Missing trade in services in the European single market.

The degree to which services are traded remains low for most EU Member States in spite of the way technology facilitates the way services can be traded and efforts to create a Single Market for services. Missing trade refers to the difference between the way services are traded domestically and internationally, whether through cross-border trade or through foreign direct investment (FDI). While there is substantial trade through FDI, cross-border trade remains low. Only 6% of EU markets are served through imports against a quarter by sales of affiliates of foreign firms and 70% by domestic firms. The decision by firms to internationalise by FDI rather than exporting is seen to depend on firm characteristics (size, age, productivity and human capital), industry and service characteristics. Services that are more physically tangible and easier to envisage (generality) are more likely to be exported while those that require either the supplier or user to physically move are more likely to be traded through FDI. Gravity equations provide additional insights into why some services are much more traded cross-border than others. Distance continues to play an important role even though transport costs do not apply to services and certain services can be traded via the internet without distance coming into play. Some of the characteristics of services affect cross-border trade differently from the choice between exporting and FDI. Physical tangibility acts to depress trade in services rather than to facilitate it. Rather it is the capacity of some services to be stored and transported as intangible goods that is more important than the physical tangibility of a service for trade in services. The influence of the requirement that either the supplier or user to physically move to supply a service is found to be diminishing over time - indicating that there may be more scope for cross-border trade in future. Willingness by consumers to purchase cross-border via the internet compared to domestic purchases is found to be low even though there are few barriers to doing so. Personal characteristics of consumers play a role but country characteristics, both economic and non-economic in nature are also very important. Not all of these are susceptible to action by policy makers but trust is identified as one important area to address.

Publication year:2018

Accessibility:Open