Chapter 3 Emergence of new sources for growth Section 1 Rise of the services industry and expansion of services trade

Chapter 3 Emergence of new sources for growth Key points of Part I, Chapter 3 While goods trade has slowed down around the world, services trade is steadily growing. The size of the global market is 1.2 trillion U.S. dollars for travel services and 1.1 trillion U.S. dollars for consulting and other business services. There are also signs of change in the industrial structure, such as an industrial shift to the platform business model, the entry of IT companies into such sectors as autonomous driving, healthcare and financial services and the arrival of product-related services using big data analysis. In 214, the ratio of exports of services to GDP in the G2 countries as a whole reached 6.4%. The ratio is particularly high in the United Kingdom, France and India. Some countries are expanding exports in specific sectors, such as financial services in the case of the United Kingdom, information and communications in the case of India, transport in the case of the ROK and tourism in the case of Turkey. Section 1 Rise of the services industry and expansion of services trade As has been mentioned in the past White Papers on International Economy and Trade, 11 the shift of priority in trade to services is proceeding at the same time as the shift of the priority in industry to services in line with the growth of the world economy. In recent years, services trade has become increasingly active because the constraint of proximity 111 between consumers and producers in the provision of services has been reduced by the spread of the shift of priority in industry and trade from developed countries to emerging countries and also by the advance of information and communications technology. Countries are focusing on sectors where they have an advantage in promoting services trade, but developed countries tend to increase income from abroad in this way more than emerging countries. In light of such trends, this section will analyze the current status of the shift of priority to services in emerging countries, with the main focus on China, where the shift is particularly prominent, and will also provide an overview of the current status of services trade, which is expanding around the world. 1.Rise of the services industry in emerging countries (1) Progress in the shift of priority in the economy to services The phenomena of the priority in economic activities shifting from agriculture, forestry and fishery (primary industry) to the manufacturing industry (secondary industry, and then to the non-manufacturing industry (service industry, or tertiary industry) in line with economic development is known as the 11 The shift of priority in industry to services and services trade are challenges that are old but also new, and they have been discussed in the White Paper on International Economy and Trade in the past few decades. The first appearance of the term services trade in the White Paper on International Economy and Trade s table of contents is presumably in the 1986 edition of the white paper that was published 3 years ago. However, the specifics of services trade have changed. For example, the White Paper on International Economy and Trade 26 observed as follows: In the actual international economy as well, such a shift is observed mainly in advanced countries, while it is not so apparent in developing nations which are now going through economic developments. However, as of 216, the shift is actually ongoing in developing countries. 111 Tanaka (215). 233

Petty-Clark s law. 112 Until now, the shift of priority in industry to services has proceeded mainly in developed countries, but in recent years, it has also made significant progress in emerging countries in line with their remarkable economic development. When we look at changes in the share of value added by the services industry in GDP in countries and regions classified into five groups based on the income level according to the World Bank s definition, 113 we can see that the share has stayed stable at a high level of around 75% in the OECD countries (developed countries, including G7 countries and euro-area countries), among high-income countries. Meanwhile, with respect to all other groups, the share of value added by the services industry is growing. In particular, since 211, the share of value added by the services industry has been growing rapidly in high-income countries that do not belong to the OECD, such as Singapore and Saudi Arabia, and upper-middle income countries, such as China and Mexico (Figure I-3-1-1). As was shown in the past White Papers on International Economy and Trade, 114 there is a tendency that the higher a country s per-capita GDP is, the larger the share of the services industry in its GDP is (Figure I-3-1-2). Presumably, the shift of priority in industry to services has not only proceeded in developed countries but is also making progress elsewhere, mainly in emerging countries, in line with the economic development. 112 The law shows that priority in economic activities gradually moves to the tertiary industry because (i) labor force moves to industries with higher profitability, while the profitability of the secondary industry is higher than that of the primary industry, and that of the tertiary industry is higher than that of the secondary industry, and (2) demand for products produced in the primary and secondary industries, such as foods and industrial goods, is satisfied when a sufficient amount of products become available in line with economic development, resulting in increased demand for services provided by the tertiary industry. 113 World Bank (215). 114 Ministry of Economy, Trade and Industry (213), Ministry of Economy, Trade and Industry (215), etc. 234

Figure I-3-1-1 Changes in the share of value added by the services industry in nominal GDP Source: WDI (World Bank) 235

Figure I-3-1-2 Relationship between per-capita GDP and the share of the services industry in GDP (214) Note: Figures for Japan and the United States are from 213. The straight line represents the trend line. Source: WDI (World Bank) (2) Expansion of the services industry and changes in the demand structure in China The shift of priority in industry to services in emerging countries is particularly prominent in China. A look at changes in the industrial structure in China shows that the tertiary industry has surpassed the primary and secondary industries in terms of value added and the number of employees due to the progress in the shift of priority in industry to services (Figures I-3-1-3 and I-3-1-4). In particular, in 215, the share of the tertiary industry exceeded 5% in terms of value added. While the real GDP growth rate is slowing down, the tertiary industry s growth is accelerating as a trend (Figure I-3-1-5). 236

Figure I-3-1-3 Changes in the industrial structure in China (GDP and the number of employees) Source: National Bureau of Statistics of China, Ministry of Human Resources and Social Security of the People s Republic of China and CEIC Database Figure I-3-1-4 Changes in the industrial structure in China (shares) Source: National Bureau of Statistics of China, Ministry of Human Resources and Social Security of the People s Republic of China and CEIC Database. 237

Figure I-3-1-5 Changes in China s real GDP growth rate (by industry) Note: The share in GDP is 9.% for the primary industry, 4.5% for the secondary industry, and 5.5% for the tertiary industry (215). Source: National Bureau of Statistics of China and CEIC Database In line with the shift of priority in industry to services, the Chinese government is promoting a structural shift from investment to consumption in order to correct the economic structure that has been overly dependent on investment until now. As was shown earlier, as a result of the economic growth achieved in the 2s mainly through investment and external demand, the share of investments in GDP in China is very high compared with the share in major countries during their periods of high growth, whereas consumption has remained sluggish (Figure I-3-1-6). The current share of investments in GDP in China is higher than the highest levels ever observed elsewhere in East Asia, including Japan, the ROK and Taiwan (Table I-3-1-7). 238

2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Figure I-3-1-6 Changes in the composition of China s GDP (%) 8 Global economic crisis (28) 6 4 2-2 Gross capital formation Exports Net exports 45.9 37.9 23.7 13.5 2.7 Private consumption Gross capital formation Exports Government consumption Net exports Note: Figures for exports are calculated based on the value of exports of good and services provided in the Balance of Payments. Source: National Bureau of Statistics of China and CEIC Database. Table I-3-1-7 Share of capital formation in GDP (Unit: %) Highest value Year Japan 36.4% 1973 ROK 38.% 1991 Taiwan 3.9% 198 Source: SNA statistics of each country and CEIC Database The retail sales value of overall consumer goods has been growing only moderately. However, the growth rate of sales of communication equipment, for example, rebounded in 214. Although the growth rate slowed down somewhat in 215, the rate remained high. In addition, the growth in sales of products related to sports and recreational activities has also been robust (Figures I-3-1-8 and I-3-1- 9). 239

Figure I-3-1-8 Changes in the growth rate of retail sales in China by item Note: 1. The breakdown of sales by item only covers the sales of companies that are larger than a certain size. The total of all items was also calculated based on this premise. 2. There are many items whose growth rates are higher than that of the total of all items because the petroleum products and automobiles, whose shares are high in terms of value (together accounting for about 4% in 215), are dragging down the figures for the total of all items. Source: National Bureau of Statistics of China and CEIC Database. 24

Figure I-3-1-9 Growth rate of retail sales in China by item (215) Note: There are many items whose growth rates are higher than that of the total of all items because the petroleum products and automobiles (together accounting for about 4% in 215) are dragging down the figures for the total of all items. Source: National Bureau of Statistics of China and CEIC Database. Regarding the sales method, Internet sales are growing rapidly against the backdrop of the diffusion of smartphones, accounting for around 1% of overall retail sales 115 (Table I-3-1-1). In China, unique mail-order services and communication platforms have emerged because of the special characteristics of the country s Internet environment, contributing to the expansion of the service economy. 116 115 It has been pointed out that the shakeout of brick-and-mortal stores which have become redundant due to a rapid increase in the number of stores is ongoing. 116 Regarding the shift of priority in industry to platform businesses, including in emerging countries, refer to Section 2 of this chapter. 241

