Modes of services supply
The World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS) distinguishes between four modes of services supply. This is a way of characterizing and sorting services transactions by the territorial presence of suppliers and consumers and it is a helpful framework for thinking about how a service, which is usually intangible, can be traded across borders. Learn more at the WTO website.
- Cross-border supply (Mode 1): This occurs when businesses from one territory sell services to customers located in another territory. For example, an architect in country A sends building plans to a developer in country B.
- Consumption abroad (Mode 2): This refers to domestic businesses selling services to foreign customers present in their market. Examples are tourism or medical services provided to foreign visitors.
- Commercial presence (Mode 3): This consists of services sold by foreign companies to domestic customers through local affiliates, subsidiaries, or representative offices established in the customers’ market. An example is a foreign hotel group selling vacation packages to domestic residents.
- Movement of natural persons (Mode 4): This characterizes services provided by a services professional or an employee of a services firm who is temporarily present in the territory of the customers. For example, an IT specialist that travels abroad to develop a new piece of software for a local client.
Why does services trade matter for small businesses trying to reach new markets?
Since 2011, trade in services has been expanding at a faster pace than trade in goods. The WTO’s World Trade Report 2019 found that commercial services trade grew 5.4% each year on average between 2005 and 2017, totalling USD 13.3 trillion in 2017. Technological progress and greater access to the internet have enabled services businesses to reach customers without needing to be in physical proximity with them, thus reducing the cost of trading services. Trade in services has also led to opportunities for small businesses to become early exporters. WTO findings have shown that services-based small businesses are on average two years younger than small firms in manufacturing sectors when they start exporting. However, the small firms in services sectors are overall less internationalized than their peers in manufacturing activities, suggesting areas for policy improvement.
Policy considerations on services trade
Trade in services remains subject to higher barriers than trade in goods, although most economies have opened up their services sector over the past few decades. Indeed, trade costs in services are almost double those in goods. These costs have remained higher despite the lowering of policy barriers, the spread of digital technologies and investment in infrastructure. There have been some improvements, however, with these costs decreasing by 9 percent between 2000 and 2017.
This situation has implications for countries worldwide, as barriers in services trade prevent a more efficient allocation of resources, the achievement of greater economies of scale, and an increase in the variety of services on offer, ultimately affecting the productivity of firms economy wide. Enhanced international cooperation may help reduce frictions in services trade and untap the potential for small businesses to trade services.
For more on this topic, see the WTO’s World Trade Report 2019.
Where can I access other resources on policy frameworks, guidelines, and tools?
- ITC Business Survey on Obstacle to Services Trade: The International Trade Centre (ITC) conducts surveys that can help countries identify services trade barriers. Visit the ITC survey.
- OECD Services Trade Restrictiveness Index Regulatory Database: This resource from the Organisation for Economic Co-operation and Development (OECD) contains information on trade restrictions and behind-the-border regulations in multiple services sectors, including computer services, construction services, and telecommunications services, among others. Visit the OECD database.
- UNCTAD Trade Policy Frameworks for Developing Countries: The United Nations Conference on Trade and Development (UNCTAD) offers a manual of best practices that can provide guidance to key actors involved in developing national trade policy frameworks. Visit the UNCTAD website.
- World Bank Report, At Your Service? The Promise of Services-Led Development: This resource presents the findings of World Bank experts on the prospects for services-led development strategies that can help low- and middle-income countries catch up with high-income countries while expanding job opportunities through services-led trade and economic activity. Visit the World Bank website.
- WTO Guide to reading the GATS schedules of specific commitments and the list of Article II (MFN) exemptions: This resource includes a full list of WTO Members’ schedules and MFN exemption lists on services trade under the General Agreement on Trade in Services (GATS). Visit the WTO website.
- WTO Trade Monitoring Database (TMDB): This database monitors services trade measures that WTO Members have been introducing since October 2015. Visit the TMDB.
- WTO-World Bank I-TIP Services Database: This database provides information on WTO Members’ commitments under the GATS, services commitments in regional trade agreements (RTAs), applied measures in services, and services trade statistics. Visit the I-TIP.
- WTO World Trade Report 2019: This edition of the WTO’s flagship report examines market and regulatory factors shaping the current and future landscape of services trade. Visit the World Trade Report.