The Export Potential of Services

Exports of services grew from $1.5 trillion in 2000 to $4.9 trillion in 2016, outpacing trade in goods. Consequently, interest in understanding the drivers and consequences of services trade has grown, yet disaggregated services data remains largely unavailable (see Figure 1). While developed countries mostly report their trade by service and trade partner, developing countries report only the exports and imports of broad service sectors without any detail on the country of destination or origin of the trade flow.

Figure 1. Countries reporting trade in services

In the current literature, two main methods are used to reduce the information gap and identify opportunities for services exports. The first method is the so-called decision support model (DSM) (Viviers and Pearson (2007), Grater and Viviers (2012)), which uses a filtering process considering the market’s political and commercial risk, the size and growth of import demand for the service sector and the accessibility of the market, to identify feasible service market combinations. The second method relies on gravity models to estimate trade potential based on the idea that the expected level of trade between two countries is positively associated with the exporter’s capabilities and market demand and negatively associated with the existing trade barriers (Baldwin (1994), Head and Mayer (2014)). While the first method does not allow the quantification of export potential, the second method cannot be applied at the detailed exporter, service and market level.

Our methodology is based on the International Trade Centre’s export potential assessment for goods (Decreux and Spies, 2016), which computes a potential export value for every exporter × product × market combination. To inform countries about the most promising service sectors, markets and suppliers, we provide a potential value of export at the sector level1, that countries should be able to reach given their export performance, the demand of the target market and the relative accessibility of the market (‘ease of trade’). To account for GDP and population growth, we project supply and demand five years ahead.

The ease of trade is estimated econometrically based on detailed trade statistics available for 42 developed countries and observable determinants of bilateral trade. We use a Pseudo-Poisson Maximum Likelihood (PPML) estimator to properly account for zero-trade flows. We run sector-specific regressions to account for the fact that relative market access varies across services sectors. The main drivers of relative market access appear to be distance, remoteness of both the exporter and the importer, sharing a common currency and a colonial history. The estimates obtained from the regressions are used to compute the ease of trade for all country pairs at the services sector level. The export potential value of every exporter in each sector and market follows directly from the combination of supply, demand and estimated ease of trade. Because some service sectors are highly heterogeneous, where possible, we compute export potential also at the sub-sector level.

In a second step, for the countries reporting trade in services by partner, we compare potential export values with actual export values to inform about the amount of unrealized potential, the room for export growth.

Table 1. Export potential of Germany in the service sector ‘Transport’
Market Export potential value (in million $) Export value (in million $) Untapped potential (in million $)
France 4,935 2,701 2,234
Netherlands 4,662 2,252 2,410
Belgium 3,681 1,244 2,437
Denmark 3,035 1,781 1,254
Italy 2,481 1,549 933
United States of America 2,220 6,710 /
Austria 2,009 1,493 516
Poland 1,951 1,421 530
United Kingdom 1,497 4,346 /
China 1,383 2,098 /

Table 1 presents potential markets for Germany’s exports of transport services. The market representing the largest export potential is France, followed by the Netherlands and Belgium. Current exports to France stand at $2.7 billion, implying that 45% of the export potential remains untapped. An even higher share, 52% and 66%, of the potential is unrealized in the Dutch and Belgian markets, giving rise to possible $4.8 billion of additional export revenues. It is worth mentioning that Germany has exhausted its potential in the United States of America, the United Kingdom and China.

Figure 2. US’ export potential in the service sector ‘Professional and management consulting services’

Figure 2 gives an example of results at the sub-sector level. It shows the United States’ potential to export ‘Professional and management consulting services’ to different target markets. The level of ‘ease of trade’ is displayed on the x-axis while the y-axis shows demand. The lighter circle is proportional to the export potential value and the darker circle is proportional to the level of exports. Canada features the highest export potential as well as the highest level of ease of trade. The United States only exploits 35% of its potential export value with its neighbour. France and Singapore are also promising markets for the development of American exports of consulting services – in both cases, the share of untapped potential exceeds 80%.

Figure 3 presents the most promising sectors for France’s exports to Austria. France’s market share in every sector is displayed on the x-axis and Austrian demand is presented on the y-axis. French export performance is largest for the sectors of manufacturing services for physical inputs owned by others and for maintenance and repair services. The sectors of transport and other business services feature the highest level of demand and the largest export potential.

Figure 3. Sectors with export potential from France to Austria

In an attempt to close the information gap caused by the lack of disaggregated trade in services data, we assess the potential of countries to export services to different target markets. We decompose services trade into three factors: the exporter’s projected market share in a service sector, the projected market demand for the same service and the relative ease with which the exporter can trade this service with the market. The corresponding export potential value follows directly from the combination of the three factors. For countries reporting bilateral trade data, the room for export growth is calculated.
Untapped potential can arise from the exporter’s lack of awareness or difficulty in complying with service-specific market entry requirements, the exporter’s inability to match consumer preferences in a specific market or exporter’s difficulties to find buyers, among others. Further research should try to identify the reasons for the presence of untapped potential in order to provide targeted assistance to countries to help them better use existing export opportunities.

Authors: joint with Yvan Decreux and Julia Spies (International Trade Centre)

Footnote:

  1. The service sector classification follows the BPM6 classification where services are grouped into 12 sectors. Sector 12 («Government goods and services n.i.e ») is excluded from the analysis due to its lack of relevance for export promotion activities.

References:

  1. Viviers, W., and J. J. A. P. Pearson. "The Construction of a Decision Support Model for Evaluating and Identifying Realistic Export Opportunities in South Africa. Report Prepared for the Department of Trade and Industry, South Africa, May, 92 p." (2007).

  2. Grater, S., and W. Viviers. "Adaptation and application of the DSM for services in South Africa." Export Promotion: a Decision Support Model Approach. South Africa: Sun Media Metro (2012).

  3. Baldwin, Richard E. Towards an integrated Europe. Vol. 25. No. 234. London: Centre for Economic Policy Research, 1994.

  4. Head, Keith, and Thierry Mayer. "Gravity equations: Workhorse, toolkit, and cookbook." Handbook of international economics. Vol. 4. Elsevier, 2014. 131-195.

  5. Decreux, Yvan, and Julia Spies. "Export Potential Assessments - a methodology to identify export opportunities for developing countries." : International Trade Centre publication (2016)