Table I-3-1-1 Value and growth rate of Internet sales in China (215) (Unit: trillion yuan, %) Sales Growth rate Retail sales 3.1 trillion yuan 1.7 Internet sales (goods and services) 3.9 trillion yuan 33.3 Internet sales (goods) 3.2 trillion yuan 31.6 Internet sales (services).6 trillion yuan 42.4 Note: 1. Internet sales refers to sales from transactions on public online platforms (regardless of whether they are self-developed or run by a third party). 2. Since retail sales are basically composed of sales of goods, only Internet sales of goods are included in retail sales. Source: National Bureau of Statistics of China and CEIC Database. On the other hand, on the macro level, the growth of consumption continued to slow down until early 215. Although the growth rate of consumption has risen since the second half of 215 and later, the growth has been moderate (FigureI-3-1-11). Presumably, one factor behind this trend is a slowdown in the growth rate of disposable income (FigureI-3-1-12). Among other factors that have been pointed out are a decline in the popularity of expensive products due to the frugality campaign and the continued high saving rate. Figure I-3-1-11 Growth rate of retails sales in China (ratio to the same month of the previous year) Source: National Bureau of Statistics of China and CEIC Database. (Year and month) 242

Figure I-3-1-12 Growth rate of disposable income per capita in Chinese urban areas (accumulated amount from the beginning of the year, ratio to the same quarter of the previous year) Note: Based on nominal values. Source: National Bureau of Statistics of China and CEIC Database 2.Worldwide expansion in services trade Services trade, which represents cross-border services transactions, has been expanding at a higher pace than goods trade in recent years. The growth rate of services trade is higher in emerging countries than in developed countries, but unlike the case of goods trade, the shares of developed countries in services trade remain at a high level, and it is assumed that developed countries also have a comparative advantage. The market size is large for tourism and business services, including research and development and professional consulting, while the growth rate is notably high for telecommunications, computer and information services and construction services. In some cases, such as the case of agricultural exports by the Netherlands, the share of value added by the services industry is so large in goods exports that goods exports are in effect equivalent to services exports. This paragraph provides an overview of the state of services trade and growth sectors. (1) Expansion of services trade mainly in emerging countries and developed countries comparative advantage Although the global value of services trade is lower than the global value of goods trade, the average growth rate of services trade in the most recent 1 years, at 7.2%, is higher than the average growth rate 243

of goods trade, which was 6.8%. 117 A look at changes in the growth rate of the value of services exports shows that while services exports and goods exports were growing at almost the same rate until the global economic crisis that was triggered by the Lehman Shock, the decline in services exports in 29 was smaller than the decline in goods exports. Although the growth of goods exports has been weak since 211, services trade has been growing in a stable manner (Figure I-3-1-13). Figure I-3-1-13 Changes in the value of global exports of goods and services (Billion dollars) 2, Annual average growth rate of goods exports (25-214) 18, 6.8% 16, 14, 12, 1, 8, 6, 4, 2, Source: WTO database Annual average growth rate of services exports (25-214) 7.2% 25 26 27 28 29 21 211 212 213 214 (Year) Goods export value Services export value Regarding the ratio to GDP, although the ratio of goods exports to GDP is higher than the ratio of services exports to GDP, the growth rate of the ratio of goods exports has been slowing down since 211, 118 whereas the ratio of services exports have continued to grow albeit moderately (Figure I-3-1- 14). 117 Between 25 and 214, the value of goods trade increased by a factor of 1.81, while the value of services trade grew by a factor of 1.88. 118 There are international debates as to whether the decline in the ratio of goods export to GDP is due to structural or cyclical factors. For example, refer to Constantinescu, Mattoo and Ruta (214). 244

Figure I-3-1-14 (%) 3 Changes in the value of global exports of goods and services (ratio to nominal GDP) 25 2 15 1 Change in goods exports (from 211 to 214) -.8% Change in services exports (from 211 to 214).4% 5 25 26 27 28 29 21 211 212 213 214 (Year) Goods export value Services export value Source: WTO Database and "The National Accounts Main Aggregates Database" (UN) By income level as classified according to the World Bank s definition, 119 the growth rate of services exports from middle-income countries was 9.3% (the annual average growth rate between 25 and 214), higher than the growth rate of 8.9% for high-income countries. However, in middle-income countries, the growth rate of goods trade, at 1.3%, was higher than the growth rate of services trade. One presumed factor behind this is the rapid increase in cross-border trade in intermediate goods that was caused by the expansion of complex production networks in middle-income countries, namely emerging countries. In high-income countries, the growth rate of services trade (8.9%) was higher than the growth rate of goods trade (5.6%), and signs of a shift in export from goods to services are apparent in high-income countries in particular (Figure I-3-1-15). 119 World Bank (215). 245

Figure I-3-1-15 Growth rate of goods and services trade (exports) 12 (%) 1 8 8.9 1.3 9.3 6 5.6 4 2 Goods Services Goods Services High-income countries Middle-income countries Note: Average annual growth rate from 25 to 214 Source: WTO Database and WDI (World Bank) Regarding imports, a similar trend is observed, but it is notable that in middle-income countries as well, the growth rate of services imports is higher than the growth rate of goods imports. The growth rate of services imports in upper-middle-income countries is the highest (12.%), indicating the possibility that such countries have become growth markets as destinations of services exports (Figure I-3-1-16). Figure I-3-1-16 Growth rates of goods and services trade (imports) (%) 12 1 1.6 11.2 8 7.8 6 5.1 4 2 Goods Services Goods Services High-income countries Middle-income countries Note: Average annual growth rates from 25 to 214 Source: WTO Database and WDI (World Bank) 246

High-income countries services trade balance has constantly been in surplus, with exports exceeding imports, so it is presumed that such countries have a comparative advantage over middleincome countries in terms of services trade. Meanwhile, the decline in high-income countries global share in services exports was smaller than the decline in their global share in goods exports, and their global share in services export started to rise in 212. Therefore, high-income countries are expected to continue to play the central role in services exports (Figure I-3-1-17). Figure I-3-1-17 (%) 82 8 78 High-income countries shares of goods and services exports and imports in world 8.7 Surplus from services trade 76 74 75.8 72 7 69.9 68 69.5 25 26 27 28 29 21 211 212 213 214 (Year) Goods (exports) Goods (imports) Services (exports) Services (imports) Note: Shares represents ratios to the total amount of imports and exports of high-income countries. Source: WTO Database and WDI (World Bank) By country, in particular, the United States and the United Kingdom, both of which are recording a trade deficit, are expanding their surplus in the services trade balance. Japan fell into deficit in the goods trade balance after the Great East Japan Earthquake, while its deficit in the services trade balance declined albeit moderately (Figure I-3-1-18). 247

Figure I-3-1-18 (Billion dollars) 4 Changes in goods and services trade balance in major countries 2-2 -4-6 -8-1, Services Goods Services Goods Services Goods Services Goods Services Goods Services Goods Services Goods China Taiwan Germany Japan ROK UK US 25 28 211 214 Source: WTO Database The United States, which is the largest services exporter, has consistently maintained a share of around 14% in the global value of services exports, indicating its high level of competitiveness. The United Kingdom and Germany have the second- and third-largest shares, respectively, but their shares have been declining in recent years. On the other hand, China, Taiwan and the ROK have been gradually expanding their shares by achieving higher growth than the United States. Japan is lagging behind in terms of both the share in global services exports and the export growth rate, but exports have been increasing somewhat in recent years (Figure I-3-1-19). Figure I-3-1-19 (%) 16 Changes in countries shares in global services exports 14 12 1 8 6 4 2 25 26 27 28 29 21 211 212 213 214 (Year) China Taiwan Germany Source: WTO Database 248

