Trade and Jobs in Europe: The Role of Mode 5 Services Exports

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From 1995 to 2011, the EU employment supported by exports of goods and services to the rest of the world grew by 67%, reaching a total of 31 million jobs. In a recent research piece[1] we set out to bring to light some key insights on the increasing contribution of services to this export-supported employment. In fact this reflects not only the increasing “tradability” of many services activities but also the “servicification” of manufacturing. As the latter relates to an indirect way of supplying services across borders, which we labelled mode 5 services exports, we also outlined some of the features of a potential policy reflection aimed to better framing the international rules covering trade in services.

Our analysis builds on previous work on the quantification of the complex relationship between exports and employment in the EU. The main results can be found in Arto et al. (2015)[2]. One interesting finding from that work was the realisation that an increasing share of the jobs supported by EU exports is in services. Services exports are growing fast and the number of jobs supported by services sectors exports to the rest of the world more than doubled since 1995 across the EU to reach 11 million in 2011. But this is not the whole story. When industry interlinkages are considered, the importance of services industries as providers of (employment-intensive) inputs to goods exporters also comes to light. This called the attention to the importance of the indirect international trade of services that is embedded in goods trade. This is what we call mode 5 supply of services, in a direct reference to the traditional GATS modes of supply.

In 2011, mode 5 services represented as much as 40% of the total employment supported by the exports of the primary and manufacturing sectors from the EU to the rest of the world (up from 31% in 1995). This also means that 26% of the export-supported employment in the EU were related to services activities providing inputs to the production of exported goods, amounting in absolute terms to 8 million jobs[3],[4].  These services activities are overwhelmingly originating in the “Other Business Activities” sector[5]. Other important suppliers of mode 5 services are the retail and wholesale trade sectors.

The importance of mode 5 services exports varies widely across sectors. In 2011 the “servicification” of exports-supported employment ranged from 29% in textiles to around 60% in the energy and chemical industries. This sectoral heterogeneity is behind wide differences across Member States: the contribution of mode 5 services exports to total exports-supported employment in 2011 ranged from 6% in Cyprus and Luxembourg to 38% in France. Moreover we found that since 1995 the relative importance of mode 5 services for employment supported by the exports of goods has increased in every EU Member State but very unevenly. It has gone up by more than 15 percentage points in countries like Latvia and Slovakia but it has increased far less in Member States like Ireland, Cyprus, the United Kingdom, Luxembourg and the Czech Republic.

The relationship between traditional GATS services exports and mode 5 services is not straightforward. On the one hand, we found an inverse relationship between the contributions of GATS and mode 5 services exports to export-supported employment across the EU. In 2011 the Member States where the GATS services export jobs make up a higher share of the export-supported employment are those where mode 5 services exports supported jobs offer the least contribution to employment. This relationship seems to have been strengthening since 1995. On the other hand, however, there is also evidence suggesting a complementary relationship between greater “servicification” of the production of goods to be exported and the ability to sustain more manufacturing jobs. This seems to back the view that the “servicification” of manufacturing industries has not led to the hollowing out of the manufacturing employment base in Europe. On the contrary it might contribute to sustaining it.

Still, a closer inspection of the evolution in the four biggest EU Member States shows well how country-specific factors play an important role. While in Italy (and to a lesser extent in France) the complementary relationship seems to have hold between 1995 and 2011, in Germany the export-supported manufacturing employment has held up despite the “servicification” of manufacturing exports having retreated in relative terms over the period. In contrast, in the UK both manufacturing and services jobs associated to the exports of goods have stalled and declined (respectively), suggesting that in that country (together with Sweden and Denmark) the greater export specialisation based on services is increasingly dependent on GATS exports and progressively more detached from the local manufacturing base.   

This analysis leaves little doubt that mode 5 has become an important part of cross-border exchanges of services. However, this is a reality that has gone largely under the radar of rulemaking. Only a small subset of mode 5 services (e.g. design, engineering originating in the country of importation which was exported under GATS as an intermediate input and is reimported as part of a final good under GATT) is already covered by specific WTO rules (Article 8 of the WTO Customs Valuation Agreement) which offers them duty-free treatment under certain conditions. As a result most mode 5 services pay duties when crossing borders as part of goods, even though the same service could be delivered separately (e.g. via mode 1) and subsequently incorporated duty-free after importation into the final product. This is the case for example for software despite it being a key services input in nowadays increasingly digital economy.

The obvious question is then how could we start to address this? For instance, could the existing WTO rules covering mode 5 be extended and included as part of various policy proposals (e.g. services trade facilitation, e-commerce, etc.) in the lead up to the 11th WTO Ministerial? Should mode 5 services feature specifically in plurilateral negotiations, like TISA? Alternatively, can a more ambitious set of coherent mode 5 rules be agreed in a bilateral context as part of deep and comprehensive FTAs?

The answer is less obvious though as it involves a number of important trade policy considerations, both at multilateral and bilateral level. However, the existing evidence clearly shows that mode 5 services have outgrown by far the narrow trade rules currently governing them.

 

 

Endnotes

The views expressed herein are those of the authors and do not necessarily reflect an official position of the European Commission.

[1] José M. Rueda-Cantuche, Lucian Cernat and Nuno Sousa (2017), ” Trade and Jobs in Europe: The Role of Mode 5 Services Exports”, forthcoming.

[2] The report is available at: http://ec.europa.eu/trade/policy/in-focus/trade-and-jobs/   and at: https://ec.europa.eu/jrc/en/research-topic/economic-environmental-and-social-effects-of-globalisation.

[3] Moreover the data also show that this “servicification” of the employment base of manufacturing exports is increasingly spanning borders as EU exporters rely on global supply chains also for services inputs. In 2011 around 38% of foreign jobs supported by EU manufacturing and primary goods exports are found in services.

[4] On aggregate mode 5 services exports also accounted for a sizeable share of total EU exports (around €414bn) in 2011.

[5] This sector includes: computer and related activities; research and development; legal, accounting, book-keeping and auditing activities; tax consultancy; market research and public opinion polling; business and management consultancy; holdings; architectural and engineering activities and related technical consultancy; technical testing and analysis; advertising; labour recruitment and provision of personnel; Investigation and security activities; renting of automobiles, other transport equipment and machinery; industrial cleaning and other business activities.

 

Bibliographic references

Arto I., J.M. Rueda-Cantuche, A. F. Amores, E. Dietzenbacher, N. Sousa, L. Montinari and A. Markandya. (2015), “EU Exports to the World: Effects on Employment and Income”, Luxembourg, Publications Office of the European Union.