Published on The Trade Post

The ECA Region is Falling Behind in Digital Trade in Services

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International trade is a major driver of economic growth and digital technology can accelerate this process. The Internet greatly expands firms’ potential to produce new goods and services and serve new markets. In particular, the Internet is having a dramatic impact on services, especially in retail, financial and professional services sectors. Firms in these sectors can create new digital products such as music, videos and books, and digitize their services as well as deliver them over long distances. This ability has led to a remarkable global expansion of digital trade in business, professional and technical services.
However, Europe and Central Asia (ECA) is lagging in digital trade. While the Internet is facilitating the global increase in trade in services, digital trade in services from countries in the ECA region are small. In Western Europe, the exports of information and communication technology (ICT) services average 4.4 percent of GDP, but only 0.8 percent in other parts of ECA. The exports of ICT services are even lower in the Russian Federation, Turkey, South Caucasus, and Central Asia, where exports of ICT services average below 0.3 percent of GDP in all countries except Armenia (1.1 percent) and Tajikistan (1.3 percent).
While these statistics are striking, they do not provide a complete picture of ICT services exports. Services are difficult to measure, as they are intangible and leave little administrative trail when crossing borders. Services delivered through the Internet are particularly difficult to capture in statistics as discussed in technical note by UNCTAD (2015). In addition, official statistics do not record free services provided on the Internet.
The amount of internet communication a region receives provides an alternative measure of a country’s service exports. Many offices make calls using a broadband internet connection – or Voice over Internet Protocol (VoIP) – to their foreign subsidiaries, suppliers and partners to provide instructions, to request technical assistance, or to seek professional and legal advice. The Internet voice traffic entering a country can be an indication of the amount of business and professional services that country exports.

The ECA region has 20 percent of global voice traffic, behind East Asia and Pacific (EAP) with 28 percent and Latin America and the Caribbean (LAC) with 24 percent (figure 1). In 2014, 78 percent of voice traffic in the ECA region was within the region, compared with almost 50 percent of voice traffic in the EAP region. This suggests that ECA countries are not taking advantage of digital technologies to market and export more services to international markets, especially to the large North American market, which accounts for only 13 percent of ECA’s VoIP traffic.

Figure 1: ECA has a sizeable amount of incoming voice traffic, but most is from other ECA countries

Image Source: Calculations based on voice traffic data from Telegeography.

Note: The incoming flows for each region are calculated by aggregating the amount of VoIP calls for the latest available year (either 2013 or 2014) entering each country in that region. The size of the ribbons represents the amount of flows between the regions, measured in millions of minutes. The flows for the Europe and Central Asia region are shaded blue and the flows for the East Asia and Pacific region are shaded red. For example, the blue ribbon with the yellow arrow represents the flows from the Europe and Central Asia region to itself. Regions are geographical classifications that include developed and developing countries.
There are two policy actions countries in ECA can take to increase the digital trade in services. First, countries can lower entry barriers into services sectors, such as retail, professional and transport services. Market entrants tend to bring new technology or business models that allow them to offer better quality and cheaper services. They will also create a competitive business environment that can motivate the incumbent firms to become more productive and sell beyond the domestic market. Second, countries should focus on the trade barriers their firms face in the importing countries. Countries may deny access to certain services sectors even though it has committed them in the World Trade Organization (WTO) General Agreement on Trade in Services (GATS). There have been cases where  EU countries tried to ban the online sale of services from other EU countries
As digital technology improves, digital trade will form a larger portion of international trade. ECA countries can increase their digital trade in goods and services to find new avenues to create new drivers for economic growth.
For more on how the internet is affecting Europe and Central Asia see: Reaping Digital Dividends: Leveraging the internet for development in Europe and Central Asia, World Bank Regional Report
A different version of this blog was originally published on April 17, 2017 on Brookings Institution's blog: Europe is Falling Behind in Digital Trade - Time to Take Action



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