As for the contribution to the growth rate of global services exports (average annual growth rate of 7.2% between 25 and 214), the United States, China, France, Germany, the United Kingdom and India made large contributions, while Japan s contribution was only.2% (Figure I-3-1-2). On the other hand, regarding the contribution to the growth rate of global services imports, China, the United States, Germany, France and India made large contributions, indicating that these countries are creating new markets related to services trade. We can see that these countries are actively engaging in both services imports and exports and that their markets are expanding (Figure I-3-1-21). Figure I-3-1-2 Contribution to the growth rate of global services exports by country (25-214) (top 2 countries) Note: Contribution to the average annual growth rate from 25 to 214 by country Source: WTO Database 249

Figure I-3-1-21 Contribution to the growth rate of global services imports by country (25-214) (top 2 countries) Note: Contribution to the average annual growth rate from 25 to 214 by country Source: WTO Database The above analysis shows that although the scale of services trade is still smaller than that of goods trade, services trade is continuing to grow by capturing services demand not only in developed countries but also in emerging countries, where the shift of priority in industry to services is accelerating. Also, it shows that developed countries likely have a comparative advantage in terms of services trade. (2) Services trade led by tourism, business services and information and communications Looking at the market size of services trade by sector, 12 we can see that the value of exports is large for travel services and other business services (hereinafter referred to as professional services) 121 and transport services, and the growth rate of exports is high for telecommunications, computer and information services, construction services and professional services (Figure I-3-1-22). 12 The classification of services trade by sector is based on Balance of Payments and International Investment Position Manual, sixth edition (IMF). The sixth edition is the most recent one. 121 Professional services correspond to Other business services as referred to in the Balance of Payments Manual (IMF) (which correspond to Other business services as referred to in the Balance of Payments (Ministry of Finance)). 25

Figure I-3-1-22 Changes in the value of global services exports by sector (25-214) (Billion dollars) 1,4 1,24 1,2 1,12 1, 8 955 (Export value) 6 4 458 417 299 2 158 131 18 77 45 Travel Professional services Transport Telecommunications, computer and information services Financial services Royalties and license fees Product-related services Insurance and pension services Construction Public services, etc. Personal, cultural and recreational services 214 25 Source: WTO Database The value of exports of travel services, the largest export item in terms of value, amounted to 1.2 trillion U.S. dollars in 214. The number of foreign travelers in 215 is estimated to rise 4.4% compared with the previous year to 1,184 million people, 122 with the number of travelers from China recording a particularly high growth rate. Meanwhile, the share of export of travel services in GDP is large in Turkey (3.7%), South Africa (2.7%) and Australia (2.2%), indicating that accepting foreign tourists from abroad is a major industry in these countries 123 (Figure I-3-1-23). 122 A press release dated May 6, 216 by the World Tourism Organization (UNWTO) (http://media.unwto.org/press-release/216-5-3/exports-international-tourism-rise-4-215) 123 Regarding travel services, refer to the analysis in Part II, Chapter 2, Section 2. 251

Figure I-3-1-23 Ratio of the value of exports of travel services to nominal GDP (214) (%) 4 3.7 3 2.7 2.2 2.1 2. 2 1.6 1.3 1.3 1.2 1.1 1.1 1. 1. 1..9 1.6 1.6.5.4.3 Turkey South Africa Australia Italy France UK ROK Mexico Indonesia Germany Saudi Arabia US Canada India Argentina Russia China Japan Brazil Global average Source: WTO Database and "The National Accounts Main Aggregates Database" (UN) The value of exports of professional services, including research and development and professional consulting, which require a relatively high level of skills, amounted to 1.1 trillion U.S. dollars (214), surpassing the value of transport services 124 to capture the second-largest share in services exports (Figure I-3-1-24). 124 As the scale of transport services depends heavily on international trade volume and fares, it has presumably been affected by the recent decline in shipping fares. 252

Figure I-3-1-24 Changes in the value of global services exports (share of each sector) (%) 3 25 2 15 1 5 25 26 27 28 29 21 211 212 213 214 (Year) Product-related Transport Travel Construction Insurance and pension Financial Royalties and license fees Telecommunications, computer and information Professional Personal, cultural and recreational services Public services, etc. Source: WTO Database The value of exports of telecommunications, computer and information services, which recorded the average annual growth rate of 9.7%, the fastest growth among all items in the past 1 years, surpassed the value of exports of financial services to capture the fourth largest share in services exports, indicating that global transactions in this sector have expanded rapidly in recent years (Figure I-3-1-24). The growth of construction services, which is the second highest after the growth of telecommunications, computer and information services although the value of exports is not large, presumably reflects the expansion of infrastructure investments around the world (Figure I-3-1-22). As for the contribution to the value of services exports on a year-on-year basis in recent years, travel services, professional services, and telecommunications, computer and information services have made large contributions (Figure I-3-1-25). It can thus be seen that a change is occurring with the emergence of new markets that are larger or growing more rapidly than the market for transport services, which have been the mainstay of services trade until now. The details of the emerging items will be examined in the next paragraph. 253

Figure I-3-1-25 Changes in the value of global services exports (contribution on a year-on-year basis) 2 (%) 15 1 5-5 -1-15 26 27 28 29 21 211 212 213 214 (Year) Product-related Transport Travel Construction Insurance and pension Financial Royalties and license fees Telecommunications, computer and information Professional Personal, cultural and recreational services Public services, etc. Total of services Source: WTO Database (3) Countries expanding services trade by taking advantage of their strengths Amid the expansion of the services trade market, the ratio of services exports to global GDP reached 6.4% in 214. Among the G2 countries, the ratio was high for the United Kingdom (the ratio to GDP at 11.4%), France (9.5%) and India (7.6%). Some countries expanded services exports in specific sectors, such as financial services in the case of the United Kingdom, information and communications in the case of India, transport in the case of the ROK and construction in the case of China (Figure I-3-1-26). 254

Figure I-3-1-26 Ratio of services exports to nominal GDP in the G2 countries (214) (%) 11.4 12 1 9.5 8 6 7.6 7.6 7. 6.3 5.5 4.8 4.8 4.1 6.4 4 3.7 3.6 3.5 2.6 2.5 2 2.2 1.7 1.6 1.6 Canada Italy Turkey Germany ROK India France UK Product-related Transport Insurance and pension Royalties and license fees Professional Public services, etc. South Africa US Australia Mexico Brazil China Argentina Indonesia Japan Russia Global total Saudi Arabia Travel Construction Financial Telecommunications, computer and information Personal, cultural and recreational Note: Due to statistical restrictions, the breakdowns of exports of Turkey (royalties), Argentina (productrelated), Mexico (product-related, construction, financial, professional and public services) and Saudi Arabia (product-related, construction, royalties and individual) are unknown. Source: WTO Database and "The National Accounts Main Aggregates Database" (UN) In the G2 countries, the ratio of services exports to GDP has a moderate degree of positive correlation with the share of value added by the services industry. However, the correlation is higher than the trend line in high-ranking countries in terms of the ratio of services exports to GDP, such as the United Kingdom, France, India and the ROK, indicating that the services industry in these countries are closely linked with foreign markets (Figure I-3-1-27). 255

Figure I-3-1-27 Relationship between the value of service exports and share of value added by the services industry (ratio to nominal GDP) (214) Note: The values added by the services industry (ratio to GDP) for the United States and Japan are the values as of 213, and that of Canada, 21. Source: WTO Database and World Development Indicators (World Bank) Next, we will look at the overview of the status of services trade in individual countries in terms of the services trade balance, represented by the value of exports minus the value of imports. The United States and the United Kingdom, which are registering current account deficits, are expanding their surplus in the services trade balance, while Germany, China and Japan, which are recording a current account surplus, are in deficit in the services trade balance. However, in the case of Japan, services exports have been increasing in recent years more than imports, so the deficit has been shrinking. In the case of China, the deficit has been expanding significantly since 211 (Figure I-3-1-28). 256

