OECD Services Trade Restrictiveness Index

Policy efforts to ease services trade constraints can bring substantial benefits

The example of Indonesia: Three decades of local reforms have contributed to a more open and competitive services sector

Indonesia is the fourth most populous country in the world and the sixth largest economy in the Southeast Asia and Pacific regions in terms of gross domestic product. Services and services trade play an increasingly important role in Indonesia’s economy as they represent new sources of growth, job creation, and overall wellbeing. Yet, despite a vibrant and increasingly digital economy, Indonesia’s trade in services is subdued compared to regional and international trade partners, highlighting the need for a targeted national services trade strategy and a regulatory reform agenda to strengthen the competitiveness of the country’s services providers domestically, regionally, and internationally.

In October 2024, the OECD launched a new study that explores patterns, policies, and reform scenarios of Indonesian services trade sector building on comprehensive data and analysis. The report highlighted that international markets represent an important channel for Indonesia to access foreign state-of-the-art services, technology, and capital. Removing economy-wide barriers are important as their benefits tend to spill over to other economic activities. The report noted that Indonesia could prioritise policy reforms that aim at lowering such barriers, including by easing localisation requirements for foreign companies, further facilitating the temporary entry of foreign personnel and key foreign services providers, and enhancing access to public procurement markets.

The rapid digitalisation of economic and social activities in Indonesia, as well as increased access to Internet by Indonesian firms and consumers present important opportunities for growth, job creation, and well-being. To reap the benefits of digital trade, the report noted that easing unnecessary trade barriers that affect digitally-enabled services and promoting policies that allow Indonesian firms and consumers to participate more widely in digital trade would be essential.

Indonesia’s major regulatory reforms over the past three decades have contributed to a more open, competitive, and innovative services sector (Figure 6). This study shows that Indonesia would gain from reforms that target services trade not only in terms of significant reductions in the current structure of services trade costs, but through significant positive economic spillovers along supply chains, particularly in manufacturing sectors that use services intensively as intermediate inputs, such as finance, telecommunications, and transport. Indonesia could also leverage ongoing international efforts by joining the Joint Statement Initiative on Services Domestic Regulation and related Reference Paper at the WTO, and by reiterating its commitments to good practices on domestic licensing procedures and regulatory transparency.

Figure 6. Services trade liberalisation in Indonesia between 1989 and 2023

STRI weighted sector averages, 1995-2023

Note: Averages based on 21 services sectors covered in the STRI. Weights based on the OECD TiVA database. The STRI takes values between 0 and 1, where 1 indicates the most restrictive regulatory environment for services trade. Lower averages indicate a more open regulatory environment.

Source: Based on OECD (2024[4]).

Revitalising global discussions on services trade could unlock USD 1 trillion in trade costs benefits

Further efforts to lower services trade barriers could yield substantial benefits in the form of trade cost reductions and productivity increases in downstream industries. Rejuvenating services trade discussions at multilateral and plurilateral fora is key for international co-operation that can help unlock such benefits (Box 1).

On a global scale, the implementation of ambitious services trade reforms targeting both economy-wide and sector-specific barriers could bring annual trade cost savings of USD 1 trillion (Figure 7) (OECD, 2024[3]). This represents the equivalent of close to 1% of global GDP or around 13% of the value of global services trade in 2023, with important gains in business sectors, financial services, transport, and communications services.

Figure 7. Ambitious horizontal and sector-specific reforms could yield USD 1 trillion in trade cost savings

Level and percentage change in ad valorem equivalent

Note: Percentage of export values. The sectors covered in the STRI can be broadly organised around four clusters: 1. Digital network services (telecommunications, computer services, broadcasting, motion pictures and sound recording); 2. Logistics and related services (transport, courier, logistics and distribution services); 3. Market bridging and support services cluster (commercial banking, insurance, accounting and legal services); and 4. Physical infrastructure services cluster (construction, architecture and engineering). For more details, see Annex B. The following sectors were not covered in the estimations due to lack of data: broadcasting services, construction services, distribution services, motion pictures and sound recording services. Access the interactive version of the graph: https://public.flourish.studio/visualisation/18319125/.

Source: OECD (2024[3]).

Figure 8 presents the country-by-country trade costs implications of a hypothetical scenario where countries would reduce their STRI index halfway towards the best performer in each sector. Trade cost reductions would accrue across all countries but would be highest in emerging-market economies. The average trade costs reductions for OECD Member countries are estimated at 11% while non-OECD Member countries would see approximately a 21% reduction on average. The highest potential benefits would be for Thailand (-30%), the Philippines (-28%), and Indonesia (-24%).

Figure 8. Trade cost effects of services liberalisation by country

Trade cost implications of policy reforms in the STRI, 2024 (% of export values)

Note: The figure presents the trade cost implications of closing 50% of the gap to the best performing countries. The following sectors were not covered in the estimations due to lack of data: broadcasting, construction, distribution, motion pictures and sound recording services. The 90% confidence intervals are computed using the standard errors of the trade elasticity estimated from a gravity model.

Source: Calculations based on methodology in Benz and Jaax (2020[5]).

Reducing services trade costs can have far-reaching effects beyond just services. Because services play a crucial role as intermediate inputs across various manufacturing sectors, lowering services trade costs facilitates manufacturing firms’ access to international markets for essential inputs such as telecommunication, transport, logistics and financial services, which in turn promotes labour productivity across manufacturing sectors (OECD, 2024[3]). For instance, labour productivity gains could be as high as 26%, 12% and 21% if a package of sector-specific reforms was implemented in air transport, telecommunications, and financial services, respectively (Figure 9).

Figure 9. Downstream effect of air transport, telecommunications, and financial services reforms on productivity in manufacturing sectors

Note: This graph illustrates the estimated gains in manufacturing labour productivity under the horizontal and sector-specific reform scenarios involving trade in finance, telecommunications, and air transport services. The colour dot markers indicate the average expected increase in labour productivity over all the 17 manufacturing sectors included in the analysis for each of the 50 STRI countries. Access the interactive version of the graph: https://public.flourish.studio/visualisation/17847376/.

Source: OECD (2024[3]).

Box 1. Workshop on Revitalising global discussions on services trade discussed possible ways forward to advance services trade reforms

Hosted by the OECD in co-operation with Canada and the United Kingdom on 9 October 2024, the workshop Revitalising global discussions on services trade: trends, opportunities and challenges marked the ten-year anniversary of monitoring the regulatory environment for services trade through the OECD STRI. Bringing together some 200 services experts from around the world, the event took stock of the evolution of services trade policies over the last decade and highlighted the importance of open services markets for policy objectives such as economic resilience, environmental sustainability, and the digital transition.

Looking ahead at the future of global services trade, the workshop participants discussed the next frontiers for services through new technologies and green transition, as well as approaches to reinvigorate multilateral and plurilateral services trade negotiations, address market access barriers and foster international co-operation.

In the context of possible ways forward, the discussion highlighted several factors such as:

• the potential of international standard setting for services to build trust and integrate markets

• the need for services rules to work hand in hand with digital trade rules and recognise that services trade increasingly involves cross-border data transfers and new technologies, such as artificial intelligence

• the role of plurilateral co-operation in rejuvenating services discussions

• the importance of addressing concerns of developing countries and assisting them with efficient regulatory practices

• the value of data in informing services trade negotiations and assessing the cost of existing measures.