1. Introduction
No, we will not go back to an economy weakened by outsourcing, bad debt, and phony financial profits. Tonight, I want to speak about how we move forward, and lay out a blueprint for an economy that's built to last – an economy built on American manufacturing, American energy, skills for American workers, and a renewal of American values … So we have a huge opportunity, at this moment, to bring manufacturing back. But we have to seize it. Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed.
President Barack Obama, State of the Union Address, 2012The state of manufacturing in OECD countries and the offshoring of manufacturing to emerging economies have been matters of concern for a least a decade (Schettkat and Yocarini, Reference Schettkat and Yocarini2006; Nickell et al., Reference Nickell, Redding and Swaffield2008; Gresser, Reference Gresser2007; Robert-Nicoud, Reference Robert-Nicoud2006; Pisano and Shih, Reference Pisano and Shih2009).Footnote 1 However, the manufacturing industry has recently been considered a potential ‘comeback kid’ (Kelleher, Reference Kelleher2014; Celasun et al., Reference Celasun, Di Bella, Mahedy and Papageorgiou2014; Hagerty, Reference Hagerty2014; Harrison, Reference Harrison2015).Footnote 2 Policymakers in several countries intend to achieve a renewal in manufacturing that will strengthen and expand the industrial base (e.g. European Commission, 2012, 2014; National Science and Technology Council, 2012; Warwick, Reference Warwick2013; Schück, Reference Schück2014; Ministry of Enterprise and Innovation, 2016).Footnote 3
Aspirations of reindustrialization are related to the trend towards the servicification of manufacturing – the increasing use, production, and sale of services (Lodefalk, Reference Lodefalk2013a; Tomiyama, Reference Tomiyama2002; European Commission, 2014).Footnote 4 Case studies illustrate this more pertinent role of services in manufacturing. Evidence ranges from small firms to large multinationals and from basic and food-related industries to the engineering and environmental industries (see, e.g., National Board of Trade, 2010, 2013a, 2014). These case studies also suggest that a wide range of services is used and supplied by manufacturing firms, including financial, transport, environmental, and research and development (R&D) services.
There are several reasons why manufacturing firms might want to focus more on services, in addition to the basic reality that some services (e.g., transportation) are necessary for trade (Lodefalk, Reference Lodefalk2014). First, services may help firms become more productive; for example, through the use of logistics, management, or engineering services that save time and materials and/or also improve coordination (Nordås, Reference Nordås2010).Footnote 5 Hiring individuals to provide such services can also augment productivity by contributing to the firm's ability to absorb frontier technologies.Footnote 6
Second, in the presence of more intense foreign competition, firms can differentiate themselves by adding services to products, bundling them with products or offering them in connection with the sale, during the life or at the end of the life of a manufactured product (Kelle, Reference Kelle2013).Footnote 7 For example, firms can differentiate their offers by being attuned to changes in demand and considering additional aspects of manufactured goods (Nordås, Reference Nordås2008). Firms may decide to employ and market services to reduce their products’ negative environmental and social impact (for example, by repurchasing or recycling used products). Firms can also add digital solutions to differentiate their offers, such as products with ‘intelligent’ systems of built-in sensors that can communicate with each other, other devices, and the manufacturer across wireless networks to provide additional customer value (Cernat and Kutlina-Dimitrova, Reference Cernat and Kutlina-Dimitrova2014; National Board of Trade, 2015b). An illustrative example of differentiation through services is Apple Computer Inc.'s entry into the entertainment services industry through the launch of the iPod and the integrated iTunes online music store. This second role of services seems considerable, according to descriptive statistics for Germany (Kelle, Reference Kelle2013).Footnote 8
Third, firms can use services to overcome barriers to foreign market entry in the form of exports or foreign direct investment (FDI), and to sustain foreign market sales. Examples of such services include distribution, interpretation, matchmaking, and monitoring services.Footnote 9 A firm can also exploit migrants’ knowledge of foreign markets and networks; for example, through hiring their consultancy services or by employing them. In this way, migrants can facilitate the entry of a firm to their country of origin (see, e.g., Hatzigeorgiou and Lodefalk, Reference Hatzigeorgiou and Lodefalk2014, Reference Hatzigeorgiou and Lodefalk2016).
Fourth, firms need services to establish, join, and manage international production networks and value chains, including headquarters or business partner services, such as data processing and R&D services (Kelle, Reference Kelle2013; Golub et al., Reference Golub, Jones and Kierzkowski2007; Jones and Kierzkowski, Reference Jones, Kierzkowski, Jones and Krueger1990; National Board of Trade, 2015b). Services enable such networks and value chains (Debaere et al., Reference Debaere, Görg and Raff2013).
