BRICS countries – Brazil, the Russian Federation, India, China, and South Africa – have emerged as important players in global services trade in the past decade. BRICS services exports are growing faster than the developed countries; their share in global services markets is also expanding rapidly. Yet they still lag behind traditional major players and much work remains to tap into their potential.

According to the World Trade Organization (WTO), China was the world’s third largest exporter of services in 2015 and India the eighth, with India being particularly successful in areas such as IT and business process outsourcing.

But since the BRICS countries started from a relatively low base, they still account for only a modest proportion of world trade. Except for India, BRICS’ services trade tends to be concentrated in traditional sectors, such as transport and travel. The sectoral composition of services trade and production is important because sectors differ in terms of their productivity, their potential for future growth and their spill-over effects.

This report provides data on sector and modes of supply for each BRICS country, and analyses intra-BRICS trade. The analysis suggests that BRICS can better integrate into the global services economy by improving services regulations and reducing trade costs.

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Executive Summary

Dynamic sectors

Dynamic services sectors, such as engineering and research and development, have seen rapid productivity growth globally in recent years. This has implications for policymakers, who need to have the right incentives to encourage high-productivity, growth-supporting services. It also means that the fact that manufacturing in developing countries and BRICS countries is peaking at lower levels as a percentage of GDP is not necessarily negative for employment and development, provided countries generate competitive offerings in dynamic services sectors.

One aspect of services trade which stands out for the BRICS countries is so-called ‘embodied’ services trade – services used as inputs in the production of other tradable goods and services. Services account for just some 20% of global exports in gross terms, but nearly 50% in value-added terms, reflecting the fact that most of the world’s cross-border services trade is in intermediate and not final services.

BRICS’ gross exports of manufactured goods incorporate between 30% and 40% of embodied services in value-added terms, primarily from domestic sources, but also from foreign suppliers, according to new TiVA data. This emphasizes the importance of developing services not only as a source of export earnings in a direct sense but also to facilitate the ability of manufacturers to be competitive in world markets.

Most data available for global markets cover only pure cross-border services trade, known as Mode 1 in the General Agreement on Trade and Services (GATS). However, a review of United States and European Union data on Mode 3 – sales by foreign affiliates – indicates that the BRICS, particularly China, are major sources of demand. Trade via Mode 3 is likely concentrated in flows with the main developed markets, as indicated by statistics on investment. The BRICS countries are taking initial steps in terms of Mode 3 exports; they are already well established as importers. Access to high-quality, reasonably priced services from the world market is important for consumer welfare and business productivity in BRICS countries.

For services trade involving the physical movement of people across borders – people-to-people connections – there are important factors that make the BRICS countries key players in this type of services trade, primarily GATS Mode 2 (as Mode 4 remains very restricted in most countries).

Natural advantages translate into vibrant tourism and travel economies in several the BRICS countries. At the same time, BRICS, particularly India and China, are themselves generating an increasing number of tourists as per-capita incomes rise.

The BRICS countries are also heavily involved in trade in educational services, primarily as sending economies. Their students study mostly in the developed markets of the United States and the European Union. Intra-BRICS exchanges are marginal.

Moving forward

The key finding from our data-driven analysis of services trade in the BRICS is that much work remains to be done to fully integrate BRICS countries into the global services economy. Economic forces will continue to pull in that direction; rising incomes will shift consumption towards services and increasing use of GVCs as production platforms will increase demand for intermediate services.

The major challenge for BRICS is to improve productivity in services trade, which would benefit trade integration, consumer welfare and downstream productivity and competitiveness.

Globally, costs are high in services trade, perhaps twice what is observed in goods. Policy plays a major role here. Although there are no explicit border restrictions, such as tariffs, other policies – both horizontal and sector-specific – affect the ability of foreign service providers to contest local markets.

Close gap

To leverage the global services economy and upgrade productivity, BRICS need to close a clear gap between aspiration and progress. Some BRICS, such as China, have taken major steps to open services markets, yet there remains scope to adjust policies to support more services trade integration.

It is important to look for other frameworks that could promote incremental change in services markets. Following the example of the Asia-Pacific Economic Cooperation’s (APEC) experience with goods, BRICS could seek a trade facilitation agenda in services, developing proposals to improve domestic regulation, facilitate investment and focus actions on dynamic segments of services trade, such as e-commerce and digital trade.

Through the G20, the BRICS could also push for a joint target to reduce trade costs by an agreed percentage over a set time, perhaps 5% in five years. As negotiating regulatory reform is very difficult, countries should be free to choose which regulations to reform to achieve their overall liberalization target. Experience suggests that such an approach can work when participants are committed to reform and act in good faith. Given that most experience with successful reforms of services’ markets has been unilateral, this kind of external anchor could provide needed support to domestic constituencies in favour of reform.

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