Smiling female spice shop owner giving shopping bags to customer at counter.

New markets and the services economy

You might have imagined that trade in goods is the major focus of international commerce, however the fastest growing area of trade across borders is in the services economy.

Economists divide all economic activity into two broad categories: goods and services.

While ‘goods’ describe tangible objects or items that change ownership as part of international trade, ‘services’ are the intangible things that come into existence when they are created and consumed.

Goods

Goods-producing industries are agriculture, mining, manufacturing, and construction: each creates some kind of tangible object. Service industries include everything else.

Services

Services include banking, communications, wholesale and retail trade, all professional services such as engineering, computer software development, and medicine, nonprofit economic activity, all consumer services, and all government services, including defense and administration of justice.

Services also include accounting, banking, cleaning, consultancy, education, insurance, expertise, medical treatment and transportation (both freight and passengers).

Traded services includes travel, communications services, design and construction services, financial services, computer and information services, business services (for example, technical and professional services) and cultural and recreational services.

Trade in services drives the exchange of ideas, know-how and technology, although it’s often restricted by barriers such as domestic regulations. (OECD 2018)

Complexities

While there are obvious benefits to new markets and the services economy there are some complexities that must be factored into any decision to operate in this space.

Trade in services often relies on the physical proximity of the supplier, for example if you want to hire a cleaner to service your office space, or a mechanic to service your car. These are services that cannot be undertaken at a distance.

As Eurostat outlines, some services, such as accountancy, may be restricted by national laws or policies, affecting their trade internationally. While other services such as health and education, international trade may be restricted and largely supplied by the public sector, with limited opportunities for SMEs.

Developing and developed economies

While developed countries maintain the lion share of services trade, according to an article published by the World Bank, developing countries are increasingly exporting services despite the difficulties and barriers to trade they face.

Services such as tourism, distribution and communications are well-established. Students studying abroad, medical tourism and visitors being delighted by the services and experiences they enjoy while in your community are examples of how SMEs are driving services exports in their ‘home’ economy.

SMEs can improve their competitiveness by outsourcing business processes, such as technology services, offshore to developing countries. This can also present the opportunity to acquire additional know-how and capacity.

If your SME is helping other businesses with their competitiveness in the domestic economy, there is a good chance your SME could find new markets helping other businesses in the international economy.

Your task

Why might trading in services be more complicated than trading in goods?

Share your ideas in the comments and respond to others’ comments to dive deeper into these complexities.

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This article is from the free online course:

SMEs and New Markets: Trade, the Chinese Powerhouse and Online Opportunities

Deakin University