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APEC attendees take note: Services are nice but most trade action still in goods

APEC attendees take note: Services are nice but most trade action still in goods

Attendees at the APEC summit this week may be walking around with a new spring in their step. Some observers have suggested the successful conclusion of the Trans Pacific Partnership could be a stepping stone to 'an even bigger Asian Pacific trade agreement among all 21 members of APEC'.

What will the summit focus on? APEC’s executive director, Alan Bollard, has declared this is the 'year of services'. This complements the hype surrounding the TPP and services. For example, Alan Oxley, a former Australian trade negotiator said:

Increasing foreign investment and access to services markets, key features of the TPP Agreement, are the new drivers of global growth. Restrictions on both are high in the Asian Pacific economies. This is why Korea, Japan and China have started to open these markets in bilateral FTAs, most latterly with Australia.

Let’s look at those three free trade agreements for a moment. The Department of Foreign Affairs and Trade released modelling by the Centre for International Economics in June which showed these agreements would boost Australian GDP by only 0.05 to 0.1 per cent. In this modelling, goods liberalisation was estimated to provide a five times bigger boost to GDP than services liberalisation. There may be a number of reasons for this. One could be that Australia’s services trade is still relatively small compared to goods trade. See the graph below.

In 2013 services made up about 17% of exports and 20% of imports. And the trend has been down. The fall in the relative importance of services exports is a commodity story: iron ore and other commodities are a larger part of our export bundle now. The share of services did increase through the 1980s, but that increase had stopped by the early-to-mid 1990s. Perhaps more surprising is the fall in the share of imports.

Just in case Australia is a bit special, let’s look at what has happened in worldwide trade. [fold]

Here, 'exports' represents a line calculated from summing up the exports of all countries, and similarly for 'imports'. In theory, the two lines should be identical, but because of measurement problems they aren’t. Awkward! In any case, both lines speak with the same voice. There has been no trend in the relative importance of services trade for at least 20 years (the spike in 2009 is GFC related and not indicative of any sort of trend).

A number of points can be made in response to these graphs. I’d lose your attention if I went through the full laundry list so I'll focus on just one.

Goods trade 'embodies' some services. If we export cheese, the export is counted as a good, but there were some services used to produce that cheese. For example, the dairy farmer may have employed an accountant to do his books, so the cheese 'embodies' some accountancy services. Therefore, the importance of services, in these graphs, is understated.

OK. Point taken. But when we are talking about dismantling barriers to trade, it is what crosses the border that counts. You can make all the changes to accountancy regulations you want, but if the cheese can’t get across the border, it doesn’t matter.

Moreover, I think the interesting point is about trends. If you listen to some of the rhetoric, 21st century trade is increasingly about services. But these graphs indicate that, worldwide, 21st trade looks similar to the trade that occurred when the Berlin Wall fell and Mark Zuckberg was starting primary school.

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