A fifth reason that manufacturing firms might want to focus on services is the outsourcing/offshoring of material inputs while concentrating on other competencies.Footnote 10 Offshoring might even be easier today than in the past, and, therefore, is more prevalent with respect to the production of goods which could reduce the relative cost of material inputs of a firm's total production value.Footnote 11 Although very novel, 3D-printing technologies could accelerate concentration on competencies other than physical production so as to transform manufacturing firms into providers of blueprints, digital solutions, and ‘ink’ from either themselves or external providers (National Board of Trade, 2016).
Despite this background, the servicification of firms – and particularly the role of servicification in foreign trade and trade policy – has received only limited attention in the literature. Therefore, in this paper I review novel micro-level evidence on servicification and analyse servicification's potential trade policy implications. The major policy conclusion – that goods and services might need to be treated in a more integrated manner in trade policymaking – is also consistent with the fact that the services industry, which is large and increasing in OECD countries, is an important user and exporter of manufactured goods (e.g. Malchow-Møller et al., Reference Malchow-Møller and Skaksen2015).
In sections 2 and 3, I summarize empirical firm-level evidence on servicification and its potential impact on the international competitiveness of firms. I find that firms in several countries have become increasingly service oriented and that there are indications that both foreign and domestic services play key roles in both contemporary firms’ international competitiveness and firms’ participation in international value chains. In section 4, I analyse trade policy implications. I find that historic divides in trade policymaking between trade in manufactured goods and trade in services, between export and import interests, and among modes of supply (1 cross border trade, 2 consumption abroad, 3 commercial presence, 4 presence of natural persons) are becoming less relevant. I also discuss potential measures to better align trade policy and trade policymaking with the needs of contemporary manufacturing and service firms. In section 5, I provide concluding remarks.
2. Empirical evidence on servicification
Cross-national and industry-level studies indicate the increasing importance of services in manufacturing across OECD countries and industries (United States International Trade Commission, 2013; Pilat et al., Reference Pilat, Cimper, Olsen and Webb2008; Görzig and Stephan, Reference Görzig and Stephan2002; Pilat, Reference Pilat2005; Nordås, Reference Nordås2010, Reference Nordås2008; Falk and Peng, Reference Falk and Peng2012; Montresor and Vittucci Marzetti, Reference Montresor and Marzetti2011; Lanz and Maurer, Reference Lanz and Maurer2015; De Backer et al., Reference K., Desnoyers-James and Moussiegt2015).Footnote 12 However, only recently have we seen the emergence of studies that exploit detailed micro-level data to analyse this phenomenon in depth.Footnote 13
Lodefalk (Reference Lodefalk2013a) uses Swedish input–output data, finding that the share of services in total inputs doubled during the 1975–2005 period. He then analyses comprehensive micro-level data (1997–2006) to consider the reorganization of manufacturing firms into enterprise groups and the industrial reclassification of activities. These results confirm that manufacturing has not declined as much as previously thought. More importantly, manufacturing not only increasingly purchases services from domestic and foreign providers but also produces services itself.Footnote 14 Diversification into services is also much greater – approximately 60% higher – when all of the activities of manufacturing enterprise groups are considered, as opposed to when only the activities of manufacturing establishments or firms are considered. He also finds that the growth rate of services exports has been substantially higher in manufacturing than in service industries.Footnote 15 However, servicification is unevenly spread across industries, as measured by the use and sale of services. In addition, there is no one-to-one relation between intensity in the use of services and intensity in the sale of services across industries.
The role of services exports in German manufacturing has been analysed in numerous studies (Kelle and Kleinert, Reference Kelle and Kleinert2010; Kelle, Reference Kelle2013; Stille, Reference Stille2003). Analysing firm-level financial and trade data, Kelle and Kleinert (Reference Kelle and Kleinert2010) conclude that manufacturing firms accounted for one-quarter of manufacturing services exports in 2005. For some services, the manufacturing industry is quite dominant, such as in the export of research and development (R&D) and engineering services (Kelle, Reference Kelle2013). More generally, from 2001 to 2005, the growth of services exports in manufacturing outperformed the growth of goods exports. Nevertheless, it is possible that these statistics have underestimated the importance of services embedded in the exports of goods. According to (Stille, Reference Stille2003), more than half of the services exported by a group of German manufacturing industries in 2000 were not explicitly registered as such but were included in the sales of goods.
