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The Global Trade Trap: Goods or services?

Updated Friday, 1st July 2011

There's a changing pattern of trade in which services are being bought and sold across national boundaries. Leslie Budd explains.

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There are certain myths that endure about economics. One is about globalisation and the role of trade in promoting globalisation. Foreign Direct Investment (FDI) has been the leading indicator of globalisation, which in itself has generated greater trade flows. Although trade has increased over time this is in line with gains in income and wealth, but also a large part of the rise is due to what are called emerging economies. The chart below shows World Merchandise Trade (US$bn at 2008 prices).

World Merchandise Trade chart

The other driver has been the development of Regional Trade Agreements (RTAs) and  more integrated regional economic areas, for example the European Union. These arrangements seek to create greater creation and diversion from other areas.

The other driver of world trade has been the development of institutions like the World Trade Organisation (WTO) which exists to attempt regulate restraints to trade.

Underneath this picture is a changing pattern of trade in which services are being bought and sold across national boundaries. The trap that many observers have fallen into is to think that services are the only important part of the economy, but you have to distinguish between tradable services (architecture and engineering services, higher education) and non-tradable ones (local hairdressers, plumbers). As economies develop and their citizens get wealthier, trade in services tend to grow. The UK is a case in point. It has had a net surplus  in tradable services for the last decade which is demonstrated in the next chart.

Net Trade Balance of UK Trade in Services

However, this surplus has not been sufficient to compensate for the deficit on traded goods as manufacturing accounts for 75 per cent of business expenditure on R & D in the UK and accounts for a significant source of demand for advanced producer services that are globally traded. There is thus the possibility of a virtuous circle whereby stimulating manufacturing will create extra demand for tradable services. 

Insurance and financial and  services accounted for  about 80 per cent of this trade in 2009, down from 92 per cent in 1998.  The figures for other business services were 29 per cent and 69 per cent respectively suggesting that the caricature that all we do is financial services is not accurate, thus entrapping ourselves in a rear view mirror picture of the British economy and its global potential. The net balances for architectural, engineering and technical services have doubled, and audio-visual services have quadrupled over the period, that  may reflect the apparent internationally comparative advantage in design.

The global trade trap is one that we could all fall into, unless we step back and take a look on what is actually going on, for which we all need to ask three questions: where’s the theory? Where’s the evidence? Where’s the data?

What is your theory, evidence and data form your own professional and personal experience? Join the debate that the Made in Britain series has stimulated by contributing your stories using the comments facility below.

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