Part of the answer can be found in a term currently generating a lot of discussion: ‘non-tariff barriers’. As services cross a border in an intangible manner, it is near impossible to impose tariff barriers on them. Barriers to services often manifest as domestic regulations that impact both local and foreign providers, such as requirements for professional licensing and certification. As a result, service trade has benefited significantly less from the proliferation of Preferential Trade Agreements (PTAs) compared to goods trade over the past decades.
Liberalising such regulations within bilateral trade agreements remains rare, and policy restrictions in the service sector remain significantly larger than in the goods sector. According to the OECD, these restrictions translate into trade costs with average multilateral ad valorem equivalents (AVEs) of approximately 16% for communication services, 20% for business services, 23% for transport services, 190% for insurance services, and 211% for financial services. AVEs represent the additional costs of the existence of non-tariff measures (NTMs), calculated as a percentage of the import price of the product.
Mario Draghi, former president of the European Central Bank, recently emphasised the high internal barriers and regulatory hurdles as important impediments to within-EU trade. Effectively acting as tariffs, these barriers reduce the EU’s growth potential as European service companies can insufficiently scale their activities in the absence of a true common market for services.
However, the higher the initial barriers to trade, the greater the potential gains from reducing those barriers. The service sector, in particular, holds significant potential for economic growth. Increased competition in this sector can lead to lower prices and economies of scale. And these benefits extend beyond final consumers, as the manufacturing industry heavily relies on intermediate services. In fact, services accounted for 25.5% of value-added in the European Union’s manufacturing sector in 2022, and for 21.6% in non-EU countries, according to the FIGARO input-output tables. Liberalising trade in services positively impacts manufacturing sectors that use these services as intermediate inputs, enhancing productivity within the manufacturing sector, according to economists from the WTO.
In this context, the progress towards reduced restrictions to services trade within the EU, led by the Single Market Enforcement Taskforce (SMET), appears slow. SMET has been working on various projects to address specific barriers, such as eliminating process barriers for renewable energy installations, tackling IBAN discrimination, and reducing administrative burdens for cross-border service providers. The pace of these efforts, however, has been gradual and significant challenges remain.
Meanwhile, the EU’s first-ever digital trade agreement with Singapore, with negotiations formally concluded in 2024, marks a significant milestone for extra-EU trade. This agreement aims to facilitate digital trade by reducing administrative burdens and increasing legal predictability, ensuring cross-border data flow. The future of services trade holds immense potential, but decisive action is needed to fully unlock its benefits and drive economic growth.
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