By David Born and Christian Krys

Over the last decade, modern services trade outshone the overall services sector in growth. This trend is set to continue, fueled by ongoing digital transformations across industries. Modern services – services that require knowledge and can be delivered digitally – offer huge opportunities for global growth and companies. In our latest RBI Quarterly, we explore key countries, dissect the impacts, and discuss strategies for companies to capitalize on benefits and tackle challenges in the surging modern services trade.

While the manufacturing sector regularly grabs the headlines, services often go unnoticed. This oversight might be due to limited availability of data or the complex nature of how services are traded, but neglects the service sector's true significance. Services contribute nearly two-thirds of global GDP. In certain developed economies, they even constitute nearly 90% of GDP.

Distinguished by their high knowledge intensity, modern services can be digitally delivered, eliminating the necessity for physical proximity between buyer and supplier. Consequently, they have become easily tradable in recent years.

Over the past decade, modern services trade has exhibited unparalleled growth, surpassing that of traditional services. Globally, the growth rate of modern service exports from 2012 to 2022 reached 6.1% per annum, outpacing the 2.7% per annum growth observed in traditional services trade. As a result, modern services have expanded their global share in total services exports from 47% in 2012 to 56% in 2022. Notably, during the COVID-19 pandemic, the share of modern services exports briefly exceeded 60%.

The rapid growth of trade in modern services is largely driven by the rise of digitalization, enabling the provision of a wider variety of services at a distance and across borders. In financial services, for instance, digital banking and insurance services have set new standards, enabling entry into foreign markets without the need for local capacities. Likewise, cloud services have grown exponentially.

Key categories of modern services

A closer look at the breakdown of modern service trade reveals a clear dominance of four key categories: computer services, professional and management consulting services, technical, trade-related, and other business services, and financial services. Together, these categories account for a staggering 75% of the total exports in modern services for the year 2022.

The majority of modern services exports primarily originate from advanced economies, comprising 79% in 2022. However, their share has marginally declined over the past decade. From 2012 onward, modern services exports from advanced economies witnessed a growth rate of 5.4% p.a., whereas those from emerging economies experienced a more substantial growth at 7.6% p.a. This development reflects a trend that is also visible in overall trade.

Remarkably, the recent surge in growth is predominantly spearheaded by a select few nations. Over 70% of the upswing in the export of modern services since 2012 can be ascribed to the top ten leading countries in modern service exports. Unsurprisingly, the United States takes the forefront in this ranking. The U.S. not only commands the cloud services market but also houses numerous global financial institutions and an outstanding consulting services market.

English speaking countries in the lead

The United Kingdom and Ireland hold the second and third positions, highlighting a common characteristic among major modern service exporters: they are either native English speakers or have a substantial number of individuals proficient in English as a second language (ESL) within their populations.

Beyond these prominent exporting nations, an array of other countries is undergoing substantial growth, positioning themselves as potential future champions in the export of modern services. Notably, countries in Eastern and Southeastern Europe stand out in this regard. Consider Lithuania as an example, where the exports of the financial services industry have grown at an annual rate of approximately 30%, marking a thirteenfold increase since 2012.

The global impacts of the rising trade in modern services

Unsurprisingly, modern services are playing an increasingly important role in global trade. Given the ongoing digitalization and the emergence of new services offerings, this trend is set to continue in the foreseeable future. It will offer new opportunities to countries and companies, but also confronts them with challenges in the geopolitical area. In the RBI Quarterly we delve into the four most important ones:

1. A new push for global growth and globalization: As they can be delivered digitally and produced where appropriate skills are located and costs are low, modern services have the potential to revitalize globalization again. This will also impact global labor market dynamics, as it reduces physical migration needs for employees.
2. Increasing demand and benefits from technological progress: As modern services evolve, there is a growing need for increasingly innovative, efficient, and high-performing technological solutions. This will fuel progress in other areas and foster a cycle of continuous innovation.
3. Boosting CO2 emissions reduction: Trade in modern services can lead to reductions in CO2 emissions via two ways. When more and more of the trade is conducted digitally, there is an expected decrease in the need for "physicality", thus, for example for business travel. Additionally, the increased productivity of value chains can result in more efficient processes that emit fewer greenhouse gases.
4. In the geopolitical spotlight: Modern services are rich in data, which is of great interest to political entities. This interest is evident in various forms ranging from benevolent to more malevolent aspects, from protecting people's data to using it for process control, surveillance, and even manipulation.