Wednesday, February 8, 2017

US Businesses Can Grasp the Services Export Prize

Projected growth of global trade in services reveals a huge opportunity for US businesses – if they equip themselves to tackle the complex regulations.

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Tourism, finance, technology, construction and business-to-business firms stand to benefit from robust growth in services exports, new analysis suggests.1

These and other service exports will make up a quarter of global trade by 2030. And while developing markets will expand their share over that period, US exporters are set to claim by far the biggest share of this projected $12.4trn market.

Accelerating in value

Services export figures have been harder to quantify than trade in goods, but detailed research for HSBC by Oxford Economics has now confirmed the strong performance of services.

With growth outstripping goods trade for some time, services' share of total world trade rose from 20 per cent in 2011 to 23 per cent in 2015, and will hit 25 per cent by 2030. The value of service exports is expected to accelerate at an average annual rate of 6 per cent until then.

The consistency of services' growth is partly due to their less cyclical nature, with exceptions such as construction and tourism. Advances in technology, falling travel costs and lower trade barriers have also made it easier to offer services across international borders.

Another key trend has been the outsourcing of business support services to lower-cost providers. The researchers expect to see this continue over the next 15 years, with companies choosing to outsource not just administrative support functions but more skill-intensive services such as R&D, marketing and design. This will push the share of B2B and other consulting services to 37 per cent of total trade by 2030.

Technology service providers are likely to see a similar boost, driven by demand for innovative software and the need to address IT security.

Healthy consumer appetite

The growing middle-class populations of developing economies represent further key drivers of services growth. Consumers in countries such as China are increasingly travelling for tourism, business and study, and are seeking out new financial and technology services.

Indigenous businesses will meet some of this demand, and are looking abroad too. By 2030, China is set to leap to third place in the global league table of service exporters, behind the US and the UK.

However, Chinese consumers will continue to import services where the overseas producer offers a more sophisticated product, or the foreign brand is more trusted than local alternatives.

Competitive advantage

As the researchers point out, service providers in established economies still have an edge: "Exporters in developed countries are generally better placed than firms in emerging markets to take advantage of these trends, as they have access to a larger pool of skilled labor, better infrastructure and greater financial resources."

The geographical footprint of services is set to change gradually, however, as emerging markets expand their service offering beyond the current focus on tourism. Indeed, India has already positioned itself as a successful exporter of business process outsourcing.

So-called 'south-south' trade will be an increasing feature of service trade – such as the movement of construction workers from between countries with different demographic patterns, and in the intra-regional expansion already observed in telecommunication companies in Asia.

Overcoming the hurdles

The US is particularly strong in exporting travel, tourism and B2B services. It also performs well in charges for the use of intellectual property, such as patents, copyrights and trademarks. These make up 18 per cent of service exports – highlighting the US's leading role in developing and marketing new technologies.

However, US businesses with ambitions to capture a bigger slice of the global services market will need to tackle barriers to trade that are often more costly than those faced by manufacturers.

Restrictions on setting up foreign operations and moving people are the chief impediments to services trade, World Bank analysis shows,2 with emerging markets imposing the highest barriers. Licensing requirements, restricted access to distribution channels, quotas governing the number of providers in a market, and lack of recognition of overseas qualifications are among the hurdles faced by businesses.

The Oxford Economics team calls for liberalization to promote services trade, while acknowledging that this is a more complex process than liberalizing goods trade.

With a tempting prize at stake – the US share of services exports by 2030 is forecast at $1.6trn – many businesses will find it worthwhile to tackle the red tape. Helped by knowledgeable banking partners with bases in their overseas markets of choice, they have much to gain from the world's soaring demand for services.

Read the research report (PDF, 853KB).

1 Unlocking the Growth Potential of Services Trade, HSBC Commercial Banking, 2016

2 World Bank STBI Regulatory Database

This article is intended solely for informational purposes. HSBC Bank USA, N.A. assumes no obligation to update or otherwise revise this article. The information, analysis and opinions contained herein constitute our present judgment which is subject to change at any time without notice. Nothing contained herein should be construed as tax, investment, accounting or legal advice. In all cases, you should conduct your own investigation and analysis of each potential transaction, and you should consider the advice of your legal, accounting, tax and other business advisors and such other factors that you consider appropriate. This is not a recommendation, offer, endorsement or solicitation to purchase or sell product or service.
HSBC Bank USA, N.A. 2016. ALL RIGHTS RESERVED. Member FDIC.

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