Figure I-3-1-28 Changes in services trade balance in major countries (Billion dollars) 6 5 4 3 2 1-1 -2-3 -4 Note: For Spain, data is available only from 28 onward. For the Netherlands, data is available only from 21 onward. Source: WTO Database 25 26 27 28 29 21 211 212 213 214 (Year) US UK Germany France China Netherlands Japan India Singapore Spain ROK Taiwan Others Looking at individual items in services trade, we can see that some countries are relatively specialized in some items in services exports. In the case of the United States, which is expanding its surplus in the services trade balance, the surplus is growing with respect to items for which high value added may be created through new innovations, such as royalties and license fees, financial services, and professional services (Figure I-3-1-29). 257

Figure I-3-1-29 Changes in services exports (United States) (Billion dollars) 8 Exports 6 4 2-2 -4-6 Imports (rebounded) (Imports and exports) 25 26 27 28 29 21 211 212 213 214 Public services, etc. Individual, cultural and entertainment Professional Telecommunications, computer and information Royalties and license fees Financial Insurance and pension Construction Travel Transport Maintenance and repair Services account balance (Year) (Billion dollars) 3 25 2 15 1 5-5 -1 (Trade balance) 25 26 27 28 29 21 211 212 213 214 Public services, etc. Individual, cultural and entertainment Professional Telecommunications, computer and information Royalties and license fees Financial Insurance and pension Construction Travel Transport Maintenance and repair Total of all services (Year) Note: Figures for the contract manufacturing services in the United States are not available. Source: WTO Database 258

Meanwhile, some countries are expanding their surplus in sectors where they have an advantage. In the case of the United Kingdom, the financial industry, which has been competitive since an earlier time, is the main driver of the surplus, and in the case of the ROK, the construction industry, which is expanding infrastructure exports through the improvement of public assistance, is the main driver. In the case of Taiwan, the professional service industry, which is focusing on research and development and business services through innovation support provided by the authorities, is the main driver of the surplus (Figures I-3-1-3 to I-3-1-32). (Billion dollars) 2 Figure I-3-1-3 Changes in services exports (United Kingdom) 15 1 5-5 25 26 27 28 29 21 211 212 213 214 (Year) Public services, etc. Professional Royalties and license fees Insurance and pension Travel Maintenance and repair Total of all services Individual, cultural and entertainment Telecommunications, computer and information Financial Construction Transport Contract manufacturing Note: Due to statistical restrictions, figures for contract manufacturing services and maintenance and repair services in the United Kingdom are only available in 25 and 214. Source: WTO Database 259

Figure I-3-1-31 Changes in services exports (ROK) (Billion dollars) 3 2 1-1 -2-3 -4 25 26 27 28 29 21 211 212 213 214 (Year) Public services, etc. Individual, cultural and entertainment Professional Telecommunications, computer and information Royalties and license fees Financial Insurance and pension Construction Travel Transport Maintenance and repair Contract manufacturing Total of all services Source: WTO Database (Billion dollars) 2 Figure I-3-1-32 Changes in services exports (Taiwan) 15 1 5-5 -1-15 25 26 27 28 29 21 211 212 213 214 (Year) Public services, etc. Individual, cultural and entertainment Professional Telecommunications, computer and information Royalties and license fees Financial Insurance and pension Construction Travel Transport Maintenance and repair Total of all services Note: Figures for the contract manufacturing services in Taiwan are not available. Source: WTO Database On the other hand, China s deficit in the services trade balance has expanded significantly because of an increase in payments in the tourism and transport sectors, which reflects growth in tourism demand 26

(Figure I-3-1-33). Germany, which is highly competitive in goods trade, has continued to record a deficit in the services trade balance, reflecting robust tourism demand (Figure I-3-1-34). Figure I-3-1-33 Changes in services exports (China) (Billion dollars) 1 5-5 -1-15 -2-25 25 26 27 28 29 21 211 212 213 214 (Year) Public services, etc. Individual, cultural and entertainment Professional Telecommunications, computer and information Royalties and license fees Financial Insurance and pension Construction Travel Transport Maintenance and repair Contract manufacturing Total of all services Note: Figures for the maintenance and repair services in China were obtained by calculation. Source: WTO Database (Billion dollars) 4 2-2 -4-6 -8 Figure I-3-1-34 Changes in services exports (Germany) -1 25 26 27 28 29 21 211 212 213 214 (Year) Public services, etc. Individual, cultural and entertainment Professional Telecommunications, computer and information Royalties and license fees Financial Insurance and pension Construction Travel Transport Maintenance and repair Contract manufacturing Total of all services 261

Note: Due to statistical restrictions, figures for construction services in Germany are available only from 214 onward. Source: WTO Database Japan s services trade balance has recently improved due to the shrinkage of the deficit in the travel balance and the expansion of the surplus in the balance concerning royalties and license fees, but an increase in imports of professional services, among other items, has made a negative contribution (the status of Japan s services trade and India s services trade will be analyzed in detail in Part II, Chapter 2 and Part II, Chapter 4, Section 1, respectively) (Figure I-3-1-35). Figure I-3-1-35 Changes in services exports (Japan) (Billion dollars) 2 15 Exports (Imports and exports) 1 5-5 -1-15 -2 Imports (rebounded) 25 26 27 28 29 21 211 212 213 214 (Year) Public services, etc. Individual, cultural and entertainment Professional Telecommunications, computer and information Royalties and license fees Financial Insurance and pension Construction Travel Transport Maintenance and repair Contract manufacturing Services account balance 262

(Billion dollars) 3 (Trade balance) 2 1-1 -2-3 -4-5 -6-7 -8 25 26 27 28 29 21 211 212 213 214 (Year) Public services, etc. Individual, cultural and entertainment Professional Telecommunications, computer and information Royalties and license fees Financial Insurance and pension Construction Travel Transport Maintenance and repair Contract manufacturing Total of all services Source: WTO Database (A) Telecommunications, computer and information services growing mainly in India and developed countries In principle, services trade requires proximity between consumers and producers, but businesses for which this constraint is weakening, such as cloud service, are also expanding because of the advance of information and communications technology. The value of exports of telecommunications, computer and information services (Table I-3-1-41) 125 recorded an average annual growth rate of 9.7% in the past 1 years. Regarding the contribution to the growth of 9.7% by country, India (2.%), where the IT sector showed a remarkable growth, the United States (1.%), where highly competitive companies in this sector are concentrated, Germany (1.%) and China (1.%) together accounted for more than half of the total contributions to the growth of this new market. On the other hand, Japan s contribution, at.1% was extremely small (Figure I- 3-1-36). The value of exports is high for Ireland (57.6 billion U.S. dollars) and India (55.7 billion U.S. dollars), 126 while the ratio of exports to GDP was very high for India (2.7%) (Figures I-3-1-37 and I-3-1-38). 125 The definitions of services trade items used in this section are cited from the Explanation of Balance of Payments Statistics (Data Based on the BPM6) (Bank of Japan (216)) (the website of the Bank of Japan). 126 The growth rate of exports of telecommunication, computer and information services from Ireland in the past 1 years cannot be calculated due to data constraints. 263

Figure I-3-1-36 Contribution to the growth rate of the value of exports of telecommunications, computer and information services (9.7%) by country (25-214) (top 2 countries) Note: Contribution to the average annual growth rate from 25 to 214 by country Source: WTO Database Figure I-3-1-37 Value of exports of telecommunications, computer and information services (214) (top 2 countries) Source: WTO Database 264

Figure I-3-1-38 Ratio of the value of exports of telecommunications, computer and information services to nominal GDP (214) (%) 3 2.7 2 1 India.8.7.6.5.6.4.3.2.2.2.2.2.1.1.1.1... Germany UK France Canada Italy Argentina Russia ROK US China South Africa Australia Indonesia Japan Brazil Turkey Saudi Arabia Mexico Global average Source: WTO Database and The National Accounts Main Aggregates Database (UN) In this sector, new initiatives using information and communications technology are ongoing at the government level as well. Estonia and the ROK, for example, have enhanced the versatility of government systems and are promoting exports of such systems as platforms. The export of such systems is partly intended to facilitate exports, encourage system use abroad by domestic companies and promote foreign investments by connecting domestic systems with systems in the importing countries. Therefore, the export of such systems is expected to bring about complex effects that are not limited to expanding services exports (Figure I-3-1-39 and Table I-3-1-4). Figure I-3-1-39 Growth rate of exports of telecommunications, computer and information services in ROK and Estonia (25-214) (%) 35 3 28.8 25 2 18.7 15 1 8.6 5 ROK Estonia Japan Note: Average annual growth rates from 25 to 214 Source: WTO Database 265

