Executive summary

The Internationalisation Monitor (IM) describes trends in globalisation and the consequences thereof for the Dutch economy and society. It is published quarterly as part of the Globalisation research agenda at Statistics Netherlands (CBS), commissioned by the Dutch Ministry of Foreign Affairs.

International trade often refers to trade in goods, but the import and export of services – such as transport, logistics, finance, communications and the use of intellectual property – are equally important for the Dutch economy. Trade in services is embedded in the everyday activities of individuals and enterprises. People are using services from international enterprises when they order food or stream TV series. Enterprises depend on international services as well in the production of goods and other services. Therefore, recent developments in international services trade are an interesting and relevant topic for this IM.

The volume of international trade in services has declined in recent years as a consequence of the challenges accompanied by COVID-19 and changes in the Dutch tax system. Trade in services has not recovered at the same pace as trade in goods; different causes of this limited recovery will be disentangled here. Furthermore, restrictions to services trade will be examined in detail. Despite the flexible nature of services, enterprises wishing to export or import them are facing obstacles. It is important to identify such obstacles to international services trade and to find out which enterprises are hampered to a relatively large extent while expanding into new or existing foreign markets.

Another important phenomenon in services trade is offshoring. Enterprises transfer parts of the production process to other countries, for example because costs are lower there. Offshoring has become easier in recent years, but a great deal is unknown about the motivation and limitations of enterprises relocating their activities. Indirect trade in services is another development with many unknowns. Due to globalisation, digitalisation and the pressure on enterprises to reduce costs, many service-related parts of the production processes are delivered by international service providers. In traditional trade statistics, the value of indirect service exports is not made visible, whereas their importance is crucial for the export of both goods and services.

This edition of the IM describes the population of service traders; disentangles different causes of the decline in traded services; looks at barriers to international trade in services; describes developments in offshoring, and quantifies indirect trade in services. We start off by providing an overview of some key features, such as types of traded services and Dutch service export markets. After this, a clearer picture is provided of the different causes of decline and limited recovery in the volume of services trade. Furthermore, the focus will be on barriers enterprises face while expanding services to new markets or within existing markets. Finally, we describe how and why enterprises transfer their activities to other countries, and study the value of indirect trade in services within global value chains.

Listed below is a summary of the main findings presented in this edition.

Chapter 1: The international services trade of the Netherlands

• International trade in services is important for the Netherlands. Service exports account for 12% of Dutch GDP.
• Services trade had been growing steadily in recent years. However, this came to an end in 2020. The coronavirus crisis as well as other factors caused international trade in services to drop sharply that year. There was some recovery in 2021, but the level of 2019 was not retrieved. Among other developments, trade in intellectual property and the fees paid and received in this respect fell sharply, reducing Ireland's importance as a partner country in services trade.
• Despite Brexit, the United Kingdom has been the most important destination of Dutch service exports; in service imports, the United States is our largest supplier.
• Compared to other EU countries, the Netherlands’ services trade is relatively large in terms of GDP. It is comparable to the trade of the top-five largest EU countries in terms of services trade types.
• As with goods trade, services trade is mainly carried out by small businesses: over 90% of services traders are independent SMEs. In terms of value, however, independent SMEs play only a minor role. Over 85% of service imports and exports are on account of large enterprises. Furthermore, between 2012 and 2020, large enterprises had a higher growth rate in services trade than independent SMEs.

