International trade in services: A portrait of importers and exporters

Holger Breinlich, Chiara Criscuolo 02 July 2010

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Trade in services has been the fastest growing component of international trade since the early 1990s, with average annual growth rates of close to 10% and a total cross-border export value of $2,800 billion in 2006 (WTO 2008). Over the same period, the composition of services trade has shifted dramatically in favour of high-skill intensive categories such as business services, provoking heated debate about the consequences of services offshoring. Given these trends and the importance to the developed economies of the service sector more generally, it is not surprising that liberalisation of services trade is a key issue in past and ongoing trade negotiations (see Francois and Hoekman 2010).

Nevertheless, we know very little about the firms that engage in trade in services. This is in stark contrast to the research on goods trade which has produced a large set of stylised facts on exporting and, more recently, importing firms (e.g. Bernard and Jensen 1995 and 1999 and Bernard et al. 2007). These facts have helped us to improve our understanding of the implications of trade liberalisation and economic integration for key economic variables such as aggregate productivity (see Melitz 2003).
The goal of our recent research (Breinlich and Criscuolo 2010) is to present a comparable set of stylised facts for firms engaged in international trade in services, and to highlight possible implications for the design of economic policy. We do so using firm-level data on services exports and imports in the UK between 2000 and 2005.

Services trade is rare, but most sectors do a bit of it

Our analysis shows that services trade is a rare activity – in 2005 only 8.1% of UK firms engaged in either exports or imports of services (see Table 1). Exporting services is more common than importing – 6.2% of firms export, but only 3.9% import and only 2% were involved in both activities at the same time. The intensity of trade – the value of exports and imports relative to the turnover of those firms engaged in services trade – is also low. Average “export intensity” (the ratio of exports to turnover), is around 31% and 27% for only-exporters and exporters-importers, respectively (Table 1, panel 2). For imports, these ratios are even lower at 9% for only-importers and 12.5% for exporters-importers.

On the other hand, exporters and importers of services can be found in all sectors of the UK economy. Indeed, some sectors not commonly associated with services trade, such as the mining or the manufacturing sector, have some of the highest shares of exporters and importers. This raises interesting implications for the link between market access in goods and services trade. For example, a natural explanation for the fact that many manufacturing firms export both goods and services is that the two are complements (e.g. a machine is hard to sell without the corresponding maintenance contract). If this is indeed the case, slow progress in liberalising trade in services will also impact on the growth of manufactured goods exports.

Table 1. Importers and exporters of services in the UK (2005)

 
(1) Share of Firms
(2) Trade Intensity
(3) Share of sector in total ...
Sector
 
Exports
Imports
 
 
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Notrade
(EnoI)
(InoE)
(I&E)
(EnoI)
(I&E)
(EnoI)
(I&E)
Exports
Imports
Total UK Economy
91.90%
4.2%
1.9%
2.0%
30.7%
27.2%
9.0%
12.5%
100.0%
100.0%
Mining
77.00%
10.7%
3.8%
8.5%
63.3%
23.4%
1.4%
5.5%
0.5%
0.4%
Low-Medium Tech Manuf.
90.80%
3.4%
2.1%
3.7%
14.2%
16.6%
7.8%
17.3%
2.6%
2.8%
High-Tech Manuf.
80.30%
9.6%
4.0%
6.1%
25.0%
22.1%
6.4%
10.6%
9.6%
9.3%
Construction & Utilities
98.10%
0.5%
1.1%
0.3%
12.5%
7.2%
5.5%
4.7%
0.1%
0.4%
Wholesale & Retail
94.00%
2.3%
2.3%
1.4%
28.4%
19.1%
13.7%
20.8%
7.6%
7.5%
Other Services
94.80%
2.9%
1.2%
1.1%
24.0%
29.5%
10.5%
10.9%
31.2%
35.5%
Bus. Serv.; Computer; R&D
85.40%
8.5%
2.6%
3.5%
35.5%
31.8%
6.3%
10.3%
48.4%
44.1%

Notes: The table provides basic information on exporters and importers of services in the UK in 2005. Row 1 reports figures for the whole economy, while rows 2 to 8 report figures for seven separate sectors. Panel 1 reports statistics on the share of firms in the economy: firms that do not trade (column 1); firms that only export (“EnoI”, column 2); firms that only import (“InoE”, column 3); and firms that import and export at the same time (“I&E”, column 4). Panel 2 reports on the trade intensity of trading firms, both for export (columns 5 and 6) and imports (columns 7 and 8). We again distinguish between firms that only do one activity or do both at the same time. Panel 3 reports on the share of each sector in total UK services trade (exports in column 9 and imports in column 10). Source: Authors’ calculations based on the Annual Respondents Database, Office for National Statistics.

Exporters and importers of services are different from other firms

One might argue that the coexistence of services exporters and importers with non-traders in each of the broad industries analysed above is an interesting but ultimately inconsequential finding. But it becomes important once we consider that exporters and importers of services are very different from firms that do not engage in international trade in services.

Table 2 presents the corresponding evidence. We again distinguish between four subgroups of firms: firms that only export; firms that only import; firms that import and export; and firms that do not trade. Table 2 shows differences between non-traders and the three subgroups of traders in terms of a number of important firm-level variables (differences are expressed in %). As we can see, exporters and importers of services are larger in terms of employment and turnover, pay higher wages, and are up to 11% more productive in terms of total factor productivity. These differences are particularly pronounced for firms that both export and import services. Services exporters and exporter-importers also employ a more highly skilled workforce, although this is not true for firms importing services only.