Table I-3-1-4 Government systems of the ROK and Estonia Estonia e-government system The electronic government system, e-estonia, has been in operation since 21. The system is planned to be introduced to Finland in 216, with an aim to provide infrastructure for administrative services and for the authorization of e-commerce transactions across national borders. Source: Website of the Estonian Information System Authority and Miraigatakokka Estonia no Chosen: Denshiseifu ga Hiraku Sekai (Raul, Maeda) (216) Korean IP system By 215, the ROK s patent system has expended to 11 countries and organizations, including India, Vietnam and Thailand. Source: Website of the Korean Intellectual Property Office and e-government of Korea Best Practices (Ministry of the Interior of the Republic of Korea) 266

Table I-3-1-41 Definition of telecommunications, computer and information services Telecommunications, computer and information services This item covers transactions of services related to information technology (IT). (1) Telecommunications services (domestic classification) Charges for using communication devices, such as telephones, telex, satellites, and the Internet; charges for Internet backbone services (2) Computer services (domestic classification) Computerized data-processing services; the development of customized software such as operating systems and applications; web page design and development; hardware consultancy and maintenance and repairs; hardware and software installation (3) Information services (domestic classification) The provision of news by the media; online services that provide content other than audio, video and computer software; transactions of services concerning database, search engine, library and archives Source: Explanation of Balance of Payments Statistics (Data Based on the BPM6) (Bank of Japan) (B) Professional services in which developed countries have an advantage Professional services (Table I-3-1-53), including research and development and professional consulting services, have been supporting the growth of services exports in recent years against the backdrop of the shift of priority in industry to services and the penetration of information and communications technology around the world. The ratio of exports of professional services to GDP is high for developed countries such as the United Kingdom (3.1%) and France (3.%). As for emerging countries, India s ratio of exports of professional services to GDP (2.3%) is high, as is its ratio of exports of telecommunications, computer and information services (2.7%). This indicates that the business of undertaking outsourcing services in IT and various other fields is having a large impact on the Indian economy (Figure I-3-1-42). 267

Figure I-3-1-42 Ratio of the value of exports of professional services to nominal GDP (214) (%) 4 3 3.1 3. 2 2.3 2. 1.5 1.5 1.4 1.4 1.9.9.8.8.7.7.7.6.5.. Global average Saudi Arabia Turkey Australia South Africa China Indonesia US Japan Argentina Russia Brazil Italy ROK Canada Germany India France UK Note: Due to statistical restrictions, the breakdown of Mexico s exports is unknown. Source: WTO Database and The National Accounts Main Aggregates Database (UN) A comparison between major developed countries (Japan, the United States, Germany and the United Kingdom) in terms of the average growth rate of exports shows that the growth rate is high for the United States (6.8%), Germany (6.4%) and the United Kingdom (6.1%), while Japan s growth rate, at 4.2% is low. If professional services are broken down further, research and development services recorded the highest growth. In the United States, the United Kingdom and Germany, the value of exports of professional and business consulting services 127 was large and made the largest contribution to the growth rate of overall professional services between 21 and 214. Professional and business consulting services is thus the main driver of exports of professional services. Although the value of exports of technical, trade-related services, and business services 128 is at a certain level, the growth rate of such services is not high compared with the growth rates of other items (Figures I-3-1-43 to 46). 127 It should be kept in mind that the growth rate of exports of professional and business consulting services from Japan (2.5%) represents the sum of the growth rates of exports of those services and technical, trade-related services and business services. 128 This category includes architectural, engineering and other technical services, operating leasing services, and trade-related services. In developed countries, sectors requiring advanced skills are presumed to correspond to architectural, engineering, and other technical services. In the United States and the United Kingdom, this item is contributing to growth and has a large share in exports of other business services (1% in the United States, 15% in the United Kingdom and 17% in Germany). In the case of Japan, it is impossible to grasp the trend due to the absence of tabulated data concerning this classification. 268

Figure I-3-1-43 (%) 8 7 6 5 4 3 2 1-1 6.8 2.5 2.9 1.1 Growth rate of exports of professional services in major countries and contribution to the growth rate by item (21-214) Note: Average growth rates from 21 to 214. Due to statistical restrictions, the figure of others for Japan is the total of the contribution of professional and business consulting services and that of technical and trade-related services. 6.1 6.4 3.5 1.4 1.1 US UK Germany Japan Research and development services Professional and business consulting services Technical and trade-related services (architectural, engineering and other technical services) Technical and trade-related services (operating leasing services) Technical and trade-related services (trade-related services) Technical and trade-related services (others) Total of all professional services Source: OECD. Stat, Office for National Statistics of the United Kingdom and Bank of England 2.6 2.9 4.2 2.3 1.9 Figure I-3-1-44 Value of exports of research and development services (214) and its growth rate (21-214) sin major countries (Billion dollars) (%) 35 16 13.6 3 14 1.3 1.6 11.1 12 25 2 1 8 15 6 1 4 5 2 US UK Germany Japan Export value (214) Average annual growth rate (21-214) (right axis) Note: Average annual growth rate from 21 to 214 Source: OECD. Stat, Office for National Statistics of the United Kingdom and Bank of England 269

Figure I-3-1-45 Value of exports of professional and business consulting services (214) and its growth rate (21-214) in major countries (Billion dollars) (%) 7 1 6 5 6.2 9.3 7.8 9 8 7 4 3 2 1 2.5 US UK Germany Japan Export value (214) Average annual growth rate (21-214) (right axis) 6 5 4 3 2 1 Note: Average annual growth rates from 21 to 214. Due to statistical restrictions, the figure for Japan shows the growth rate of the total of professional and business consulting services and technical and trade-related services. Source: OECD. Stat, Office for National Statistics of the United Kingdom and Bank of England Figure I-3-1-46 Value of exports of technical, trade-related services, and business services (214) and its growth rate (21-214) in major countries (Billion dollars) (%) 5 6 45 4 35 3 25 2 15 1 5 5. 2.9 US UK Germany Japan Export value (214) Average annual growth rate (21-214) (right axis) 27 2.3 2.5 5 4 3 2 1

Note: Average annual growth rates from 21 to 214. Due to statistical restrictions, the figure for Japan shows the growth rate of the total of professional and business consulting services and technical and trade-related services. Source: OECD. Stat, Office for National Statistics of the United Kingdom and Bank of England As for the trade balance concerning professional services in major developed countries, the surplus in the United States and the United Kingdom has been expanding due to an increase in exports of professional and business consulting services, while the deficit in Germany has been shrinking. On the other hand, the deficit in Japan has been expanding (Figures I-3-1-47 to 5). Figure I-3-1-47 Trade balance concerning professional services (United States) (Billion dollars) 4 33 34 35 31 3 29 3 25 2 19 17 2 21 21 15 1 5-5 5 7 9 5 6 6 5 (1) -1-2 8 7 21 211 212 213 214 4 (Year) Research and development services Professional and business consulting services Technical and trade-related services (architectural, engineering and other technical services) Technical and trade-related services (operating leasing services) Technical and trade-related services (trade-related services) Technical and trade-related services (others) Total of all professional services Note: Figures in boxes are the trade balance for the total of all professional services. Source: OECD. Stat 271

Figure I-3-1-48 Trade balance concerning professional services (United Kingdom) 5 (Billion dollars) 4 3 2 1 29 13 7 1 1 1 23 25 18 2 9 9 4 2 35 31 23 27 12 11-1 -2 21 211 212 213 214 (Year) Research and development services Professional and business consulting services Technical and trade-related services (architectural, engineering and other technical services) Technical and trade-related services (operating leasing services) Technical and trade-related services (trade-related services) Technical and trade-related services (others) Total of all professional services Note: Figures in boxes are the trade balance for the total of all professional services. Source: OECD. Stat, Office for National Statistics of the United Kingdom and Bank of England 272

