Why services are important to trade and investment in the APEC region

Tuesday, June 05, 2012

The services industry has a vital importance to the equilibrium and growth of an economy.
In May 2012, The Australian APEC Study Centre ran a Regional Forum on Services Trade Policy in HoChiMinh City, Vietnam titled, ‘Recognizing the importance of open services to manufacturing trade and investment in the APEC region.’

This forum followed on from a training course which was held in November 2011 which sought to raise awareness and improve the understanding of policymakers in APEC developing economies of the important role services play in supporting other sectors, in particular manufacturing.

The first theme of the forum introduced participants to key concepts – foremost of which are the concepts of embodied services and embedded services – and to aspects of services trade not typically covered in the literature.

Embodied services

The traditional approach to compiling statistics on trade in services, using balance of payments data, ignores the fact many services are ‘embodied’ in the goods and people that move across international borders. Estimates of embodied exports indicate that services sectors indirectly make a much larger contribution to a county’s exports than the official statistics suggest.


What then is an embodied service? Services are essential to growing, mining or making things. Businesses use energy, water and transport to produce things and move them to market. They also rely on services such as modern communications, banking and insurance, lawyers and accountants to run their business.


All these services are said to be ‘embodied’ in the value of the final output of the business. Part of the value of the output is therefore created by the services used to produce it. These services can be said to be ‘carried’ by goods and services (output) which are exported across borders. They contain, or carry, embodied services.


In recent years there has been an increasing use of intermediate services in all aspects of business, better known as ‘outsourcing’. Individual businesses are increasingly outsourcing activities that were previously carried out internally, such as research and development, product design, product manufacturing, distribution, and marketing.


As a consequence of this trend, there is evidence that a convergence in production systems in manufacturing and outsourced services is well underway. Outsourced services are an increasing phenomenon being embodied in the manufacture of goods and the delivery of services has always involved the use of capital goods to a greater — for example, telecommunications and transport — or to a lesser degree — for example, the delivery of professional services rely on commercial office space and information technology systems.

Embedded services
Another aspect of services trade that is often overlooked is the importance a manufacturer’s service business is to the company’s bottom line. Manufacturing firms are themselves also offering more services to their customers. Add-on services related to their product (‘embedded services’) can be a valuable component of the manufacturer’s revenue. An embedded service is a service linked and related to the sale of merchandise or to the sale of another service. For example, after-sales support, technical assistance, training and finance. The concept of embedded services goes to the question of how services are delivered for export. An analysis of embedded services also reveals the changing nature of the manufacturing sector and its relationship with services industries. To succeed in competitive global markets, manufacturers use their services offering as a means of differentiating their product from that of competitors. This trend is already widespread in advanced economies and is becoming increasingly important in East and Southeast Asia.