The ECA Region is Falling Behind in Digital Trade in Services

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. 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.