Crozet and Milet (Reference Crozet and Milet2014) provide the first firm-level analysis of the share of services in production sales in France using a large panel of manufacturing firms for the 1997–2001 and 2003–2007 periods.Footnote 16 The share of services as a portion of sales steadily increased over time. This pattern is evident across manufacturing industries. The authors primarily attribute this trend to increases within firms with respect to the sale of services, although firm entries and exits also contribute to a higher share of services in sales. In 2007, approximately 83% of the sample firms sold services. On average, the share of services was 11% of sales. However, for more than one-quarter of the firms, services accounted for the majority of sales.
In addition, Neely et al. (Reference Neely, Benedetinni and Visnjic2011) study the services offered by an international sample of incorporated manufacturing companies with at least 100 employees. Information on services offered is retrieved from the business descriptions of companies in a commercially available database. The authors find that approximately 30% of firms offer services and that, for most countries, this share was stable in the years studied (2007, 2009, and 2011). However, heterogeneity across countries is considerable. At the high end is the United States (USA), with an average of 55% of firms offering services, and at the low end is Bermuda, with approximately 18% of firms offering services. Interestingly, although only 1% of Chinese firms offered services in 2007, this share has since increased to 19%.Footnote 17
Finally, novel statistics – value-added trade statistics – at the industry level also reveal the share of services exports in manufacturing; however, these statistics are likely to underestimate the actual importance of services. Traditional statistics show that in 2013, the share of services was 28% of gross exports of goods and services from the EU and 30% of gross exports from the USA.Footnote 18 However, when the value added by the services industry to manufacturing was considered, services accounted for approximately 50% of gross exports for both the EU and USA in 2009 (OECD, 2014). Nevertheless, even with value-added trade statistics, the share of exports of services in manufacturing is likely to be underestimated – manufacturing subsidiaries that are classified as service businesses might not be fully captured, even with value-added trade statistics.Footnote 19 Another problem is that the expansion of the in-house production of services in manufacturing firms is not accounted for in these statistics. The inclusion of in-house production would likely result in a higher share of services contained (embodied) in or added to (embedded in) industry exports.Footnote 20 Moreover, neither FDI in services nor services sales by foreign affiliates (FATS) are included in the aforementioned statistics, although local establishments and their sales are important modes of delivery of trade in services.Footnote 21 Furthermore, there are some indications that companies export bundles of goods and services, neglecting to specify the services component separately in contracts, as in the case of an installer accompanying a new secure radio communication system (National Board of Trade, 2012; Stille, Reference Stille2003).Footnote 22 The fact that available statistics clearly underestimate the share of services included in manufacturing exports is suggested by value-chain analyses of products as diverse as shoes, suit jackets, and smartphones (Low, Reference Low2014; Ali-Yrkkö et al., Reference Ali-Yrkkö, Rouvinen, Seppälä and Ylä-Anttila2011; National Board of Trade, 2007; Ali-Yrkkö and Rouvinen, Reference Ali-Yrkkö and Rouvinen2013).Footnote 23
3. Empirical evidence of the impact of services on firm exports
Although there have been studies on selected services (e.g., business services) and trade, few such studies analyse the general effects of servicification on foreign trade. To the best of our knowledge, the most detailed study to date is Lodefalk (Reference Lodefalk2014). Export intensity is regressed on two service input parameters; the share of services produced in-house and the share of services bought in while controlling for firm, industry, and year heterogeneity.Footnote 24 He finds premia in terms of higher exports and productivity for firms that have larger shares of in-house service production.Footnote 25 The final econometric estimate confirms that as the share of in-house services increases, firms’ export intensity also increases. The elasticity of export intensity with respect to the share of services produced in-house is 0.6 on average when second-order effects are considered. The strongest links exist between hiring managers and professionals and export intensity.Footnote 26
A complementary perspective is provided by studies of the impact of importing services (or of the barriers to such imports) on manufacturing trade in services. In this vein, Nordås and Rouzet (Reference Nordås and Rouzet2015) and Pasadilla and Wirjo (Reference Pasadilla and Wirjo2014) exploit the new services trade restrictiveness index (STRI) provided by the OECD and bilateral trade data. Using a simple gravity model while considering sample selection bias using a cross-sectional sample of 40 countries for the 2012–2013 period, Nordås and Rouzet (Reference Nordås and Rouzet2015) find that restrictions on importing services are associated with less trade in manufacturing. Interestingly, the negative association with trade is roughly twice as strong for manufacturing goods exports when compared with services exports. The most harmful import barriers to manufacturing goods exports are in the air, telecom, and maritime services industries. Pasadilla and Wirjo (Reference Pasadilla and Wirjo2014) ask if restrictions on services correlate with economies ability to compete in the export of manufactured goods and found negative correlations between gross manufacturing exports for the Asia-Pacific Economic Cooperation (APEC) economies in 2009. The results suggest a negative impact of restrictions on manufacturing.Footnote 27 Finally, Egger et al. (Reference Egger, Merlo and Wamser2015) analyse the relation between policy variables, including the STRI and the presence of trade agreements, and the aggregate foreign activity of a cross-section of goods and services German multinational enterprises in 2005 and across 79 countries, using logistic regression.Footnote 28 They find negative associations not only between services trade restrictions and foreign activity but also between the presence of bilateral investment treaties and foreign activity. Interestingly, these results are somewhat similar for both goods and services enterprises. However, the coefficients for the presence of services trade agreements are only statistically significant for services enterprises.
