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Chapter IV — International competitiveness of EU industry
box IV.4: trade in services: definition, sectoral breakdown and
measurement 70
International trade in services involves transactions between residents and non‑residents of an economy. Services
are less tradable than goods. As they are immediately consumed, they cannot be resold. For many services, the
consumer and provider of the service have to be located at the same place.
From a sectoral perspective, the main components of services activities are generally broken down into three
categories grouping together 11 types of services sectors:
1. Transportation
2. Travel.
3. Other services, including: communication services, construction services, insurance services, financial services,
computer and information services, royalties and licence fees, other business services, personal, cultural and
recreational services and government services
There are four modes for the supply of services:
‑ Mode 1 is cross‑border supply, where only the service crosses the border. The change of country can, for
example, be via electronic communication (Internet, telephone, facsimile, etc.). The sectors characterised by
cross‑border supply are: most of transportation, communication services, financial and insurance services,
royalties and licence fees. Parts of certain sectors can involve cross‑border supply: part of computer and
information services, part of other business services, and part of personal, cultural and recreational services.
‑ Mode 2 is consumption abroad, when consumers cross the border. This is the case principally for tourism or
business travel, when individuals go to hotels and restaurants. Part of transportation can also be counted as
consumption abroad (supporting and auxiliary services for carriers in foreign ports).
‑ Mode 3 is commercial presence, when suppliers (firms) cross the border to supply services. A foreign
company will, for example, open branches or subsidiaries in the destination country. Some construction services
involve commercial presence.
‑ Mode 4 is the presence of natural persons when suppliers (natural persons) cross the border to supply
services. An individual who is self‑employed (for example a consultant or a health worker) or an employee (for
instance a construction worker) moves temporarily to the country of the consumer to supply services. This form
of trade is found in the following sectors: part of the computer and information services sector, part of ‘other
business services’, part of the personal, cultural and recreational services sector, and part of the construction
services sector.
In this report, there is a gap between the conceptual classification of trade in services and the data that were used
from the balance of payments statistics. Data on trade in services are more deficient than data on trade in goods.
There are practical difficulties that arise when capturing trade in services. It is complicated to separate goods and
services in the balance of payments. As a result, the latter may be under‑recorded. Moreover, certain transactions
falling under the four modes of supply are not accounted for in the balance of payments estimates of services trade.
Cross‑border trade (Mode 1) is the mode of supply best covered by the balance of payments statistics. Mode 2 —
consumption abroad — is generally well covered as it is represented by expenditures in tourism and business travel.
Trade through commercial presence (mode 3) is accounted for through company surveys (foreign affiliates trade in
services surveys), which are a different type of statistics. The balance of payments takes into account residency rather
than nationality: a service is considered as traded if it takes place between residents and non‑residents. In the case
of trade through commercial presence (mode 3), there are only residents of the country who are involved. Mode 4 —
presence of natural persons — is also badly covered.
70 For more background, see European Commission, United Nations, International Monetary Fund, Organisation for Economic Cooperation
and Development, United Nations Conference on Trade and Development, World Trade Organisation (2002) and WTO (2007).
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