Comment on “Deconstructing Deglobalization: The Future of Trade is in Intermediate Services”

Abstract

The degree of globalization is often assessed using a conventional measure of global trade openness, namely the ratio of world trade in goods to world gross domestic product (GDP). This conventional measure of globalization peaked in 2008 at the onset of the Great Trade Collapse, which is treated by some commenters as a sign that the world has entered an era of delocalization. However, looking only at trade in goods might overlook an important fact that the nature of globalized economic activities is evolving. Baldwin et al. (2024) highlight the contrasting trend that world trade in goods has peaked, or at least plateaued, in 2008 whereas world trade in services has continued to grow rapidly from 1990 to 2019.

The history of globalization is inextricably linked to technological advances, and so will its future. Advances in information and communications technologies (ICT) enable the digitalization of services, leading to increased trade in digitally deliverable services. Also, new data networks, digital tools and platforms enable suppliers to expand their customer base beyond the national boundary and give consumers better access to a wider variety of good quality services at competitive prices. More importantly, ICT facilitates offshoring of intermediate services, which are purchased and used as inputs throughout the economy, including the production of manufactured goods. Interested in such a rising role of services trade, Baldwin et al. (2024) examine trade data on Other Commercial Services (OCS) and the cross-border flows of intermediate services. Based on simple statistics and economic logic, Baldwin et al. develop compelling arguments that services trade will continue to grow faster than goods trade and the future of world trade will lie in services, especially in intermediate services.

Although left aside in the data analysis and discussions of Baldwin et al. (2024), I have some comments regarding the data used in Baldwin et al. and the enabling condition for the expected growth of services trade, both of which should ideally be addressed in future research. First, for the purpose of comparison with goods trade, Baldwin et al. focus on examining services trade of the traditional made-here-and-sold-there type, which falls under Mode 1 of the World Trade Organization (WTO) services trade nomenclature. However, finance, engineering, and other business services supplied through foreign affiliates, which correspond to Mode 3, appear to be increasingly important. According to US Bureau of Economic Analysis,¹ for instance, about 70% of services supplied by US-based firms to foreign persons in 2019 are accounted for by those through the majority-owned foreign affiliates of US multinationals, that is, Mode 3. To better assess the rising role of services in globalized economic activities in general, it would be called for to analyze services trade across ownership-based as well as residence-based national boundaries.

In addition, intermediate services of interest are not only transacted in markets but also within the boundaries of the firm. More sophisticated services, such as research and development, design, and marketing that dictate the firm's competitive advantages, are more likely to be kept as in-house inputs rather than relying on outsourcing (see, e.g. Miroudot & Cadestin, 2017). Intra-firm services inputs, such as those supplied by parent multinationals to their foreign affiliates, are hardly captured by ordinary services trade statistics nor international input–output tables. When reading the data on trade in intermediate services, we should pay due attention to the unobservable trend of declining or increasing proportion of outsourcing relative to in-house services inputs.

Next, even though there is ample room for future expansion of services trade as argued in Baldwin et al. (2024), digital technologies as a lever for accelerating services trade would not unconditionally be diffused uniformly across nations. Moreover, the spread of technology itself would not necessarily mean facilitating the autonomy of technology-adopting nations and the divergence of economic activities among those nations. Rather, the uneven nature of digital transformation may lead to the concentration of wealth in a handful nations and a handful firms. To think more deeply about the future prospects of the services trade, it appears to be necessary to clarify what conditions make “technology for all” to maximize the potential benefits from new waves of globalization with increased services trade.

At least, on top of highlighting the opportunities arising from digital transformation for geographically dispersed suppliers and buyers of services, it would be called for to sort out challenges facing less developed nations and the firms not on the technological frontier. The challenges to be overcome range from underdeveloped digital infrastructure to weak regulatory framework and from limited digital competencies to inadequate financial supports (see, e.g. United Nations Conference on Trade and Development, 2022). The future pattern of the services trade will be determined by policy efforts of governments and strategic responses of firms, faced with both opportunities and challenges.