Miroudot et al. (Reference Miroudot, Sauvage and Shepherd2013) study formal and informal barriers to cross-border trade in services by comparing domestic trade patterns with international trade patterns for a large number of countries and industries, drawing on Novy (Reference Novy2013). They find that on average, trade costs barely changed for trade in services over the 1995–2007 period, whereas they declined substantially for trade in goods. Looking at a subsample of four major developed economies (the USA, Canada, the EU, and Japan) and two developing economies (China and India) in 2007, the estimated average ad valorem barriers to trade are in the triple digits for services (169%), almost twice as large as those for goods (95%). However, the costs of trade in services have decreased for China since its entry into the World Trade Organization (WTO). The authors suggest that this finding indicates the potential for regulatory reform to substantially reduce barriers to trade in services.
The role of services traded through the movement of persons and their impact on firm exports is studied by Lodefalk (Reference Lodefalk2016), who uses panel data for Sweden for the 1998–2007 period. The results suggest that firms that hire recently arrived persons from a foreign market are positively associated with subsequent exports to that market. This link is strongest for services, especially for more complex services, and weakest for homogeneous merchandise. The author also exploits indicators of various trade barriers, finding that the hiring of persons recently arrived from abroad seems to assist firms in overcoming informal barriers to exports. Finally, the author exploits the STRI data to compute the distance to best practices in terms of openness to services imports through the temporary movement of persons (mode of supply 4). He shows that there is ample scope for improvement towards the country that is ‘best in class’.Footnote 29
4. Discussion of trade policy implications
Manufacturing firms increasingly purchase domestic and imported services, produce services themselves, and provide domestic and foreign customers with services; in short, they become increasingly service oriented – they ‘servicify’.
The evidence suggests that servicification promotes firms’ competitiveness abroad. Nevertheless, there are substantial barriers to trade in services – barriers that are considerably higher than those to trade in manufactured goods, as indicated above. These barriers risk restricting the foreign competitiveness of manufacturing firms that servicify (and of services firms).Footnote 30 For example, being able to provide manufactured goods, but not embedded or ancillary services, can place an exporting manufacturing firm at a disadvantage.Footnote 31 Likewise, restrictions on cross-border data flows that are required for the proper functioning of many current and new manufactured goods could substantially disrupt the business of servicifying manufacturing firms (Chander, Reference Chander2015). Another example is the case in which a firm that needs to hire or bring key personnel home from abroad to provide essential inputs into an important export order but where the firm never knows if and when this person will arrive, due to lengthy, unpredictable and non-transparent government procedures. Arguably, such uncertainties and delays are rarely acceptable for material inputs, because ‘just-in-time’ delivery is required to conserve resources.Footnote 32
Below, I discuss trade policy and policymaking from the perspective of servicifying manufacturing and contemporary services firms. The discussion starts off with the question of why barriers to trade are still so high for trade in services. Next, I identify policymaking issues that either obstruct the liberalization of trade in services in general or do not align with servicifying firms. Finally, I discuss potential steps for reforming trade policy and policymaking.