Figure I-3-1-49 Trade balance concerning professional services (Germany) (Billion dollars) 1 5-5 4 3-4 -5 5 5 5 5-4 -5-5 -4-4 (4) -1-15 -7-9 -8 (12) -8 (7) (9) -2 21 211 212 213 214 (Year) Research and development services Professional and business consulting services Technical and trade-related services (architectural, engineering and other technical services) Technical and trade-related services (operating leasing services) Technical and trade-related services (trade-related services) Technical and trade-related services (others) Total of all professional services Note: Figures in boxes are the trade balance for the total of all professional services. Source: OECD. Stat 273

Figure I-3-1-5 Trade balance concerning professional services (Japan) (Billion dollars) -1-1 -5-1 -6-6 -6-8 -13-12 (7) (4) -15-2 -25-7 -8-11 -2 21 211 212 213 214-2 Research and development services Professional and business consulting services technical, trade-related services, and business services Others Total of all professional services -22 (Year) Note: Figures in boxes are the trade balance for the total of all professional services. Due to statistical restrictions until 213, figures for others are the trade balance for the total of services other than research and development services. Source: OECD. Stat On the other hand, the share of major developed countries of the overall value of exports of professional services has been declining slightly while China's share has been increasing considerably (Figure I-3-1-51). 274

Figure I-3-1-51 Changes in the share of the value of exports of professional services by country (%) 14 12 1 8 6 4 2 25 26 27 28 29 21 211 212 213 214 China Taiwan Germany Japan ROK UK US (Year) Source: WTO Database Importing countries of business-related services are not necessarily limited to developed countries, with outsourcing from China and other emerging countries accounting for a large portion of overall imports. Between 25 and 214, the value of imports of professional services increased by 8.8% annually on average, and the United States (1.2%), China (.8%) and Germany (.7%) made large contributions to the growth. This suggests that business services are being outsourced globally, with developed and emerging countries taking advantage of each other s strengths (Figure I-3-1-52). Figure I-3-1-52 Contribution to the growth rate of the global market of professional services (growth rate of the value of imports) (8.8%) by country (25-214) (top 2 countries) Note: Contribution to the average annual growth rate from 25 to 214 by country Source: WTO Database 275

Professional services Table I-3-1-53 Definition of professional services This item covers various services for businesses other than product-related, financial, insurance and information services. It is further broken down into "research and development services," "professional and management consulting services," and "technical, trade-related, and other business services." (1) Research and development services Services associated with research and development (such as basic research, applied research, and the development of new products); outright sales of the industrial property rights obtained as a result of research and development (such as represented in patents, utility model rights, and design rights) (2) Professional and management consulting services Legal services; accounting and management consulting services; public relations services; advertising and market research services (3) Technical, trade-related, and other business services Architectural, engineering, and other technical services; agricultural and mining services; operating leasing services; trade-related services; other professional business services Source: Explanation of Balance of Payments Statistics (Data Based on the BPM6) (Bank of Japan) (C) Exports of product-related services (maintenance and repair services) growing faster than product exports Regarding product-related services (Table I-3-1-59), which cover services derived from goods, the ratio of exports of such services to GDP is high for France (.6%), Germany (.3%) and the ROK (.2%) (Figure I-3-1-54). 276

Figure I-3-1-54 Ratio of the value of exports of product-related services to nominal GDP (214) (%).6.6.4.3.2.2.2.2.2.2.2.1.1.1.1..... Global total Australia Brazil India Turkey South Africa Japan Indonesia Canada US UK Russia China Italy ROK Germany France Note: Due to statistical restrictions, the breakdowns of exports of Argentina, Mexico and Saudi Arabia are unknown. Source: WTO Database and The National Accounts Main Aggregates Database (UN) Maintenance and repair services, which are among product-related services, cover repair of goods and after-sales services provided across national borders, such as maintenance of aircraft and other equipment and after-sales services undertaken by sellers based on goods transaction contracts. Exports of such services may include cases in which value added shifts from sales of goods to provision of services derived from goods based on the analysis of big data obtained through IoT and other advanced technologies (Figure I-3-1-55). Figure I-3-1-55 Value of exports of maintenance and repair services and its growth rate (25-214) (Billion dollars) (%) 2 35 18 3 16 32.8 14 25 12 25.1 2 1 11.7 12.1 8 1.3 15 6 6. 1 4 12.3 2 5 US Singapore France Germany Switzerland Japan Export value (214) Average annual growth rate (25-214) (right axis) UK 277

Note: Due to data restrictions, the figure for France shows the growth rate from 28 to 214. The above figure covers the top five major developed countries with the highest export values as of 214. Source: WTO Database Regarding countries share in the value of exports of maintenance and repair services, the United States has maintained a share of more than 3% of the total and has also stayed in surplus in the balance of trade in such services (Figure I-3-1-56). Figure I-3-1-56 Changes in the share of value of exports of maintenance and repair services by country (%) 4 35 3 25 2 15 1 5 25 26 27 28 29 21 211 212 213 214 (Year) US Singapore France Germany Switzerland Japan UK Note: Due to data restrictions, a calculated value was used for the global total. The above figure covers the top five major developed countries with the highest export values as of 214. Source: WTO Database An example of maintenance and repair service is the Maintenance Repair Overhaul (MRO: outsourcing of aircraft maintenance) business in the aircraft industry. This business serves an after-sales market where demand continuously arises after the sale of aircraft, and this market has continued to expand. Of MRO services, labor-intensive ones, such as aircraft maintenance, have been increasing mainly in emerging countries as a trend. Meanwhile, concerning aircraft engines, major global engine manufacturers are providing a variety of services to airlines. The provision of total care service, which charges fees related to the use of engines, such as fees for supply of engine parts and maintenance based on flying hours, is known as an example of the engine manufacturing business shift to the services industry. In addition, in recent years, engine manufacturers have been engaging in solution businesses, such as developing maintenance schedules from the perspective of preventive maintenance through the monitoring of the status of engine operation and the status of flight control through big data analysis and 278

other techniques and improving operational efficiency through data analysis. Businesses integrating manufacturing technology with information and communications technology are thus expanding as a trend. The trade trend by industry cannot be identified by looking at the international balance of payments concerning maintenance and repair services. However, the United States, where major manufacturers of industrial engines are concentrated, has continuously maintained a large share, while exports from the United Kingdom have been recently increasing. Moreover, in major product exporting countries excluding China and Taiwan, the growth rate of the value of maintenance services exports is higher than the growth rate of the value of product exports, indicating that the importance of providing new services is growing in the manufacturing industry as well (Figures I-3-1-57 and I-3-1-58). Figure I-3-1-57 Changes in the growth of value of exports of maintenance and repair services (25=1) 14 12 1 8 6 4 2 25 26 27 28 29 21 211 212 213 214 (Year) US Singapore France Germany Switzerland Japan Note: Due to data restrictions, the figures for France were calculated assuming its value as of 28 as 1. The above figure covers the top five major developed countries with the highest export values as of 214. Source: WTO Database 279

Figure I-3-1-58 Comparison of the value of exports of maintenance and repair services and that of products Note: Top 1 countries with the highest value of exports of products in 214. The size of the bubbles represents the value of exports of maintenance and repair services in 214. Source: WTO Database Table I-3-1-59 Product-related services Definition of product-related services Total of manufacturing services on physical inputs owned by others (hereinafter referred to as contract manufacturing services ) and maintenance and repair services (1) Contract manufacturing services Fees charged by a processor when the owner of the goods commissions the processor to process or assemble the goods. (Examples) Oil refining, liquefaction of natural gas, and assembly of clothing and electronics (2) Maintenance and repair services Maintenance and repair work by residents on goods that are owned by nonresidents (and vice versa). (Examples) Repairs and maintenance of movable property such as vessels and aircraft, after-sales services incurred by the seller under a sales contract, such as repairs and maintenance during the warranty period Source: Explanation of Balance of Payments Statistics (Data Based on the BPM6) (Bank of Japan) 28

