Trends in Global Value Chains

4. Key trends in services trade by mode of supply

International integration is no longer driven only by the shipment of goods across borders, but increasingly by the ability of firms to deliver, source and combine services across countries. Business services, finance, telecommunications, transport, logistics, professional services and intellectual property related activities are now essential inputs into production and trade (Francois and Hoekman, 2010[6]; Miroudot and Cadestin, 2017[7]).Digitalisation has further accelerated this transformation. Improvements in data infrastructure, cloud computing, digital platforms, remote delivery technologies and artificial intelligence have expanded the range of services that can be traded internationally without the physical movement of either suppliers or consumers (López González, Sorescu and Kaynak, 2023[8]).

At the same time, the internationalisation of services extends beyond cross-border digital delivery. Many services continue to require proximity to customers, regulatory authorisation, local knowledge or a commercial presence in the destination market. For this reason, the supply of services through foreign affiliates is a critical component of global services trade. Measuring services trade therefore requires going beyond conventional cross-border transactions to capture the full range of ways in which firms serve foreign markets.

The OECD Trade in Value Added Indicators for Services by Mode of Supply (TiVA-MoS) dataset provides a comprehensive framework to analyse these developments by distinguishing the four modes defined in the WTO General Agreement on Trade in Services (GATS). Mode 1 refers to cross-border supply, when services are supplied from one economy into another, for example through digital delivery, telecommunications or transport networks. Mode 2 captures consumption abroad, such as tourism, education or health services consumed by residents of one economy while physically present in another. Mode 3 captures services supplied through commercial presence, when a firm supplies a service through an affiliate established in the foreign market. Mode 4 refers to the temporary movement of natural persons to supply a service abroad. The distinction matter because Modes 1, 2 and 4 are usually recorded through balance-of-payments statistics, while Mode 3 requires information on foreign affiliates.

International trade in services is growing faster than trade in goods

Services trade has expanded more rapidly than goods trade. Figure 4.1 highlights a structural shift in the composition and dynamism of international trade. While trade in goods remains the largest component of gross trade flows, trade in services has become the more dynamic margin of globalisation. This is consistent with the increasing tradability of knowledge-intensive, digitally deliverable and business-support services, as well as with the growing role of services as intermediate inputs in global production.

In cumulative terms, services trade expanded by about 64% between 2011 and 2023, compared with about 26% for goods trade. The difference is particularly visible after the mid-2010s, when goods trade weakened while both cross-border services and Mode 3 services continued to expand.

Mode 3 remains the largest channel of international services supply

The modal breakdown shows that commercial presence abroad is the largest channel of international services supply. Figure 4.2 shows that, in 2023, services supplied through commercial presence reached about USD 8.8 trillion, compared with USD 6.9 trillion for Modes 1 and 4 combined and USD 0.7 trillion for Mode 2. Adding the estimated overlap between Mode 3 and cross-border trade (USD 2.4 trillion), total international services supply reached around USD 18.9 trillion.

The pandemic shock had a different sectoral and modal profile. In 2020, Mode 2 fell by almost 60%, from USD 0.9 trillion in 2019 to USD 0.4 trillion, reflecting the collapse in travel, tourism and other forms of consumption abroad. Modes 1 and 4 declined only moderately, while Mode 3 fell by around 5%. The recovery was strong after 2020. By 2023, Modes 1 and 4 had reached their highest level in the series, while Mode 3 exceeded its pre-pandemic level by more than USD 1 trillion. This suggests that the pandemic accelerated some digitally deliverable services while confirming the continuing importance of foreign affiliate activity.

The chart also includes an overlap between Mode 3 and cross-border trade, highlighting that some transactions involving foreign affiliates may also be recorded in balance of payments statistics, for example when a foreign affiliate exports services cross-border. Without accounting for this overlap, total services trade by mode would be overestimated. The overlap reached about USD 2.4 trillion in 2023, underlining the need for careful integration of cross-border trade statistics and foreign affiliate statistics when measuring services globalisation. Adding cross-border trade and foreign affiliate activity (and considering the overlap between the two), trade in services accounts for 21% of global GDP (as compared to 26% for goods).

Different services industries rely on different modes of supply

The relative importance of each mode varies substantially across services industries. Figure 4.3 shows world trade in services by industry and mode of supply in 2023, expressed as a percentage of industry output. It illustrates that the preferred mode of international supply is highly sector specific.

Transport services are the clearest example of cross-border intensity. In water transport, Modes 1 and 4 accounted for around 36% of industry output in 2023, the highest value among the industries shown. Air transport followed, at about 27%. By contrast, Mode 3 is especially important in sectors where market access often requires local establishment, regulatory authorisation, proximity to clients or a local network. Finance and insurance had the highest Mode 3 intensity, at around 18% of industry output. IT services, warehousing, wholesale and retail trade, publishing and broadcasting, administrative support services and telecommunications also showed relatively high Mode 3 shares.

Mode 2 is concentrated in a narrower set of activities. Hotels and restaurants had the largest Mode 2 share, at about 6% of industry output, followed by air transport, recreation and education. This reflects the nature of consumption abroad, which is closely linked to tourism, travel, international students and other situations in which the consumer moves to the territory of the supplier.