4.1 Why are barriers to trade in services so high?
The relatively high barriers to trade in services are partially related to the shorter history of trade liberalization negotiations for services.Footnote 33 However, success has also been relatively limited, even after the breakthrough General Agreement on Trade in Services (GATS). Overall, the GATS appears to have been poorly used as a vehicle for liberalizing trade in services and binding actual market openings, resolving disputes on trade in services, and notifying and discussing trade issues.Footnote 34
One reason for the relatively limited success in liberalizing services trade in recent decades is that such negotiations are inherently complex, especially compared to goods negotiations. Trade in services is not limited to cross-border exchange, it also includes consumption abroad, FDI, and the temporary presence of natural persons. The modal structure and related issues of interpretation can complicate negotiations. Furthermore, the trade restrictions subject to negotiations are non-tariff, such as prohibitions, quotas, and regulations, instead of tariff measures. This means that more branches of government are more often de facto involved in the domestic consultations that feed into negotiation positions than they are involved in negotiations on liberalizing trade in goods.Footnote 35 This also means that barriers to services trade are difficult to measure and commitments to reduce them can only be compared with difficulty.Footnote 36 Adding to this complexity, for services, national treatment is negotiable under the GATS, whereas for merchandise, national treatment is not negotiable under the GATT. Therefore, in the GATS, negotiations on the trade liberalization of a single industry involve eight parameters: market access and national treatment times four modes of delivery (Adlung and Mamdouh, Reference Adlung and Mamdouh2014). For any government and, in particular, for countries with limited institutional capacity, this means that negotiations on services are demanding. For developing countries that prioritize agricultural or non-agricultural goods liberalization, this issue can affect both the degree and the character of their involvement; for example, to condition liberalization of services on meaningful concessions from developed countries in agricultural negotiations.Footnote 37
Another reason for limited progress in liberalization of trade in services is that several countries have already liberalized unilaterally.Footnote 38 For example, in infrastructural services, foreign businesses might be relatively uninterested in spending scarce resources to lobby their governments for foreign market access. The final reason for the limited progress of liberalization could be that popular sentiments against services liberalization are so strong that even though they are fragmented, they limit governments’ political impetus to liberalize (e.g. Sendén et al., Reference Sendén, Stavlöt, Calmfors, Montgomery and Dimdins2013; Calmfors, Reference Calmfors2006).
Turning to the role of dispute settlement, parties have referred to the GATS in only 23 cases of consultations to resolve trade disputes, whereas the corresponding number for trade in goods under the General Agreement on Tariffs and Trade (GATT) is 396 (WTO, 2015a). Even specialized agreements under the GATT have been referred to more often than the GATS.Footnote 39 The relatively infrequent use of the GATS to resolve disputes may have limited its contribution to an open and predictable trading environment for services.
The limited bindings of market openings for services trade mean that the substantial unilateral liberalization that has been achieved in recent decades can more easily be reversed during times of hardship; for example, in the wake of the most recent financial crisis.Footnote 40 Some assessments gauge the commitments from the Uruguay Round to be more than twice as restrictive as actual policies, on average, leaving substantial room for policy discretion and reversal (e.g., Mattoo and Gootiiz, Reference Mattoo and Gootiiz2009; Miroudot and Pertel, Reference Miroudot and Pertel2015). Such uncertainty can reduce firms’ willingness to invest in the capacity to export services abroad.Footnote 41 Overall, relatively limited liberalization and non-binding or otherwise restricted market access to trade in services is likely to put firms at a disadvantage as they servicify.Footnote 42
4.2 Issues in trade policymaking for servicifying firms
In addition to the internal dynamics of services trade negotiations, there are issues in trade policymaking that generally may limit liberalization of trade in services or in other ways may be misaligned with servicifying firms.
First, there is a disconnect in trade policy between efforts to liberalize trade in manufactured goods and trade in services – whether through the WTO or through preferential trade agreements (PTAs). This disconnect is unfortunate as manufacturing and service activities become increasingly entwined.
An illustrative example of how the separate (and arguably dismal) treatment of services affects servicifying manufacturing firms is that their industries rarely appear to be consulted when governments prepare for negotiations on trade in services (see, e.g., National Board of Trade, 2010; Ministry of Foreign Affairs and Trade, 2014). The National Board of Trade (2012) argues that this has resulted in the neglect of services industries that are key for manufacturing, such as maintenance and repair along with rentals and leasing. The particularly slow progress in liberalizing and binding commitments on trade in services is likely to be a major disadvantage to servicifying manufacturing firms.Footnote 43 One explanatory factor for the neglect of manufacturing in consultations on trade in services could be problematic official statistics. As previously discussed, official statistics overestimate the decline in manufacturing and grossly underestimate exports of manufacturing services, especially when delivered through a presence abroad.