Chapter 2: Services trade in turbulent times

• During the coronavirus crisis, Dutch international trade in services contracted more strongly than trade in goods. In Q3 2020, the total value of service imports fell by 27.4% year on year. For service exports, this drop was 19.5%. In comparison: the value of goods imports dropped by 7.8% and the value of goods exports by 6.1% in this period.
• Recovery has been slow in services trade. At the end of 2021, the import value in the international trade in services was still 11.1% below the pre-pandemic level of two years earlier. As for service exports, the gap amounted to 3.9%. Trade in goods recovered more rapidly: at the end of 2021, the value of goods imports was up by 28.8% and the value of goods exports was up by 22% compared to the end of 2019.
• This situation was reversed during the global financial crisis: services trade was only slightly affected then, while goods trade declined sharply and took more time to recover. The most obvious conclusion seems that services trade appears more sensitive to a health crisis like the coronavirus pandemic compared to goods trade.
• However, in addition to the general economic impact of the coronavirus crisis on aggregate demand, economic output and its effect on international trade in general, services trade faced some unique challenges. The two most obvious ones are related to (1) the very exceptional and far-reaching restrictions on international travel that were imposed during the coronavirus crisis and (2) the recently implemented and still pending changes in the fiscal treatment of multinationals which are active in the Netherlands. International travel is an important part of services trade, which means travel restrictions hit services trade directly. In a similar fashion, fiscal changes made it less attractive for multinationals to channel certain revenue flows through the Netherlands. Some firms decided to restructure their business and shifted all or some of their trade flows to other countries (possibly driven by these fiscal changes). This has also directly affected services trade as some of the affected flows fall under the definition of services trade.
• A breakdown of services trade into three parts has been developed. The first part captures the component of services trade that is directly related to the impact of travel restrictions. The second part captures the component that is related to enterprises restructuring their international services flows. The third and final part is a residual component: it covers all services trade that was not directly related to the travel restrictions and the restructuring.
• While the sharp decline in services trade at the onset of the coronavirus crisis was initially driven mainly by the travel component of services trade, and was mainly attributable to popular holiday destinations, this component has also gradually and partially recovered over time. At the same time, total services trade of enterprises restructuring their business continued to decline slowly but gradually during this period, and mainly involved services relating to, for example, royalty fees and certain consultancy services.
• Service imports would have grown by 1.5% if restructuring firms were excluded. If the travel component was also excluded, growth would have been equal to 10.5%. In service exports, the respective growth figures would have been 2.9% and 11.2%.

Chapter 3: Potential barriers to trade in services

• This chapter describes the role of natural barriers such as geography and culture as well as non-tariff barriers created by legislation and regulations in the context of trade in services. As such, it forms an introduction to the next two chapters, which further examine the impact of such barriers on international trade in services.
• Based on evidence from the literature and results of some descriptive statistics, we can draw the following conclusions regarding the natural barriers: the export value of services to smaller economies (measured by GDP) is relatively lower; the relationship between physical distance and trade in services is not clear-cut; there is more trade in services with virtually-proximate countries; sharing a common language promotes trade in services; countries that are culturally more similar have stronger international trade relations and more trade in services; digitalisation facilitates international trade in services.
• Traditional analyses of trade barriers mainly focus on the effects of tariffs. Barriers to trade in services, however, are different from tariffs. They are usually regulatory barriers, rather than explicit taxes. While services are not subject to border tariffs, they are subject to other non-tariff barriers to trade. This may include requirements for a commercial presence, lack of transparency, and restrictions on obtaining a permit.
• Non-tariff measures limit the export potential of service providers. In this Internationalisation Monitor, we measure non-tariff trade barriers using two external data sources: the OECD's Services Trade Restrictiveness Index (STRI) and the European Commission's Restrictiveness Indicator.
• According to the OECD STRI, the Netherlands is relatively unregulated in terms of services compared to other countries. The services market of countries outside the European Economic Area (EEA) is a lot more difficult for Dutch enterprises to enter and operate in than the EEA market.
• According to the EC Restrictiveness Indicator, the Dutch market is relatively open for services trade. With an export share of 14%, the UK is our main customer. The UK is one of the less restrictive countries according to the EC Restrictiveness Indicator.
• The many forms of regulation make it more difficult for international service providers to access foreign markets (extensive margin, see chapter 4) as well as to expand their export portfolio in already established markets (intensive margin, see chapter 5).

