Abstract
Most manufacturing activities use inputs from the financial and business services sectors. But these services sectors also compete for resources with manufacturing activities, provoking concerns about de-industrialization -- financial services in industrial countries like the United States and the United Kingdom, and business services in developing countries like India and the Philippines. This paper examines the implications of services development for the export performance of manufacturing sectors. It develops a methodology to quantify the indirect role of services in international trade in goods and constructs new measures of revealed comparative advantage based on domestic value added in gross exports. The paper shows that the development of financial and business services enhances the revealed comparative advantage of manufacturing sectors that use these services intensively but not that of other manufacturing sectors. It also finds that a country can partially overcome the handicap of an underdeveloped domestic services sector by relying more on imported services inputs. Thus, lower services trade barriers in developing countries can help to promote their manufacturing exports.
Highlights
On the face of it, services play a relatively small role in international trade
We develop a methodology to quantify the indirect role of services in international trade in goods and construct new measures of revealed comparative advantage based on value-added exports
We show that the development of financial and business services enhances the revealed comparative advantage of manufacturing sectors that use these services intensively but not of other manufacturing sectors
Summary
On the face of it, services play a relatively small role in international trade. Conventional trade statistics show that services trade currently accounts for only one-fifth of cross-border trade (Loungani et al, 2017). We expect to see a more positive effect of access to foreign services inputs on manufacturing export performance in countries with lower levels of domestic services development This is supported by our empirical analysis. The current paper connects the two literatures: we measure precisely services input intensity as the ratio of embodied services to manufacturing value-added, considering both direct and indirect input usages; we directly quantify the effect of services development on the export performance of manufacturing sectors. The second hypothesis in this paper considers how the access to foreign services markets may help developing countries to bypass their possibly inefficient domestic services provision.7 Such a bypass effect is discussed in a theoretical model by Ju and Wei (2010); they derive the conditions under which financial globalization can. This is broadly consistent with the theory of comparative advantage – countries with under-developed services sectors benefit from imported services, but our paper shows that these benefits may go beyond services sectors through inter-sectoral linkages
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