The chart also shows that overlap between Mode 3 and cross-border trade is highest in information technology services, pointing to some complementarity in modes of supply where digital firms rely on foreign affiliates not only to serve host markets but also to export to third countries.

Services global value chain participation differs across countries and modes of supply

Data by mode of supply also change the picture of services participation in GVCs. Figure 4.4 distinguishes backward participation (the foreign services content embodied in a country’s gross exports) and forward participation (the domestic services value added embodied in other countries’ exports). Both dimensions are reported separately for cross-border trade and Mode 3.

Small open economies tend to record the highest overall services GVC participation. Luxembourg stands out, with very high backward participation through cross-border services. Switzerland, the Netherlands, the United Kingdom and Ireland also show high participation when the four components are considered together. This reflects the role of small open economies, financial centres and MNE hubs in importing, exporting and intermediating services VA.

Backward participation is generally more pronounced through cross-border services than through Mode 3. Across the countries shown, the average backward cross-border component is around 15% of gross exports, compared with around 10% for Mode 3. This suggests that imported services inputs used in exports are often sourced cross-border, particularly in smaller economies and in economies with strong international business services linkages. Luxembourg, Ireland, Denmark, Belgium, Hungary and the Slovak Republic are among the economies with the highest backward cross-border services participation.

Mode 3 is nevertheless central for several economies. Switzerland, the United Kingdom, Ireland, Latvia, Romania, Costa Rica, Croatia and New Zealand show relatively high backward participation through Mode 3.

The forward participation indicators reveal a different geography. The United States has the highest forward participation through Mode 3, at close to 31% of gross exports, followed by the Netherlands, France, Switzerland and the United Kingdom. This suggests that domestic services VA supplied through affiliates abroad is embodied in the exports of other countries. Large economies with internationally active services multinationals therefore contribute to foreign production networks not only by exporting services directly, but also through the activities of their affiliates abroad.

Manufacturing exports embody substantial services content, including through Mode 3

The importance of services in manufacturing is clearer when services are decomposed by source and mode of supply. Figure 4.5 focuses on the services content of manufacturing gross exports in 2023. It distinguishes domestic services VA, foreign services VA supplied through Modes 1 and 4, and foreign services VA supplied through Mode 3. The results confirm that manufacturing exports rely heavily on services, both domestic and foreign.

For many economies, services account for a very large share of the value of manufacturing exports. Luxembourg records the highest total services content among the countries shown, at 65% of manufacturing gross exports. Belgium, Spain, France, Switzerland, New Zealand, Portugal and the Slovak Republic also record total services content of around 39‑44%. This reflects the growing role of design, logistics, finance, distribution, management, research and development, software, telecommunications and other business services in manufacturing production and export performance.

The composition of services content differs across countries. Domestic services content is especially high in the European Union aggregate (where intra-EU trade is regarded as “domestic”), the United States, New Zealand, Brazil, Spain, France and Israel. This indicates that domestic services sectors provide an important foundation for manufacturing competitiveness.

Foreign services content supplied through Modes 1 and 4 is particularly important in small and highly integrated economies. Luxembourg, Hungary, Ireland, the Slovak Republic, Belgium and Estonia record the highest shares of foreign cross-border services content in manufacturing exports. Foreign services content supplied through Mode 3 is smaller on average, but economically meaningful. Switzerland records the highest Mode 3 foreign services content in manufacturing exports, at around 12% of manufacturing gross exports, highlighting the key role of MNEs in Swiss trade.

Domestic consumption of services involves a different mix of modes of supply across countries

Domestic final demand provides a complementary perspective to export-based indicators. Figure 4.6 looks at how services are domestically consumed across countries. It shows foreign services VA embodied in domestic final demand for services by final mode of supply in 2023. The indicator captures the extent to which households, firms and governments rely on foreign services VA, either through cross-border supply, consumption abroad or Mode 3.

Ireland records the highest total foreign services VA in domestic final demand among the economies shown, at 25% of national VA. Estonia, Latvia, Luxembourg, the Slovak Republic, Lithuania, Croatia, Sweden and Switzerland also record high values. These results point to the importance of foreign services inputs not only in exports, but also in domestic consumption and investment. In smaller open economies, domestic final demand for services is often deeply connected to foreign providers, foreign affiliates and imported digital or business services.

Modes 1 and 4 are particularly important for Ireland, Estonia, Belgium, Luxembourg and Thailand. This likely reflects the role of cross-border business, digital and intellectual property related services in domestic demand. More generally, high Modes 1 and 4 values indicate that cross-border services supply is an important channel through which domestic users access foreign services.

Mode 3 is also highly significant. The Slovak Republic, Latvia, Estonia, Croatia and Lithuania all record high Mode 3 foreign services VA in domestic final demand. This shows that foreign affiliates are important suppliers of services to domestic consumers and firms.

Mode 2 is smaller in most countries but important in specific cases. Iceland has the highest Mode 2 share, followed by Estonia, Luxembourg, the United Kingdom and Norway. This reflects the importance of travel-related consumption and the movement of consumers across borders.