World Trade in services

Services perform several important functions to promote the development in all countries especially in a developing economy. This sector provides infrastructure, education, health, banking, finances, highly rated technical services, software programming and many other aspects. Thus, it creates meaningful linkages of services with almost all sectors of the economy.

Nationally, service’s contribution in a country’s GDP and employment generation is only a part of the role of services, in a country’s development. Services also impart a meaningful role in all aspects of cultural life of a country and thus, it adds to development process.
Cross border trade in services is a relatively recent phenomenon. Historically, trade in services was not covered under the GATT. However, as the relative importance of services in GDP increased developed countries, the USA took the lead in including services within the mandate of GATT in the Uruguay round which was completed in 1994. Since then, trade in services has started increasing as the WTO members have to provide freer market access to overseas service providers. Trade in services includes two broad categories, viz., factor services (foreign capital and labor) and non-factor services (travel, transport, insurance etc). Value of exports of commercial services amounted to $1763 billion 4 years ago and total service trade had increased at an annual average rate of 7% up to 2003 and 12% per annum after 2003.

The growth prospects of trade in services are very high because its share in the world GDP is increasing at a fast pace. According to a World Development Report, the world GDP is estimated as $27,846 billion of which 63% is accounted for by services. During last 2 decades world GDP rose by 2.6 times, the services sector increased by 3.1 times. Importance of the services sector increases with the economic development of a country. Even in the developing economies of Asia, the services sector is emerging as a dominant segment of the economy. In India, the share of services in GDP rose to above 50% during last 5 years which was about 35% in 1980.

The strengthening of world economic growth maintained its momentum from second half of 2003 and is projected to maintain or exceed most of its momentum there after. Global GDP growth is expected to reach 3.7% in 2004, up from 2.5% in 2003. In line with the predicted economic recovery, global trade could expand by 7.5% in 2004 onwards.

There are a number of risks associated with these projections. Among these risks are:

The US current account deficit is projected to increase further although its size is considered to be unsustainable in the medium term. In 2003 the US current account deficit reached $542 billion dollars corresponding to 4.9% of US GDP. A stronger than expected rise in the US private savings ratio, triggered either by a decline in house or stock prices, could lead to a slower than projected increase in imports with negative repercussions on exports of countries dependent on the US market.

Western Europe’s demand recovery could falter. Growth in fixed investment could be dampened if the real appreciation of the European currencies observed. Consumer expenditure could also be weaker if the uncertainty about the financial reforms in the pension and health systems lead to a marked rise in precautionary savings.

Most projections for world economic growth assume a fall in average oil prices in 2006-07. In fact in the middle of 2007, crude prices in the international market has risen to more than $75 per barrel which is an all time high and further expected to touch $80 per barrel.

Most of the acceleration in global output growth can be attributed to expected developments in North America. Western Europe and Latin America, Asia and the transition economies are expected to record the highest growth above the world average.

The stronger global economic activity will lead to a faster growth of world trade. In the OECD countries, the expansion of exports of goods and services was close to 9% at an annualized rate. Information available indicates that the momentum of trade growth remain strong.