In negotiations spanning trade in services and manufactures, trade-offs seem often to be made between export interests in manufactures and export (or even competing domestic import) interests in services. In the Doha Round, countries decided formally at the Hong Kong Ministerial Conference to ‘front load’ negotiations on the liberalization of trade in goods (WTO, 2005). My general assessment is that this was and still is symptomatic of a prioritization of trade in goods over trade in services.Footnote 44 The result is that servicifying firms in particular, and export service interests in general, would seem to lose (National Board of Trade, 2013a). What is arguably needed instead is a dual-track approach.
Finally, the separation of negotiations might have been conducive to differential approaches to liberalization. The practice of listing sectoral market openings for trade in services rather than sectoral restrictions, as in goods negotiations, might not have served transparency or future liberalization efforts well.Footnote 45
Potential explanations for the separation of trade policy on goods and services include the omission of trade in services in the predecessor to the WTO – the GATT – and the discussions preceding the Uruguay Round of trade negotiations that led to the GATS. During the creation of the multilateral trading system in the late 1940s, liberalization of trade in services was not emphasized. This neglect is understandable because cross-border trade in services was limited to a few industries, such as shipping.Footnote 46 Much later, digitization and subsequent information and communication technologies facilitated cross-border trade in services, such as engineering services, and enabled the splintering of production, and even detailed tasks, into components (Baldwin, Reference Baldwin2006; Grossman and Rossi-Hansberg, Reference Grossman and Rossi-Hansberg2008, Reference Grossman and Rossi-Hansberg2012).Footnote 47 Nevertheless, even in the late 1940s, trade in services was not excluded from the mandate of this envisaged system. Indeed, services were recognized as ‘substantial elements of international trade’ (United Nations Conference on Trade and Employment, 1948).Footnote 48 However, the proposed organization was never established; there remained only a provisional agreement on trade in goods (the GATT), which evolved into the WTO.
The current separation of negotiations over, and administration of, trade in goods and trade in services also seems to stem from the dynamics of the discussions between proponents and opponents preceding the Uruguay Round of trade negotiations. As the new round of trade negotiations was launched, Brazil and India accepted the inclusion of services only if their negotiations were separate from negotiations on goods.Footnote 49
Second, an arguably less-useful divide in contemporary trade policy is that between export and import interests: most countries still typically favour export interests. However, manufacturing firms increasingly rely on imported services; they may need to transfer or hire scarce service professionals across borders and they increasingly export service-intensive products and ancillary services. With trade in manufactured goods increasingly becoming dependent on imports and exports of services and on international value chains, it is in countries’ economic interest to liberalize at home while seeking openings abroad (OECD, 2013).
Third, there is arguably a troubling divide among various modes of service delivery. Servicifying manufacturing firms (and services firms) that internationalize are likely to use several complementary modes. For example, when customizing a product for a foreign customer, cross-border visits are commonplace. Later, when the product is exported, persons may accompany it. Meanwhile, software updates may be provided electronically, and data may be transferred across the border. Finally, to more regularly accommodate the customer's needs, a local establishment can be needed.Footnote 50
Consequently, there are arguments in favour of mode neutrality in commitments.Footnote 51 In contrast, making commitments in a specific mode is likely to distort the behaviour of both firms and customers. Firms may refrain from fully developing their business models according to technological developments and changes in customer behaviour.Footnote 52 Mode-specific commitments may therefore introduce deadweight losses to welfare. A counterargument might be that mode-neutral commitments could be dominated by the concerns of a mode that would be considered as particularly sensitive to liberalize. More analysis of the issue of mode neutrality is therefore needed. What is clear, though, is that from a contemporary business perspective, mode neutrality is preferable to asymmetric, mode-specific commitments.
4.3 Potential steps for reforming trade policymaking
When recognizing the issues in trade policy, we need to consider potential steps for reforming trade policymaking so as to better align it with modern manufacturing and services firms. Care must be taken, however, to avoid introducing new asymmetries to trade policymaking.
