In previous crises, services trade has been much more resilient than goods trade. However, the coronavirus pandemic has hit trade in services harder than trading in goods in most economies. Travel – tourism and business – comprised 23 per cent of world services exports in 2019 but has now almost ground to a halt.
International travel restrictions such as screening arrivals or quarantine are common but more than 100 countries have banned visitors from some or all other regions.
Global international travel arrivals fell 65 per cent in the first half of 2020 compared with the same period of 2019, losing USD460 billion of revenues. The Asia Pacific region was hardest hit with tourist arrivals down 72 per cent. Border closures saw international tourism decline significantly in Malaysia, New Zealand, Australia and Singapore.
Thailand, which welcomed nearly 40 million visitors in 2019, had none during April to August 2020, causing its services exports to collapse by 72 per cent in the second quarter compared with a year earlier while its goods exports fell less than 17 per cent.
Although tourism should rebound sharply, it may not return to pre-pandemic levels for up to four years – far longer than after the SARS epidemic, 9/11 attacks or the 2009 financial crisis. Even when travel restrictions lift, people may remain hesitant to travel abroad and are unlikely to holiday more to make up for lost trips.
However, the depth and duration of the pandemic is likely to accelerate digitisation and permanently change many aspects of our lives. There will be more remote working and virtual meetings, digital menus in restaurants and virtual gym or yoga sessions, for instance, providing an opportunity for economies to boost digital services flows.
Demand for digital services tends to be more resilient to economic shocks because many, including cross-border and banking and IT, can be carried out even during a crisis. There is considerable growth potential for digitally-enabled services such as telecoms, computer, R&D, consulting, accounting and advertising, plus personal and recreational services such as audio-visual entertainment.
However, tackling barriers to digital trade and improving digital infrastructure will be essential. International trade rules have not kept pace with digitisation and barriers to digital trade remain around taxation, data localisation requirements and the interoperability of regulations across different markets.
Developed economies such as the US and Luxembourg are best prepared to engage in digital trade while countries such as India, Indonesia and Colombia still maintain relatively high barriers and would benefit from digital infrastructure investment.
The recovery in overall services trade will largely depend on how long it takes to lift travel restrictions. Rolling out an effective vaccine will help, but near-term prospects for removing restrictions are not bright.
But the longer restrictions remain in place, the more important digital services become. And prolonged lockdowns and travel restrictions may accelerate permanent changes in behaviour that provide growth opportunities for trade in digital services.
Although growth in digital services is unlikely to fully offset the collapse in travel in the short term, there could be a two-speed revival in services trade with international travel remaining subdued while digital services recover more quickly.
First published 21 October 2020.
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