Chapter 4: Export of services to a new EU country: opportunities and barriers

• Chapter 3 in this publication has already provided an overview of natural and non-natural barriers to trade in services, such as non-tariff barriers. This chapter focuses more specifically on the impact of trade barriers and restrictions when it comes to the decision of enterprises to start exporting services to a new EU market.
• The two most popular new service export destinations within the EU in the period 2017-2019 were Belgium followed by Germany. The United Kingdom, which is no longer a part of the EU as of 2020, is in third place. Countries located farther away from the Netherlands, such as Latvia and Croatia, are among the least popular markets to which Dutch enterprises start exporting services.
• Smaller enterprises with fewer employees have a greater tendency to start exporting services to nearby EU markets. Larger enterprises are more likely to start exporting services to EU destinations located farther away, such as the Baltics or eastern European EU Member States.
• In this chapter, we investigate whether – and which – enterprise characteristics play a role in the probability of starting exports to an EU Member State, in addition to destination country characteristics, virtual proximity and trade impediments at the country and sector level. The probability to start exporting services to a new EU Member State is influenced by a multitude of factors at both the country and company level. Both enterprise characteristics and destination country characteristics are included in the analyses.
• We find that smaller enterprises with fewer employees have a higher probability to start exporting services to nearby Member States, while larger firms (i.e. with more employees) are more likely to start exporting to less popular destinations. The size of the destination market, measured in terms of population, is an important positive indicator for exports to get started. The distance to the destination country, on the other hand, leads to a lower probability to start exporting services. More productive enterprises, enterprises with goods exports in the three years prior to the survey year as well as enterprises with an affiliate in the destination market have a greater chance of an export start.
• Virtual proximity to the destination country plays a positive role in the decision to start service exports, especially for small enterprises (compared to large enterprises). The same conclusion holds for less versus more productive enterprises. For less productive enterprises, virtual proximity plays a bigger role than for more productive enterprises.
• Several regulatory trade barriers, measured by the OECD's intra-EEA Services Trade Restrictiveness Index, are on average related to a lower probability of service exports starting. However, these effects vary greatly, especially by sector. For individual countries we find more coherent results with significant negative effects. This is most probably due to the intra-EEA Services Trade Restrictiveness Index having very small differences between individual countries.
• In general, enterprises are mainly hindered in starting service exports to EU Member States where service sectors are more strictly regulated.

Chapter 5: Expanding trade in services : what puts limits on firms?

• Trade barriers can be separated into border measures and behind-the-border measures. Border measures can affect the initial foreign market entry of a firm, or the extensive margin of trade. Behind-the-border measures may affect their ongoing operations in that market, known as the intensive margin of trade.
• The OECD and the European Commission have identified a wide range of trade barriers in various service sectors and countries. In this chapter, we investigate to what extent these barriers affect the exports of a sample of 950 large firms exporting services from the Netherlands anywhere in the world over the period 2014-2021.
• On average, these firms export and import services to almost 60 different countries. In roughly 20 of these countries, they have a foreign affiliate. The average export value of a specific service to a certain country amounts to €1,600. The average export value per firm has grown significantly, from €72,000 in 2014 to €160,000 in 2021.
• Descriptive statistics highlight that GDP, physical as well as virtual distance and the digital adoption of the destination country are critical determinants of the export value. The restrictiveness indices of the OECD and the European Commission also correlate negatively with export values, although this relationship is less obvious than for the other determinants.
• In the econometric analysis, we use a Pseudo Poisson Maximum Likelihood (PPML) estimator to further investigate the effects of various determinants on the export value of services by taking into account their simultaneous effects. We then see that the negative effect of the OECD restrictiveness index is significant. This is largely driven by barriers to competition, which can be seen as barriers to operations.
• The composite restrictiveness index as constructed by the European Commission does not have a significant effect on the export value of services. However, taking into account firm heterogeneity, we find that firms with the lowest labour productivity are significantly affected by these barriers. Furthermore, specific restrictions that make up this composite index such as legal form requirements do play an important role.
• We also investigate to what extent distance affects the trade in services. Since a service does not need to be physically delivered, trade in services can be spared of transportation and storage costs. As such, it is often thought that trade in services might be immune to the gravitational forces of distance. Virtual distance, time zone differences or the level at which countries adopt digital technologies are sometimes proposed as better proxies to capture the distance between the provider and consumer of a service. However, out of this selection, we still pinpoint physical distance as the dominant determinant for trade in services.