A first step to either bridging or dismantling the discussed divides would be to engage in domestic cross-sectorial consultations.Footnote 53 Governments could consistently consider the views of manufacturing firms and related services subsidiaries in preparation for negotiations concerning trade in services.Footnote 54 Broader consultations would likely lead to shifts in the prioritization of services and perhaps in priorities regarding modes of supply along with barriers at home and abroad.Footnote 55 Support for services trade liberalization from manufacturing businesses can also be instrumental in attaining the critical mass needed to seriously commit to negotiations not only in the WTO but also, for example, in negotiations on the Trade in Services Agreement (TiSA) and bilateral agreements. Likewise, it would make sense for governments to consistently consider the views of services firms when preparing for negotiations concerning trade in goods. The services industry exports a significant amount of goods (Malchow-Møller et al., Reference Malchow-Møller and Skaksen2015; Lööf, Reference Lööf2010).Footnote 56
In reviewing consultation processes, governments could also pay more attention to small and medium-sized enterprises (SMEs). Paying more attention to SMEs in manufacturing could also muster support for substantial negotiations to liberalize trade in services. SMEs contribute non-trivially to foreign trade, but their specific concerns are less explored (Cernat et al., Reference Cernat, Norman-López and T-Figueras2014; Manson, Reference Manson2015).Footnote 57 Regarding services, there are indications that new firms contribute to the overall servicification of manufacturing (Crozet and Milet, Reference Crozet and Milet2014). SMEs also rank formal and informal non-tariff barriers to trade as more trade-restrictive than transport and tariff costs. Meanwhile, large firms that already have addressed or even are benefitting from such barriers may be more frequently consulted and active in providing responses than SMEs (National Board of Trade, 2012; OECD Working Party on SMEs and Entrepreneurship, 2009).
It is difficult to see any substantial downsides to the broadening of consultations, but that assessment likely hinges on either existing or additional resources being reallocated/added to the responsible part of government. An unknown parameter is, of course, business's response. If businesses do not engage in consultations, little may be added in terms of support for liberalizing trade in services in ways that benefit servicifying firms. Both the level of consultations and the manner in which they are conducted might need to be experimented with to enable meaningful outcomes.
In negotiations, countries might also need to pay more attention to certain issues to promote the foreign competitiveness of contemporary manufacturing and services firms. One such issue is the cross-border movement of persons; for example, through, but not limited to, Mode 4 liberalization of trade in services at home and abroad. Cross-border movement of persons is highly restricted and delivery through Mode 4 accounts for the smallest share of trade in services. Nevertheless, case studies and business surveys highlight the continued importance of the movement of persons for firms and trade despite the possibility of using digital communication tools such as Skype (Harvard Business Review, 2009 ; National Board of Trade, 2013b).Footnote 58 The servicification of firms can contribute to this interest. Because services are intangible and commonly more heterogeneous than traditional manufactures, informal barriers to trade are more troublesome. The movement of persons can assist firms in this regard by transferring tacit information and establishing personal relations that foster trust in business relations (Lodefalk, Reference Lodefalk2016). The National Board of Trade (2015a) concludes that liberalization in this area is win-win and that even unilateral liberalization to enable the cross-border movement of persons would be beneficial from an export perspective. It therefore argues that countries should also consider improving processes related to visas and work permits to increase firm competitiveness.Footnote 59 This objective would likely include both facilitating these processes and (importantly) making them predictable, transparent, and rapid, because firms in this field also benefit from certainty and ‘just-in-time’ supply.Footnote 60 Admittedly, the liberalization of even the temporary cross-border movement of persons has been regarded as a sensitive issue by many OECD countries. Considering its importance, though, it would seem appropriate to aim for negotiations on processes and fixed timetables to facilitate the highly restricted temporary cross-border movement of persons while paying attention to the concerns of both sending and receiving countries.
A final proposal for negotiations might be to consider adding a fifth mode of supply (Mode 5) to international trade rules, as proposed by Cernat and Kutlina-Dimitrova (Reference Cernat and Kutlina-Dimitrova2014). Servicifying manufacturing means that domestic intermediary services; for example, R&D and design, could carry custom duties on manufactures. These extra tariffs might not be trivial. One estimate is that between one-quarter and one-half of manufacturing exports consists of such services. However, before adding this dimension to negotiations and trade rules, more analysis of suitable modalities of negotiations and likely impacts on trade liberalization is needed.Footnote 61 One concern to consider is whether jointly negotiating the liberalization of some goods and services might negatively affect the prospect for liberalization of those goods. As mentioned, the negotiation of liberalization of trade in services is already complex and trade barriers are usually substantially higher for trade in services.Footnote 62
5. Concluding remarks
In recent years, reindustrialization has become an increasingly popular concept among policymakers. As a result, several governments have adopted strategies to promote domestic manufacturing as a way of creating jobs and economic growth. As I have demonstrated in this article, however, recent research challenges several notions about manufacturing and services firms. Contemporary manufacturing firms often import, use, produce, and export services – services surround, embody, and are embedded in, and ancillary to, exporting manufactures. Likewise, services firms export a significant amount of goods.
