Christian Bluth / Nov 2017
Mariya Gabriel, European Commissioner for the Digital Economy and Society. Photo: European Union
While trade in goods has been stagnating for many years, trade in services, especially digital services, is growing at solid rates. Presently, trade in services accounts for 23 percent of world trade and it is forecast to increase further. For Europe, this can mean a great trade potential, since most European countries generate a large share of their value added in GDP in the services sector. Even for a country with a comparatively large manufacturing sector such as Germany, the share of value added generated in the services sector is as high as 70 percent. But harnessing the benefits of growing trade in services is not enough. The European economies need to perform well in digital services as well as this is going to be one of the most important future growth markets. In addition, digital services are crucial for the operations of manufacturing industries as well and can help to enhance productivity. But are the European economies prepared for this? Are they realising their potential in this area? Or, if not, which obstacles are holding them back?
These questions were addressed by a study of the Bertelsmann Stiftung and ECIPE. The central feature of the study is a ranking that shows to what extent 28 countries have realised their potential in trade in services. Its findings – overall and for the most digital-intensive services sectors – are presented in the table below. As one can see, Ireland is performing particularly well, along with other small service-driven economies. Also the UK and the USA perform well in the overall ranking. The large EU economies, notably France, Italy and Germany, are only in the bottom mid-range of the ranking and remain below their trade potential.
The ranking can also be broken down into the most digitally-intense service sectors: business services, merchanting, communication services, financial services, IT services and insurance. Overall, a similar picture emerges, with Ireland and Belgium performing particularly well in most sectors. Only in communication and insurance do Germany and France realise or surpass their trade potential.
As the ranking makes clear, many EU economies need to do more in order to position themselves successfully in the growth market of digital services. Too many of them currently trade below potential. What needs to be done? As the study shows, besides insufficient infrastructure development, the lack of use of digital tools by both customers and companies is the main obstacle. This reluctance to embrace digital tools needs to be overcome. If the productivity in the services sector remains below its potential, this will also impact manufacturing that typically relies on several businesses services: either they have to cope with less than perfect services or turn to foreign service providers. Both would not bode well for the European service economy.
Methodological remark: The ranking is based on a gravity analysis of services trade in the most digitally-intensive sectors. This analysis contrasts actual trade flows with potentially possible trade flows. The ranking reflects the size of the gap between potential and true values.