Chapter 6: Offshoring services

• The production process of goods and services consists of numerous steps. A firm may decide to execute parts of the process abroad where there is a comparative advantage, often because of lower wages. This is called offshoring. Due to globalisation, digitalisation and lower transport costs, offshoring has become easier and cheaper in recent decades. As a result, different parts of the production process now take place all over the world: in global value chains. Offshoring thus enables firms to focus on specialised, knowledge-intensive activities in the Netherlands.
• Using a survey about global value chains and offshoring, this chapter describes the phenomenon of offshoring by firms in the Netherlands between 2018 and 2020.
• Over this 3-year period, almost 500 firms offshored one or more activities to foreign countries. Offshored activities mainly included administration and management activities, followed by production, marketing, sales and aftersales. Compared to earlier surveys concerning offshoring, R&D and IT activities were increasingly being offshored. Most popular destinations for offshoring were countries in the EU, followed by India and European countries outside the EU.
• The jobs that were lost due to offshoring were mostly low to middle education jobs in production activities. The jobs that were created by offshoring were predominantly higher education jobs.
• Cost reductions (both wages and other costs such as transportation or materials) were the most import motivation for firms to outsource activities abroad.
• Firms offshoring activities may encounter obstacles in doing so. Most commonly encountered were administrative and legal barriers, followed by cultural or linguistic barriers.
• Due to the COVID-19 crisis, about 100 firms temporarily or permanently moved activities back to the Netherlands, a process known as reshoring. By contrast, the pandemic also led 50 firms to do the opposite, i.e. offshore. Finally, some 80 enterprises postponed or dropped their offshoring plans.

Chapter 7: Services ‘in boxes’: the role of indirect service exports

• Services can be exported either directly by the service sector or indirectly via exports of other sectors. Indirect service exports refer to the intermediary inputs of services that are incorporated in exports of primary and manufacturing goods, such as the software or design services required in car manufacturing.
• These indirect service exports are not immediately apparent in gross export statistics. These inputs are also known as ‘services in boxes’ and it has been advocated that more account should be taken of them in trade policies, as part of a new modality of exporting services (Mode 5 in the GATS framework).
• The share in total export earnings originating in the Dutch services sector increased from 42% in 1988 to 66% in 2014. These earnings include both direct and indirect service exports. In many other countries, the share of domestic value added generated within the service sector due to exports has increased since the 1980s as well.
• The direct service exports was the engine of growth behind the growing role of services in Dutch exports since 2000. But there was also a significant amount of indirect services embodied in manufacturing exports: in 2014, for example, these accounted for 15% of the total value added in the services sector generated by exports.
• Dutch value added attributable to the services sector and incorporated in Dutch exports amounted to €178 bn in 2019, equivalent to 24.5% of Dutch GDP.
• The foreign value added in services incorporated in Dutch exports amounted to €81.4 bn (a 12.1% share of the total value of Dutch gross exports).
• The increased role of services in the production process of manufacturing firms is also known as servicification.
• In 2020, one quarter (25%) of the total value of Dutch manufacturing goods exports was attributable to the service sector. Of this 25%, about 15% was domestic value added in services (€26.4 bn) and 10% was foreign value added in services (€19.1 bn).
• The most important types of domestic services embodied in manufacturing exports were wholesale and retail services, services related to management advice, and employment services. Rental and lease services (including royalty payments) and business services were the imported services most often incorporated in manufacturing exports.
• Building materials and other transport equipment were the manufacturing industries depending most heavily on domestic service inputs for their exports: about 19% of their respective export value. Servicification was lowest for the petroleum industry.
• The electro-technical industry had the highest share of foreign services inputs (32%) incorporated in manufacturing exports.
• Almost half of the imported services incorporated in manufacturing exports were from the United States (19%), United Kingdom (16%) and Germany (12%).