I find that trade policy does not currently reflect these realities. First, barriers to trade in services abound and are much less regulated by multilateral trade agreements than are barriers to trade in goods. Second, countries continue to focus on tearing down trade barriers abroad while reluctantly dismantling them at home. Third, trade policy commitments in services are commonly made in four asymmetrically liberalized modes of supply. This may complicate using and switching among several modes of trade in services for manufacturing and services firms. In conclusion, current trade policy is likely to limit the competitiveness of firms and, ultimately, welfare.
I argue that trade policymaking requires a new paradigm attuned to this new reality. Liberalizing services trade then becomes not a manufacturing industry issue but instead a general issue of increasing firm competitiveness, and vice versa. Additionally, because imports of services are critical for subsequent exports of goods, the mercantilist undercurrent of trade policymaking seems outdated. Reducing that undercurrent would reduce tensions in trade negotiations and might influence policymakers to increase liberalization and to bind those commitments.Footnote 63 Because of servicification, mode neutrality might become another way to facilitate competitiveness. In addition, the reduction of unduly burdensome regulatory barriers to trade in services becomes less sensitive. Because imports from many destinations are critical to exporting goods, there is no need to refrain from liberalizing non-tariff barriers that discriminate against foreign competitors because reducing barriers for one foreign country would reduce barriers for all of them.
A few practical steps for policymakers and officials might therefore include considering the interests of manufacturing when crafting and implementing policies on trade in services, and vice versa; preparing the ground for negotiations on processes and fixed timetables to facilitate the highly restricted cross-border movement of persons, an area in which there is likely to exist a strong business interest; and possibly also, after further analysis, considering reducing tariffs on services embodied and embedded in manufactures and their sales.
However, beyond a paradigm shift and some initial steps, a framework might be needed to systematically highlight the interconnectedness of areas of trade, interests, and modes of supply. Ideally, such a framework should help identify negotiation priorities regardless of the trade policy silo to which issues traditionally belong. This framework would need to go beyond inter-ministerial and inter-industry consultations.
Interestingly, there have been proposals to identify clusters of intimately linked goods and services, clusters around which negotiators could gather to identify and address key barriers (National Board of Trade, 2012). For example, the National Board of Trade (2014) has recently identified services that are considered indispensable for environmental goods, arguing that trade in these services should therefore be liberalized in tandem. Hoekman (Reference Hoekman2014, Reference Hoekman2013) suggests a ‘think supply chain’ approach in which industry representatives and officials from regulatory bodies, trade ministries, and international organizations, such as the WTO, cooperate to facilitate the reduction of regulatory barriers that are unnecessarily harmful to a particular international supply chain. This work could also provide information that improves the public's understanding of the issues involved, thereby rendering some issues less contentious. This framework would also provide feedback about on-going and future negotiations in the WTO and elsewhere. Regardless of the approach, it is clear that trade policymaking might need to be redesigned to accommodate today's firms, which increasingly venture into other industries – such as servicifying manufacturers or services firms that integrate manufactures into their offers – and are becoming increasingly dependent on international value chains.
Statistics must also be developed and existing statistics fully utilized to ensure that jobs related to and value added in complex and servicifying firms are properly considered in policymaking. For example, improvements are needed in the areas of developing official statistics at the enterprise group level (Lanz and Maurer, Reference Lanz and Maurer2015; Lodefalk, Reference Lodefalk2013a); integrating internationally linked input–output databases such as the WIOD (World Input Output Data) into the toolbox of statistical offices and their products; developing bilateral micro-data on trade in services for SMEs; designing a classification of intermediate services (Lanz and Maurer, Reference Lanz and Maurer2015); revising industry classifications so that they better reflect current servicifying manufacturing firms and changes in service firms (De Backer et al., Reference K., Desnoyers-James and Moussiegt2015). As firms increasingly produce and sell abroad, which is likely to be further enabled, e.g., by 3D-printing technologies, it might also be important to incorporate foreign affiliates’ sales of goods in official statistics on trade in goods, thus facilitating comparison with trade in services statistics (Li et al., Reference Li, Whalley and Chen2015).Footnote 64
Finally, more research is needed on the roles of services in manufacturing firms, including those in developing countries, on potential heterogeneity in the impact of services across firms and the implications of these services for trade policy. A relevant research agenda could also include how firms bundle and deliver goods and services, their sequencing and complementarity in trade, how servicification affects trade margins, and how firms address duties on services that are either embodied in goods or embedded in their sales.
