International Trade in Services in BRIC Countries

Introduction

International trade in services plays a pivotal part in economic growth, reduction of poverty, and export competitiveness of a country. The share of trade in services in overall trade has been increasing at a rapid pace for the past three decades. Financial services, communication services, and business and professional services have been the most dynamic components of services trade. Trade in commercial services is defined as total trade in services minus government services not included elsewhere (Soo, 2012). Unlike goods, services are not physically tangible. Services are considered invisible — they cannot be stored and cannot be transported. They are usually produced and consumed simultaneously. Internationalization of trade in services is the exploitation of commercial economies of scope and scale (Lipsey, 2006). Companies cater to several international markets by deriving economies of scope and utilizing competitive advantages over national rivals. This is done with the motive of establishing an international network of branches aimed at expansion, yielding the benefits of global integration of information, data, and marketing, the retention of internationally mobile clients, and the reduction of investment and operating costs.

There exist three sub-categories of commercial services: transportation services, travel, and other commercial services. Transportation services encompass all forms of transportation of passengers and freight. Travel comprises goods and services acquired by personal travelers, including business travelers. Lodging, food and beverages, entertainment, internal transport, gifts, and souvenirs all constitute a prime part of travel services. Other commercial services can be further categorized as: (1) communications, comprising telecommunications, postal, and courier services; (2) construction; (3) insurance services; (4) financial services; (5) computer and information services; (6) royalties and license fees; (7) other business services; and (8) personal, cultural, and recreational services (Cattaneo et al., 2010).

The global financial crisis had a deep impact on international trade from both financial and physical perspectives. From the financial perspective, the crisis adversely affected international trade by directly impairing the environment for trade financing — toughening conditions, reducing credit lines, and delaying trade settlement. From the physical perspective, the financial crisis led to considerable depreciation of financial assets. Consumption and investment declined drastically due to the rapid reduction of wealth, which caused a decline in demand for imports, including services. As financing constitutes a component of services, any financial crisis has a direct impact on the services sector. Physical economy operations are directly linked to services trade, which affects it to a great extent (Lipsey, 2006).

BRIC Countries and Services Trade

The BRIC countries possess diverse services structures, yet all follow a similar trend: each has generally decreased the share of traditional services in its exports. The development of new patterns of specialization in Brazil and China has paved the way for significant enhancement in their shares of other business services, while computer and other information services have gained considerable importance for India's exports (Havlik et al., 2009). The economic rise of Brazil, Russia, India, and China has triggered impressive changes in the world economy during recent years. These countries have attained commendable trade and output gains by expanding at rates far exceeding global averages. China, in particular, has emerged as a global player due to its rapid economic expansion. Business service exports in Brazil, India, and China are increasing at the rate of approximately 10% per year, and India is expected to soon join the group of countries that export more services than goods (Cattaneo et al., 2010).

Since the 1990s, the share of services in BRIC country GDPs has increased at a consistent pace. In China, the share of services rose from 38.5% in 1990 to 45.7% in 2008. This growth is attributed to increased technology-intensive investments and a higher supply of human resources, which drove higher productivity in the BRIC economies. Apart from services exports, BRIC imports of services have also grown tremendously, reflecting the increasingly broad-based nature of growth achieved by these economies. Large-scale industrialization and an increased emphasis on exports encouraged high demand for services, and improvements in the living standards of the middle class have further driven import demand.

In BRIC countries, services are on average characterized by lower tradability than goods, reflected in the lower share of services in GDP compared to goods. Among the BRIC nations, Hong Kong stands out as an outlier with respect to openness in services trade, indicative of the peculiar nature of its economy. India ranks second in terms of services openness. India's global specialization in services trade is evident in the fact that its services export ratio to GDP more than twice exceeds the corresponding indicators for the United States and Japan. By contrast, Brazil has a quite low share of services exports in GDP, at only 1.7%, while being more open to services imports, whose share stands at 2.6% of GDP. Brazil still lags behind all other BRIC nations in this regard. China and India are considered the biggest services traders among the BRIC countries, as they together constitute 60% of total BRIC services imports and exports.

On the whole, the share of BRIC countries in global services trade is much lower than that of developed countries. The total services exports of BRIC countries are 4.5 times smaller than those of EU27 (Havlik et al., 2009).

Geographical Structure of Services Trade

EU27 tends to be a more significant market for Brazil, China, and Russia than the United States or Japan. The current geographic structure of services exports shows that the United States has higher export shares in India and Hong Kong compared to the EU. The EU27 share in Russia's services exports exceeds 40%, indicating that Russia is the most dependent on the EU as a market for its services exports. China and Russia hold large EU services export shares when examining EU27 markets from the perspective of export services among BRIC countries. Due to increased imports from Hong Kong and China, Japan holds a high share of BRIC service imports — approximately 10% according to 2007 statistics. BRIC countries account for only a 4% share in the services imports of both the United States and EU27.

All BRIC countries are now making strenuous efforts to increase their services exports at a much faster pace than the United States, Japan, and EU27. India has led this growth by increasing its services exports more than fivefold during the period 2000–2007. China and Russia increased their services exports by four times during that period, and Brazil by 2.5 times. If exports of services to the EU grew at the same pace, China and Hong Kong would be well positioned to gain larger shares in EU services exports (Havlik et al., 2009).