"The role of trade in services in global value chains"
[As prepared for delivery]
The Third China Beijing International Fair for Trade in Services organised and sponsored by the Chinese Government has become the most authoritative and influential trading platform in the field of global trade in services. As you many of you are aware, the Fair is permanently supported by the United Nations Conference on Trade and Development, the World Trade Organization and the Organisation for Economic Co-operation and Development. We at UNCTAD consider this venue an unparalleled opportunity to promote trade in services, not merely as a means to boost growth, but also as a means to create employment and embolden entrepreneurship.
The services sector has become a key economic sector across the world. The latest available data shows that in 2011, the sector accounted for two thirds of world output, and provided employment for 1.4 billion people in the world. Globally speaking, employment directly in the service sector represented about 44 percent of total employment in 2011, up from a share of 39 per cent in 2000. UNCTAD analysis shows that during the last decade the share of services employment increased in all regions of the world, with the exception of North Africa. Services have also become the largest provider of jobs to women.
But we must remember that the services sector is highly diverse. Activities in the services sector vary dramatically in terms of productivity and in terms of potential for employment creation and skills utilization. While advanced economies have higher-than-world-average shares of services in their GDP and their employment, this is not the case in developing countries. Specifically in the least developed countries (LDCs), the services sector has been the largest sector of the economy, with its share in GDP remaining fairly stable at a little below 45 per cent since early 1980s, but employment in this sector is estimated to account for only 26 per cent in 2013.
In general, the service sector in developing countries reflects a sharp distinction between high productivity, low employment service industries that make the bulk of the contribution to economic growth and low productivity industries where more of the employment in services is concentrated. Part of the explanation for this is the lack of structural transformation in these economies, and lack of productive capacities. At UNCTAD, we believe that an important way to increase the impact of the service industry on employment is by promoting service sector activities that harness the potential of global value chains. Let me briefly describe what I mean, and offer you some UNCTAD thinking on how governments and firms can work together to take advantage of this growing opportunity.
The demarcation between the service sector and the other sectors of the economy have blurred in recent years, as services are increasingly used in both agriculture and manufacturing. The increased use of intermediate services by manufacturing firms has become a defining characteristic of the production process. This is part of the broader trend towards production through global value chains, which in the simplest terms have enabled a shift from trade in goods to a trade in tasks. Indeed UNCTAD estimates that some 80% of global trade is composed of trade in intermediate goods and services across global value chains.
A recent UNCTAD study confirms that global value chains make extensive use of services. While services account for only about one-fifth of global gross exports, nearly half of the value added embodied in exports is contributed by service activities. When we look at the entire global value chain, services activities are located both upstream and downstream. Examples of these activities include research & development, design, logistics, financial services, marketing, distribution, and after-sale services. Other services support those activities within the value chain, including water and electricity supply, telecommunications and professional services such as legal, accounting and management consulting. Furthermore, when inputs are supplied by the final product owner and manufacturing is performed under a contract between the processor and the final product owner, such manufacturing activity (or processing) is in fact considered a service activity as well.
As the global value chains consist of different activities or tasks which are allocated across the countries by multinational companies largely based on the cost-cutting principle, what a country can do in these chains is mainly determined by the skill level of its labour in carrying out specific tasks. Developed countries and few developing countries such as Korea and Singapore have dominated the supply of services in the upstream and downstream of global value chains such as product development, design, marketing, logistics, financial services and distribution services. On the other hand, most developing countries are basically either raw material suppliers or manufacturers including assemblers/processors in the midstream of the value chain. Indeed to move further up the value chain and to engender a virtuous cycle of productive employment creation and structural economic transformation countries must pay great attention to this sector and how it can enable their development. Technological advances and fragmentation of production processes in global value chains has driven the rapid expansion of high technology services including communication, and computer and information services, providing export opportunities for developing countries where there is a large pool of youth with required education and skills. Such services exports can help create jobs, particularly for youth who are prone to use new technology.
Therefore compared with the beginning of this century, more developing countries have embarked on the road to designing and implementing specific plans to develop the services sector and include this sector in their development strategies.
What is the most challenging is to build and expand their productive and trade capacities in promising service industries. Addressing barriers against service exports is another key challenge. We do not have an exhaustive list of solutions to offer but let me mention a few measures that could be considered.
These measures include:
Firstly, increasing government support to the services sector, including lowering tax burden on services suppliers and access to credit including export credit. It is fair to say that as an emerging sector in developing and least developed countries, services are not yet given as much attention as the agriculture and manufacturing sectors in terms of government support, particularly in terms of financing.
Secondly, countries can initially focus on building supply capacity in services that create "inputs" such as infrastructure services and business services. Infrastructure services such as transport, telecommunications, energy and financial services, or business services such as research and development, legal, accounting, management consulting, computer and information services are key factors incorporated in the production process.
Countries can also improve regulatory and institutional frameworks for the service sector. A diversity of regulatory and institutional models exists across countries and there is no "one-size-fits-all" model. Countries must design and implement their regulatory and institutional frameworks in line with their specific situation.
Countries can also strengthen human resources development. This is an imperative issue to be addressed as exemplified by "brain drain" of qualified services providers from the domestic market, which has been a concern for many countries.
Finally, countries can address market access barriers to services exports through pro-active participation in trade negotiations. Although in reality markets are more open in relation to the trade in services than is indicated by the commitments undertaken by countries in the WTO or FTAs, various border and regulatory measures, including those relating to qualifications affecting temporary movement of natural persons, can still act as complex constraints to trade.
Ladies and Gentlemen,
UNCTAD's mandate, which was most recently reaffirmed by our member States at the UNCTAD XIII Conference in Doha in 2013, has stressed the importance of services for inclusive and sustainable development, and calls upon UNCTAD to continue working in this area. As you may recall, among the international organizations concerned with trade and development issues, UNCTAD has acquired a unique status over the years when it comes to research and analysis, deliberative forums, as well as technical assistance and capacity building work in relation to services and services trade, dating back to the 1960s. Services policy reviews conducted with UNCTAD assistance for a number of developing and least developed countries (Lesotho, Nepal, etc.) have served as a useful instrument for these countries to design and implement their services sector development plan and strategies, and increase their supply and export capacity in existing and promising services activities.
We stand ready to continue to deliver these types of targeted activities to help countries devise an appropriate strategy to harness the enormous potential that the trade in services across Global Value Chains offers them.