Euro area benefits from easing services trade
By Nina Furbach and Iván Ordoñez Martínez
Services are playing a growing role in global trade. The ECB Blog shows that this trend has been driven by a decline in non-tariff trade barriers. The euro area has benefited more than other regions and is highly competitive in the services sector.
Technological progress is driving a new phase of globalisation. Global trade has long been dominated by manufacturing goods. Yet, over the past decade, services trade has grown significantly faster, as technology has continued to evolve.[1]
There is broad consensus that this development is due to a decline in non-tariff barriers to services trade. Previously, service providers in many sectors faced travel costs and visa restrictions. Now, with improved communication technologies, more services can be delivered in a different location than their origin. [2]
In this post, we quantify the role that non-tariff trade barriers have played in the strong growth in services trade and assess the implications for euro area competitiveness.
We confirm that the growth in services trade is driven by a decline in non-tariff trade barriers. The euro area has benefitted more than other regions and is highly competitive in services. However, it has started to lose ground to its international competitors. There is growing concern that the euro area could soon find itself outflanked, particularly in information and communication technologies (ICT). Decisive measures are necessary to counter this development, to avoid strategic dependencies and to remain competitive.
The reduction in non-tariff barriers to services trade
When it comes to traditional trade in manufacturing goods, firms and businesses face well-defined trade costs. For instance, we know the price of shipping a container across the ocean and which import tariffs need to be paid. For services, however, the picture looks different. Traders don’t face the usual tariff-related hurdles. Rather, non-tariff barriers – such as travel costs and visa conditions for contractual service suppliers, and restrictions on cross-border data transfers – weigh on their business. And many of those barriers are tough to measure.
To address this challenge, barriers to services trade can be effectively analysed with gravity models. In these models, non-tariff barriers are proxied by measuring the effects of distance and international borders on trade flows. We analyse trade patterns from 2012 to 2019 for 62 countries, allowing for changes in non-tariff trade barriers over time and across exporting countries. To fully capture these effects, we also simulate a “what if” scenario in which we calculate what services trade would have looked like in 2019 if non-tariff trade barriers had stayed the same as in 2012. For comparison, we apply the same model to manufacturing goods trade.
Our results suggest that the decline in non-tariff barriers can explain the increase in services trade. In a counterfactual scenario in which non-tariff barriers of all bilateral trade flows remained at their 2012 level, services exports would have stagnated, both in the euro area and globally (Chart 1, panel a). The results are primarily driven by changes in the estimated impact of distance, rather than by changing effects of international borders.
These findings are in line with the notion that technological progress has allowed an increasing share of services to be provided and consumed remotely, making them more tradable across countries. In contrast, most of the long-term trend in goods exports cannot be explained by changes in non-tariff barriers (Chart 1, panel b).
Chart 1
The effects of non-tariff trade barriers on exports
Services |
Goods |
|---|---|
(index, 2012 = 100) |
(index, 2012 = 100) |
 | |
Sources: WTO, ADB, Eurostat, TDM and ECB staff calculations.
Notes: The solid lines depict extra-euro area exports and the dashed lines depict global exports, with panel a) showing services trade and panel b) showing goods trade. Global services and goods exports exclude intra-euro area exports but include extra-euro area exports. The red lines depict the estimated export levels in a counterfactual scenario in which non-tariff barriers to all bilateral trade flows stay at 2012 levels. The latest observations are for 2019.
Data across sub-sectors support these findings. The Organisation for Economic Co-operation and Development (OECD) classifies services exports into those that can be provided remotely (such as management consulting, financial services and insurance) and those that cannot be provided remotely (such as transport services and construction). When this distinction is applied to the data, we find that exports of services that can be provided remotely have grown more strongly than those that cannot. In 2021, the former accounted for 48% of euro area services exports (compared with 30% in 2012) and 61% of global services exports (compared with 47% in 2012).[3]
Euro area competitiveness
Overall, services account for around one-third of euro area exports. A substantial share of euro area services exports are in sub-sectors that can be provided remotely and thus benefit from the decline in non-tariff barriers. The largest share comes from other business services (25%) such as research and development (R&D) and consulting, followed by ICT (21%), transportation (14%) and travel (13%).
