-border trade in “free” digital services, such as searching on Google, chatting on Facebook or getting information from Wikipedia. Their accounting is a headache for statisticians all over the world, since in GDP all goods and services are taken into account at their market monetary value, which means that from a statistical point of view, free services do not represent any value. But in international trade the problem comes into sharp relief, as it turns out that free services account for almost a quarter of all trade in services in terms of value added.

Another $0.8 trillion of added value comes from intangible assets provided to foreign subsidiaries of multinational companies, such as royalties for the use of trademarks.

And if you take all these components into account, the total added value of services in world trade is $13.4 trillion. This is more than the value added of goods - $13 trillion. Taking into account the significant difference in growth rates, we can expect that in the coming years it will be trade in services that will be the basis of all world trade.

Moreover, these calculations give reason to believe that, in general, rumors about the death of globalization may turn out to be exaggerated. The observed decline in international trade may simply be a consequence of a shift from the statistically well-observed trade in goods to the much more difficult to measure (but no less important) trade in services. In addition, these trends may also significantly reduce the effectiveness of government-imposed trade barriers, since the “permeability” of borders for services is much greater than for goods. Banning the export of apples is easier than stopping the flow of information via the Internet. So, ultimately, the effect of the trade wars unfolding before our eyes in the 21st century. may be much less than some politicians would like.

But let’s return to stimulating the export of services from Russia: this strategy can be advantageous not only because it follows global trends. It can also make it possible to more fully use one of Russia's most valuable resources - human capital, which, despite all the efforts of recent years, still remains one of Russia's competitive advantages in the world market. After all, for the development of the country it is much more useful to export the product of the work of our programmers than the programmers themselves. Not to mention the fact that such an approach can help achieve what our officials have been working on for so long and so unsuccessfully - economic diversification. So this seems like almost the first time we've heard anything that actually resembles an economic strategy other than just throwing government money at everything. I wouldn't want to miss this chance.

The author is the rector of the Russian Economic School