It is the systematic differences between traders and non-traders of services shown in Table 2 which make the coexistence of both types of firms within all sectors of the UK economy so important. For example, if only those firms exporting services can benefit from better access to foreign markets in a given sector, one would expect services trade liberalisation to lead to increased market shares of these firms compared to purely domestic firms (which, in addition, might be exposed to tougher import competition as a consequence of the liberalisation). Given that services exporters are more productive and more skill intensive, we would expect this to lead to increases in aggregate productivity and the relative wages of more highly skilled workers. This is of course the same logic that underlies recent models of heterogeneous firms in the goods trade literature, which have proved to be a powerful tool for the analysis of trade liberalisation episodes (see Melitz 2003 and Bernard et al. 2003).

Table 2. Differences between services traders and non-traders (2000-2005)

 
(1)
(2)
(3)
(4)
(5)
 
Employment
Turnover
Wages
TFP (2000-2004)
Fraction of highly skilled employees
Importer only vs. Non-Traders
+45%
+80%
+28%
+4%
-4%
Exporter only vs. Non-Traders
+18%
+45%
+33%
+11%
+10%
Exporter-Importer vs. Non-Traders
+59%
+124%
+58%
+11%
+13%

Source: Authors’ calculations on the Annual Respondents Database and Third Community Innovation Survey, Office for National Statistics.

Services traders are also different from each other

A final striking feature of our data is that services traders are not just different from firms not engaged in international trade in services, but also from each other. In Table 3, we highlight a few of these differences. For example, the 1% of exporters with the largest amount of exports in terms of value (“top 1%”) export more than 60,000 times more than the 1% of exporters with the smallest amount of exports (“bottom 1%”). They also tend to export more types of services, and to many more destinations. As a direct consequence, a very small fraction of firms accounts for the bulk of UK services exports and imports. This can be seen from the last row of Table 3 which shows that the top 1% of exporters and importers account for over 70% of aggregate exports and imports. Recalling that services traders themselves only account for a small share of all firms (3.9% for importers and 6.2% for exporters, to be precise) makes this concentration of trade even more astonishing: the top 1% of importers, which represent 0.039% of UK firms, account for close to 80% of the UK’s services imports. Similarly, the top 1% of exporters (representing 0.062% of UK firms) account for 74% of exports.

This additional layer of heterogeneity might again hold some important lessons. For example, the strong degree of heterogeneity present among services traders suggests that a given policy intervention may have very different implications across different exporters and importers.

Table 3. Export and import patterns of firms (2000-2005)

 
Exports
Imports
 
Number of Destin.
Number of Services
Total Firm Exports (£ mill.)
Number of Destin.
Number of Services
Total Firm Imports (£ mill.)
Mean
5.9
1.2
4093.1
4.9
1.8
2930.1
Bottom 1% of services traders
1.0
1.0
0.8
1.0
1.0
0.9
Top 1% of services traders
49.0
4.0
66671.4
56.0
9.0
68505.1
Share of total trade accounted for by top 1% of services traders
73.90%
79.34%

Source: Authors’ calculations on the matched Annual Respondents Database (ARD) and International Trade in Services Survey (ITIS), Office for National Statistics.

Conclusions

For a deeper understanding of the patterns and consequences of international trade in services, researchers will increasingly have to turn to firm-level data. Such data will help to uncover the striking differences that exist, both between services traders and non-traders, and within the group of services traders themselves. As we have tried to argue here, this is not just of academic interest, but will hold important lessons for the likely consequences of policy interventions, such as the effect of services trade liberalisation on aggregate productivity.

Disclaimer: This column contains statistical data from ONS which is Crown copyright and reproduced with the permission of the controller of HMSO and Queen's Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates.

References

Bernard, AB and JB Jensen (1995), "Exporters, Jobs, and Wages in U.S. Manufacturing: 1976-1987", Brookings Papers on Economic Activity: Microeconomics, 67-119.

Bernard, AB and JB Jensen (1999), "Exceptional Exporter Performance: Cause, Effect, or Both?", Journal of International Economics, 47(1):1-25.

Bernard, AB, J Eaton, JB Jensen, and S Kortum (2003), "Plants and Productivity in International Trade", American Economic Review, 93(4):1268-1290.

Bernard, AB, JB Jensen, S Redding, and P Schott (2007), "Firms in International Trade", Journal of Economic Perspectives, 21(3):105-130.

Breinlich, H and C Criscuolo (2010), “International Trade in Services: A Portrait of Importers and Exporters”, CEPR Discussion Paper 7837.

Francois, J and B Hoekman (2010), “Services Trade and Policy”, CEPR Discussion Paper 7616.

Melitz, MJ (2003), "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity", Econometrica, 71:1695-1725.

World Trade Organisation (2008), Statistics Database, International Trade and Tariffs Data.

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Topics:  International trade

Tags:  UK, trade in services, firm-level data

Professor of Economics, University of Surrey and CEPR Research Fellow

Head of the Productivity and Business Dynamics Division in the Science Technology and Innovation Directorate at the OECD

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