In Japan, too, it is becoming increasingly important to develop new business models that strategically link the strengths of the manufacturing industry, which has until now maintained a high level of competitiveness in the world, with data obtained through goods. Initiatives being considered in Japan in response to this trend will be discussed in Part II, Chapter 2, Section 1. (D) Japan and the United States leading in terms of royalties and license fees While royalties and license fees (Table I-3-1-67) are a major item that makes significant positive contributions to Japan s services trade balance, 129 the United States has the largest global share and is highly competitive in this field. Japan has the second largest share after the United States, and the growth rate of the value of receipts of royalties and license fees has recently been rising albeit moderately (Figure I-3-1-6). Figure I-3-1-6 Ratio of the value of receipts of royalties and license fees to nominal GDP (214) (%) 1.8.8.8.6.4.5.4.4.4.4.2.2.2.1........ Japan US UK France ROK Germany Canada Italy Australia Russia South Africa India Argentina Brazil Mexico Indonesia China Global average Note: Due to statistical restrictions, the breakdowns of Turkey and Saudi Arabia are unknown. Source: WTO Database and "The National Accounts Main Aggregates Database" (UN) As for the growth rate of the value of receipts of royalties and license fees from abroad, namely exports of intellectual property, in the past 1 years, Singapore, China and Taiwan recorded particularly 129 As was analyzed in the White Paper on International Economy and Trade 215, the main method of repatriation of profits by overseas affiliates of Japanese companies is the payment of dividends and royalties. Dividends are included in the primary income balance of the international balance of payments, while royalties are included in the royalties for intellectual property rights, etc. of the services account balance. 281

high growth rates, and these countries imports of intellectual property have also been increasing significantly (Figures I-3-1-61 to 64). Figure I-3-1-61 Contribution to the growth rate of the value of receipts of royalties and license fees (6.8%) by country (25-214) (top 2 countries) Note: Contribution to the average annual growth rate from 25 to 214 by country Source: WTO Database Figure I-3-1-62 Contribution to the growth rate of payments of royalties and license fees (6.8%) by country (25-214) (top 2 countries) 282

Note: Contribution to the average annual growth rate from 25 to 214 by country Source: WTO Database Figure I-3-1-63 Changes in the growth rate of value of receipts of royalties and license fees (25=1) 7 6 5 4 3 2 1 25 26 27 28 29 21 211 212 213 214 China Taiwan Germany Japan ROK UK US France India Singapore Switzerland (Year) Note: Due to data restrictions, figures for France were calculated assuming the figure of 28 as 1. Source: WTO Database Figure I-3-1-64 (%) 5 45 4 35 3 25 2 15 1 Changes in the share of value of receipts of royalties and license fees Note: Due to data restrictions, figures for France are only shown from 28 onward. Source: WTO Database 5 25 26 27 28 29 21 211 212 213 214 (Year) China Taiwan Germany Japan ROK UK US France India Singapore Switzerland 283

A close look at the case of the United States, which is the largest exporter of intellectual property in the world, shows that the largest portion of exports are fees for the use of industrial rights received as royalty income from factories and subsidiaries established by manufacturers expanding into foreign countries. In terms of the balance of payments, fees for computer software and trademarks, the areas of strength for U.S. companies, are boosting the surplus (Figure I-3-1-65). Figure I-3-1-65 Changes in the breakdown of royalties and license fees in the United States Note: The value of receipts of fees for trademarks in 214 includes the value of receipts of franchise fees. Source: Unites States Department of Commerce and CEIC Database In the case of Japan, most of the surplus concerning royalties and license fees is attributable to fees related transportation machinery, indicating that the overseas expansion of the automobile industry, which has been one of Japan s major industries, is increasing royalty income. On the other hand, Japan 284

is recording a deficit concerning fees for the use of copyrights, etc., including the use of software 13 (Figure I-3-1-66). Figure I-3-1-66 Changes in the breakdown of royalties and license fees in Japan Source: Balance of Payments (Ministry of Finance) Table I-3-1-67 Royalties and license fees Definition of royalties and license fees This item covers charges for the use of proprietary rights arising from research and development as well as from marketing, charges for licenses to reproduce or distribute copyrighted works, and charges for screening and broadcasting rights. 13 Looking at technology trade based on the science and technology statistics of the Ministry of Internal Affairs and Communications in order to examine trends by sector, the manufacturing industry is recording a surplus, driven mainly by the automobile sector, while the non-manufacturing industry is recording a deficit. In particular, the deficit recorded by the information and communications sector is large, offsetting the surplus recorded by academic and research institutions. 285

(1) Charges for the use of industrial property Charges for the use of industrial property rights such as patents, utility model rights, design rights, and trademarks; charges for the use of know-how or technical information; various expenses related to franchising; payments/receipts for grants of distribution rights; technical assistance or management fees related to such rights. (2) Charges for the use of copyrights Charges for licenses to reproduce or distribute computer software, music, video recordings, etc.; charges for the use of copyrighted works such as literature, art, music, video, and characters; charges for screening and broadcasting rights; charges for film distribution rights; charges for the right to release films on video Source: Explanation of Balance of Payments Statistics (Data Based on the BPM6) (Bank of Japan) (E) Other services The ratio of export of financial services and insurance and pension services to GDP are high in the United Kingdom, indicating that the provision of services to foreign countries by financial institutions and other companies is an important business for the country (Figures I-3-1-68 and I-3-1-69). Figure I-3-1-68 Ratio of the value of exports of financial services to nominal GDP (214) (%) 3. 2.5 2.5 2. 1.5 1..5.5.5.5.4.3.3.2.2.2.1.1.1.1.....5. Global average Argentina Indonesia Saudi Arabia China Brazil Russia ROK Turkey Japan Australia South Africa Italy India Canada US France Germany UK Note: Due to statistical restrictions, the breakdown of Mexico s exports is unknown. Source: WTO Database and The National Accounts Main Aggregates Database (UN) 286

Figure I-3-1-69 Ratio of the value of exports of insurance and pension services to nominal GDP (214) (%) 1.2 1.1 1..8.6.4.2. UK.3.3.2.1.2.1.1.1.1.1......... Mexico Germany France Turkey India Italy US Canada South Africa ROK China Japan Australia Brazil Russia Argentina Saudi Arabia Indonesia Global total Source: WTO Database and The National Accounts Main Aggregates Database (UN) The ratio of exports of transport services to GDP is high in the ROK (2.5%), and the ratio of exports of construction services, including those related to infrastructure projects, is also high in the ROK (1.2%). The ratio of exports of public services contracts to GDP is high in the United Kingdom (.14%) (Figures I-3-1-7 to 72). Figure I-3-1-7 Ratio of the value of exports of transport services to nominal GDP (214) (%) 3. 2.5 2.5 2. 1.5 1.8 1.8 1.5 1.3 1.1 1.2 1..5. ROK France Turkey Germany UK Russia.9.9.9.7.7.5.5.4.4.4.4.2.1 India South Africa Japan Canada Italy US Argentina Indonesia Australia China Saudi Arabia Brazil Mexico Global average Source: WTO Database and The National Accounts Main Aggregates Database (UN) 287

