Meaning of Trade in Services
The advanced economies are primarily service economies in the sense that the services sector generates the major share of employment as well as income in these economies. In the industrial market economies, services produce, on an average, over 60 per cent of GDP and provide about 60 per cent of the total employment. It has been the experience that the share of the service in the GDP and total employment increases as the economy progresses.
Thus, in the developing countries, the share of the services sector in the GDP increased from 40 per cent in 1965 to 47 per cent in 1990. In the low income countries, this ratio increased from 32 per cent to 35 per cent during this period.
During the same period, the share of services in India’s GDP increased from 34 per cent to 40 per cent. Economic development is, thus, characterised by an increase of the share of the services in the GDP and total employment. This trend tends to increase the international trade in services.
The size of the international market for service is difficult to measure. However, it has been estimated that services, termed as invisibles, account for about one-quarter of the world trade. That the world trade in service is dominated by the developed countries is reflected by the fact that the developed nations run large surpluses and the developing countries show huge deficits on the invisible account.
International trade in services is subject, in general, to lot of restrictions. The General Agreement on Tariffs and Trade (GATT) which has been trying to liberalise the trade in goods does not cover the service. The industrialised nations, like the U.S.A. and the members of the EEC have been strongly arguing for the inclusion of trade in services in the GATT negotiations.
The developing countries, like India on the other hand have strongly opposed such a move. The fear of the developing countries is that the liberalisation of trade in services will result in the destruction of their service industries by the multinationals.
On the other hand, it is argued that the liberalisation and the resultant competition will improve the efficiency of the service sector in the developing countries and this will help improve the overall efficiency of the economy and the export competitiveness of the developing countries.
It may also be pointed out that strategic considerations also discourage, both developed and developing countries, the opening up of certain services of foreigners and in certain cases even to domestic private firms.
An important characteristic of services that has far reaching implications for marketing of services is their inseparability, i.e. services cannot be separated from their providers, whether they are persons or machines. This does not, however mean that all service require the physical proximity of the provider and user.
There are two broad categories of services, viz.:
(i) Those that necessarily require the physical proximity of the provider and the user; and
(ii) Those that do not, though such physical proximity may be useful.
The services where physical proximity is essential fall into three categories:
The first category is characterised by the mobile provider and immobile user. This involves cases where the mobility of the beneficiary to the place of the provider is not physically feasible. For example, an Indian firm which has a construction contract abroad will have to send the manpower required to the construction site for carrying out the work. Similarly, a technician may have to go to a plant abroad to rectify a problem with the plant.
The second category is characterised by mobile user and immobile provider. This category consists of services which involves some key elements which are not normally transferable to the user’s location. For example, certain experiments can be done only in those laboratories equipped for them. A patient who wants an open-hearted surgery will have to go to a hospital where the required facilities are available.
The third category consists of mobile user and mobile provider; proximity may be achieved by either the provider going to the user or the user going to the provider. Services for which physical proximity is not essential are known as long distance services. Examples of this category include transmission ‘over the wire’ of live music concerts or data. In advanced countries, traditional banking and insurance services fall into this category since loans or insurance policies can be secured by mail or phone.
The scope for long distance transactions will increase with the advance of technology. This has important implications for broader issues such as the trend effect immigration restrictions on the relative wages of skilled and unskilled labour since skilled services may increasingly be transacted “long distance” whereas the latter cannot.
Even in respect of many long distance services, physical proximity between the provider and user will help increase the efficiency of the service. A large number of service firms will therefore like to have places of business in countries with sufficient market. The ‘right to establish’ is an essential aspect of free trade in services. The right to establish also involves the right to employ people without restrictions on the nationality.
International trade in many services involves international factor mobility. There are a number of international transactions involving temporary-factor-relocation services such as those requiring temporary residence by foreign labour to execute service transactions. International trade in service, thus, involves intricate issues like right to establish factor mobility. These are special problems in liberalising trade in services compared to trade in goods.
Because of these characteristics and the socio-economic and political implications of certain services, they are, generally, subject to various types of national restrictions. Protective measures include visa requirements and investment regulations. Services in different countries include banking and insurance; transportation; television, radio, film and other forms of communication, and so on.
Several economists have tried to allay the fears of the developing countries in respect of liberalisation of trade in services. It has been pointed out that several developing countries have acquired enough strength in different services to successfully compete with developed countries.
For example, countries like Korea, Brazil, India, Lebanon and Taiwan have done well in international construction and design contracts. Several developing countries have great potential in the field of professional services. Some already have considerable exports of tourism and shipping.
It has been argued that if developing countries protect more expensive or lower quality services produced by local firms, they run the risk of handicapping their exports of goods: many services are upstream or downstream services to producers. Access at reasonable cost to quality services can make the difference between success and failure in exporting. In many developing countries, the need for such services argues for at least selective liberalisation.
If this encouraged the multinational corporations of the industrial countries to provide these services to developing countries, it would help developing countries’ exports of manufacturers in three ways. First, it would lower their costs and help them to develop markets. Second, it would encourage the multinational corporations to move away from goods in favour of producing more services. Third, if industrial nations can sell more services, they may be more willing to lower protective barriers elsewhere.
These arguments, which sound theoretically very good many, not be easily realised. It needs to be cautioned that unless the developing countries take measures to strengthen their services before liberalisation, it would adversely affect the domestic service industries.
India has great potential in a variety of services. The large number of scientists, Professional and skilled and semi-skilled personnel working abroad is indicative of India’s potential in several fields. With such a resource potential, we should be able to develop a number of service industries capable of obtaining customers from abroad.