The decline in non-tariff barriers to services trade appears to have boosted euro area exports more than exports of other regions, suggesting that the euro area has been effective in adopting digital communications technologies that facilitate the delivery of services abroad. In the absence of global changes in non-tariff barriers from 2012 to 2019, the euro area’s global export market share in services would have stood below 20% in 2019, 3 percentage points lower than in the observed data (Chart 2, panel a).
Chart 2
Global export market shares in services
The effects of non-tariff trade barriers on the euro area’s export market share |
Export market shares of the largest global exporters |
|---|---|
(percentages) |
(percentages) |
 |
 |
Sources: WTO, ADB, ECB balance of payments statistics, WEO and ECB staff calculations.
Notes: Panel a): The dark blue line depicts the observed extra-euro area export market share in services. The red lines depict the estimated extra-euro area export market share in a counterfactual scenario in which non-tariff barriers to all bilateral trade flows stay at 2012 levels (solid), and in a counterfactual scenario in which non-tariff barriers for Ireland change as in the observed data, while non-tariff barriers for all other countries stay at their 2012 level (dashed). Panel b): The dark blue lines depict extra-euro area export market shares in services (solid), services excluding Ireland’s ICT sector (dotted) and manufacturing goods excluding energy (dashed). The latest observations are for 2019 for panel a) and 2023 for panel b).
Owing to the decline in non-tariff barriers, the euro area has gained shares in global services markets over the past decade, despite losing market shares in goods trade. The euro area is highly competitive in services, with its export market share surpassing that of all international competitors, including the United States and the United Kingdom (Chart 2, panel b). However, it lost ground to its international competitors in 2022 and 2023, the most recent data points.
In light of this development, there are increasing concerns that Europe could fall behind, particularly in ICT, which is the fastest growing services sector globally.[4] In this sector, we see a clear productivity gap compared with international competitors, which has only recently started to become evident in global exports data (Chart 3). Despite losing significant ground in 2022 and 2023, the euro area was still the global leader in exports of ICT services in 2023, with an export market share of more than 25%.
Chart 3
Global ICT services export market shares
(percentages)
Sources: World Bank, WTO, ECB balance of payments statistics and ECB staff calculations.
Notes: The dark blue lines depict extra-euro area export market shares. The latest observations are for 2023.
Taking a closer look, the euro area’s performance in global markets for services is greatly affected by Ireland: excluding Ireland, the euro area’s export market share in ICT services stands at roughly 10% and has declined significantly over the past decade (Chart 3). Ireland’s exports of ICT services have also contributed strongly to the euro area’s increased export market share in total services (Chart 2, panel b).
Ireland stands out as a country in which activities of multinational enterprises, potentially related to the relocation of intellectual property products, have marked impacts on euro area GDP and its components.[5] Yet the empirical results are not primarily driven by Ireland (Chart 2, panel a), suggesting that the euro area’s competitiveness gain from the decline in non-tariff barriers was not due to the activities of multinational enterprises.
What is needed to secure competitiveness
The euro area faces notable challenges to its competitiveness in services trade. While it appears to be benefiting from the decline in non-tariff barriers, its innovation activity in the fastest growing sectors continues to lag that of international competitors. According to the 2024 EU Industrial R&D Investment Scoreboard, US firms accounted for 70% of global R&D investment in ICT performed by the business sector in 2023. Euro area firms accounted for only 7%. In terms of telecommunications services, the euro area outperformed the United States. However, it lagged significantly behind in terms of computer services and software.
This may reflect dependencies on technologies of non-euro area suppliers that are essential for the digitalisation of the economy. Looking ahead, closing the gap in R&D spending and fostering innovation will be key for the euro area to avoid strategic dependencies and to remain competitive, by taking advantage of the global shift toward services trade and capitalising on advancements in digital technologies.
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