Britain's cause best served by services

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The Independent Online
Whether or not the great Tokyo trade triumph proves real, it might give a little impetus to the Gatt talks. While John Major dutifully claimed that the deal would create 300,000 jobs, he did not point out that the UK could do better out of a new Gatt deal than almost any other country.

The reason is that this round of the General Agreement on Tariffs and Trade ought to increase the pace at which international trade in services is opened up. Since Britain earns more from exports of services than it does from exports of goods, this ought to be good news. People may find that hard to believe, but in 1991 (we do not yet have full 1992 figures) we earned pounds 103.4bn from visible exports, and pounds 109.1bn from invisible exports. These invisible receipts are more than 20 per cent of gross national product, by far the highest percentage of any Group of Seven nation. (France comes next at 11 per cent, then Germany at 9 per cent).

Even without a new Gatt agreement, trade in services is growing at about twice the rate of trade in goods. True, trade in goods is still larger, but the gap is narrowing: in 1980 the split was 70/30, now it is about 63/37. On present trends, international trade in services will overtake trade in goods around the year 2010. The Gatt deal ought to bring the crossover forward.

It is deeply unfashionable to say it, but if one were looking at Britain's strategic interest, one would say that we should stop pressing for further free trade in goods, but focus directly on free trade in services.

Many people will wonder about the dynamics of this process - why should the pattern of world trade be changing in this way? As with most really important issues, very little serious research has been done. This is partly because it is difficult to get information, but perhaps more because it is analytically very difficult to disentangle the various forces at work. Here are some.

For a start, the big industrial nations are reaching saturation in some of the basic consumer durables, like televisions, and maybe cars. Once one reaches this point, the market shifts from growth to replacement, quite a sharp change in the curve. Next, goods are increasingly being made near their point of sale, partly for fear of protectionist pressures, partly because much added value now comes in the design and marketing and not in the manufacturing. As an example of these two forces, Japan now exports fewer cars than it did 10 years ago.

Third, the price of many manufactured goods is declining. This is particularly apparent in things like personal computers, where the actual price has fallen sharply over the past five years, but the real price of most consumer items is now starting to fall, if one allows for the improvements in quality that manufacturers are forced to make. There is no corresponding fall in the price of services.

Fourth, there are some internationally traded services, like tourism, which are clearly enjoying a very rapid increase in demand, and where growth is closely related to increases in income: as people get richer they tend to spend quite a large proportion of their additional wealth on travel.

Fifth, demography may be a factor. Old people spend a higher portion of their income on services than young: they are less impressed by the new electronic toy from Hong Kong, and more impressed by a nice holiday touring classical sites in Greece. The ageing of the population of the industrial world may be a very important factor that will actually start cutting international trade in the next century.

The most important question that these Tokyo talks raise is: what can Britain do to speed up this process? There is of course no simple answer, except the general one that we should be aware of where our real interests lie. What clearly is needed, though, is much more research on the whole subject. The City Research Project, financed by the City Corporation, and run by the London Business School, is handling the financial services side of it, but very little is being done on other aspects of such trade.

For example, we do not know much about the inter-relationship between Britain as a tourist centre and funding of the arts; nor about the long-term gains from educating foreign students here; nor about the foreign earnings of the medical profession or how the NHS might be developed into an important export industry. Finally, there are external political dynamics here: since protectionist France comes second to Britain in terms of contribution to GNP from service exports, it too has an interest with us in freeing up such trade. Persuade Germany too, and momentum is generated. If France realises that it too has more to gain from freer trade in services than from protecting its small farmers, then Gatt will look in far better shape.