Figure I-3-1-71 Ratio of the value of exports of construction services to nominal GDP (214) (%) 1.4 1.2 1.2 1..8.6.4.2.3.3.2.1.1.1.1.1.1........1. ROK Russia Japan Turkey China UK France Indonesia India Germany Italy Canada US Brazil Australia South Africa Argentina Global total Note: Due to statistical restrictions, the breakdowns of exports of Mexico and Saudi Arabia are unknown. Source: WTO Database and The National Accounts Main Aggregates Database (UN) Figure I-3-1-72 Ratio of the value of exports of public services to nominal GDP (214) (%).16.14.14.14.13.12.1.8.6.4.2. UK Germany US.11.1.1 South Africa Turkey Japan.8.8.7.7.6.5.5.5.4.4.3 ROK Canada Saudi Arabia Indonesia Australia Italy Russia France Brazil Argentina India.1 China.1 Global total Note: Due to statistical restrictions, the breakdown of Mexico s exports is unknown. Source: WTO Database and The National Accounts Main Aggregates Database (UN) (4) Export industries shift of priority to services Until now, an overview of cross-border provision of services has been provided. Regarding goods exports as well, the share of value added by the services industry during the processes leading to export has been rising, particularly in developed countries. The share of value added by the services industry 288

in exports related to the overall manufacturing industry in the OECD member countries, which was 32.8% in 1995, rose to 35.9% by 29. However, the share has recently declined slightly, and in the non-oecd countries, the share has been on a downtrend compared with the share in the 199s (Figure I-3-1-73). Figure I-3-1-73 Share of value added by the services industry in manufacturing industry exports (%) 4. 35. 3. 32.8 34.3 35. 35.8 35.9 34.4 34.5 31.7 3.8 31. 29.8 29.5 3.6 3.5 25. 2. 15. 1. 5.. 1995 2 25 28 29 21 211 OECD countries Non-OECD countries Source: Trade in Value Added (OECD) However, the share of value added by the services industry has grown rapidly in some sectors and countries, and in some cases, the increase in the share may be leading to the development of industries and the expansion of exports through a rise in productivity. A typical example of such phenomenon is the Netherlands agricultural exports. The share of business services 131 in agricultural exports in the Netherlands was below the average for the whole of the OECD in 1995, but the share later rose rapidly, reaching 35.2% in 211 (Figure I-3-1-74). Despite the small size of its territorial land, the Netherlands is the second-largest food exporting country in the world, and the strength of its service sector, as exemplified by the well-developed distribution function, is cited as the driving force of the Netherlands food exports. 131 The total of wholesaling, transport, information and communications, and research and development. The classification is in accordance with the OECD Trade in Value Added. 289

Figure I-3-1-74 (%) 37 35 Share of value added by business services in agricultural exports 35.2 33 31 29 27 25 26.5 28.5 25.6 1995 2 25 28 29 21 211 (Year) Whole of the OECD Netherlands Source: Trade in Value Added (OECD) This trend becomes all the more prominent when compared with the case of Japan. It is not an exaggeration to say that the Netherlands agricultural exports are services exports, rather than exports of agricultural products 132 (Figure I-3-1-75). Figure I-3-1-75 Sources of value added concerning exports in the agricultural sector (%) 1 8 23. 19.4 6 35.2 25.6 4 2 41.8 55. Netherlands Japan Value added by the agricultural sector Value added by business services Others Note: Figures are based on the industrial structure as of 211. 132 Regarding specific trends in agricultural exports from the Netherlands, refer to the detailed analysis in Part II, Chapter 3. 29

Source: Trade in Value Added (OECD) 3. Summary The shift of priority in industry to services associated with the growth of the world economy is making significant progress in both developed countries and emerging countries, and this trend is prominent in China in particular partly due to the Chinese government s policy. As a result, even while goods trade is slowing down worldwide, services trade continues to expand steadily while capturing demand in emerging countries. Although the scale of services trade is still smaller than that of goods trade, there is a strong tendency of an increase in services exports from developed countries in particular, suggesting that such countries have a competitive advantage. In addition to travel and transport, which have until now been the major trade items, new growth sectors are emerging in services trade. Services trade is expanding in new sectors, such as telecommunications, computer and information services and business services, where the constraint of proximity between consumers and producers on the provision of services has been overcome due to the advance of information and communications technology. Amid the expansion of and changes in the services trade market, countries are promoting services trade by taking advantage of their respective strengths. Countries, developed ones in particular, such as the United States and the United Kingdom, are enhancing their competitive advantage in new growth sectors and increasing income from services trade. Moreover, some countries are expanding exports by increasing value added concerning goods trade as well by making use of distribution and research and development services, as is the case with the Netherlands exports of agricultural, forestry and fisheries products. The importance of services trade is expected to grow further in the future, but Japan s presence is not necessarily strong in this respect. While the state of and challenges for Japan s services trade will be analyzed in detail in Part II, Chapter 2, it can be said that the need to conduct various initiatives to expand services exports further will continue to grow. 291

Column 6 Types of services trade Service refers to the provision of something non-tangible, such as benefits and satisfaction. In other words, service has such characteristics as (i) intangibility (being invisible before and after the purchase), (ii) irreversibility (cannot be returned after the purchase), and, (iii) non-storability (cannot be stored or kept as inventory). As a result, cross-border services trade is conducted through various modes that are different from the mode of goods trade. The WTO, which aims to realize smooth trade between countries, classifies the modes of services trade into four types 133 (Column Figure 6-1). Column Figure 6-1 Four modes of services trade under the WTO GATS Source: METI (a) First mode: cross-border trade Cross-border trade refers to the provision of services by a service supplier from its home country to a consumer in another country. In particular, cross-border trade is a mode that has in recent years been expanding beyond the constraint of proximity between consumers and producers on the provision of service because of the advance of information and communications technology. Supply of software and outsourcing of business services, for example, correspond to cross-border trade of services. (b) Second mode: consumption abroad Consumption abroad refers to situations where a service consumer moves into another country to obtain a service. International tourism, for example, corresponds to consumption abroad. (c) Third mode: commercial presence Commercial presence refers to situations where a service supplier in one country establishes a presence in another country to provide a service. This is a mode of services trade conducted mainly in the form of overseas business expansion made through foreign direct investment. Opening restaurants and retail stores abroad, for example, corresponds to commercial presence. In this case, services are directly provided abroad, so this mode of services trade is most affected by the business environment in the country where the presence is established, including regulations and institutional systems. 133 The General Agreement on Trade in Services (GATS). This is the first multilateral international agreement concerning governmental regulations that obstruct services trade. 292

(d) Fourth mode: movement of people Movement of people refers to situations where persons in one country move into another country to provide a service to consumers there. For example, the performance of concerts in a country by artists invited from abroad and the supply of healthcare services in a country by doctors coming from abroad correspond to movement of people. Like the third mode, this is prone to be affected by the business environment in the country where the service is provided, including regulations and institutional systems. In services trade, in addition to the second to fourth modes, which have until now been the mainstream, the first mode of trade is also growing, leading to further diversification of trade. There are limits to grasping the state of services trade quantitatively due to the absence of a system equivalent to customs clearance applied to goods trade, among other factors. However, there are expectations that services trade will be analyzed not only based on more detailed trade data and international balance of payment data but also from various viewpoints, including investment and value added trade. Column 7 New trends in production-related services in Japan: the case of Hitachi Ltd. The manufacturing industry, which is said to be affected most by the shift in products value from the products themselves to the services obtained through them, is starting to undergo a major change amid the progress in practical use of innovative technologies in the information and communications sector, such as big data analysis, artificial intelligence and IoT. As is observed in the case of maintenance and repair services as part of production-related services, which was discussed in Part I, Chapter 1, Section 3, the industry-led development of platforms that earn income continuously and globally has already proceeded among major companies in the United States and Europe, and in Japan, too, Hitachi Ltd. has launched a new initiative. On May 1, 216, the company announced a plan to promote the expansion of IoT-related businesses across sectors on a global scale by establishing a new organization called Hitachi Insight Group 134 in Santa Clara in the U.S. state of California. According to the plan, this organization will engage in a digital solution business using an IoT platform (Lumada) that enables the development of IoT-related solutions and easy customization by integrating knowhow and technology related to practical operation of industrial equipment, plants and social infrastructure (operational technology) with IT technology and will establish an eco-system of IoT-related businesses based on this platform. Not only for Hitachi but for any business model using information and communications technology, the importance of data, which is their source of value added, has become extremely high. There are expectations for the formulation of international rules concerning the development of a stable environment and foundation for cross-border use of data that is intended to further promote global business expansion by Japanese companies. 134 Comprised of Hitachi, Ltd., Hitachi Data Systems of the United States, and Hitachi Consulting of the United States, among other companies (press release issued by Hitachi) 293

Column Figure 7-1 Examples of solution cores 135 Source: Material for Hitachi IR Day 216 (June 1, 216) 135 Solution models 294