Global trade is becoming “weightless”, as trade in goods — things that you can drop on your foot — has plateaued, while trade in services — which are largely weightless, consisting of electronic transmissions and documents — has not. Service exports worldwide have grown 15-fold since 1998; goods exports grew by only 9 times during the same period. Services trade will most likely continue to grow faster than goods trade for the foreseeable future.
Why? There are essentially no taxes on imported services. And while services sold directly to consumers tend to be restricted by regulations, services that support the operations of companies — such as accounting, human-resource management, IT support, legal services, research and development, marketing and the like — are generally less constrained. So the barriers to trade in such “intermediate services” are not due to government policies but are simply due to the difficulty of using foreign teleworkers — and digital technology is lowering these barriers at an exponential pace.
The changes that came with telework during COVID accelerated this trend by 5 to 10 years. The use of artificial intelligence is rapidly making domestic and foreign workers better substitutes than they were in the past. Simultaneous speech translation, for example, will mean that most emerging-economy workers will be able to speak (via an app) good enough English to deliver services to clients anywhere. Generative AI will accelerate this by distilling the experience of rich-nation service workers into an app which can be given to emerging-economy service workers in order to “level up” their skills.
Putting these factors together, it is clear that the future of trade lies in services. Barriers are radically higher for services than goods, but falling radically faster, and, unlike farm and factory goods, there is no capacity constraint in emerging economies when it comes to intermediate services. The demand for intermediate services is huge in rich nations and the supply of appropriate workers is huge in emerging economies, since they are already providing these services in their local economies. The growth of service exports from emerging markets has been remarkable: since 2016, emerging economies have seen their service exports grow far faster than those from high-wage nations.
This trend is now reshaping the economic development pathways of these countries, offering new opportunities for growth and job creation. Just as Bengaluru thrived on service exports, I believe that cities ranging from Nairobi and Cape Town to Bogotá and Buenos Aires are poised to become centres of service exports and thus drivers of their nations' economic prosperity and growth.
This new development path will require a shift in mindsets, since services have hitherto played almost no role in development thinking. Services were viewed as incapable of sparking a growth take-off in the way manufacturing could. This is strange, since most of the growth in today’s rich nations is driven by the expansion of service sectors in cities, not factories in the countryside. Overall, national-development strategists in the digital era may do well to look to urban economics rather than development economics for inspiration and guidance.
Companies should adapt their strategies to leverage the benefits of digital technologies and global labour markets. This change in world trade will release a tidal wave of low-cost, highly skilled workers who have so far been forced to work for low wages in their local economy. Investing in digital infrastructure, enhancing workforce skills and fostering innovation in service delivery will be crucial for businesses to remain competitive in the evolving global trade landscape.
Policy-makers, on the other hand, need to create supportive regulatory frameworks that facilitate the seamless exchange of services across borders while ensuring fair competition and protecting domestic labour markets. This may include addressing issues related to data privacy, cybersecurity and the taxation of digital services. Moreover, policies that support workforce retraining and upskilling will be essential to help workers transition to new roles in the digital economy.
The transformative shift towards service-oriented globalisation presents both challenges and opportunities for businesses and policy-makers. Companies should adapt their strategies to leverage the benefits of digital technologies and global labour markets. Investing in digital infrastructure, enhancing workforce skills, and fostering innovation in service delivery will be crucial for maintaining competitiveness in the evolving global trade landscape. Policy-makers, meanwhile, need to create supportive regulatory frameworks that facilitate the seamless exchange of services across borders while ensuring fair competition and protecting domestic labour markets. This includes addressing issues related to data privacy, cybersecurity and the taxation of digital services. Policies that support workforce retraining and upskilling will be essential to help workers transition to new roles in the digital economy.
To conclude, the future of globalisation lies in services, not goods. Embracing this transformation is key to harnessing the full potential of the new era of globalisation and ensuring inclusive growth and development. The "emerging market miracle" will continue, driven by services rather than industry and commodities. The future is arriving faster than most believe, driven by exponential advances in digital technology and AI. Now is the time to decide what the future will hold and make the most of the opportunities that unfold.
