Impacts of the fourth industrial revolution on international trade in services of developing countries

The 4th Industrial Revolution has invented advanced technologies to realize hyperconnections, integrate digitizationphysicsbiology between the world and the digital space, creating new productive forces and relations of production. Therefore, The Fourth Industrial Revolution has been and will bring more and more great impacts to the global economy, especially the international trade industry an area that is receiving significant attention from a large number of countries in the world. Developing countries have taken advantage of the positive effects of this revolution, and have experienced changes in the structure and proportion of international trade in services in recent years. These changes also present new challenges for countries, especially in the context of economic transformation after COVID19. This study will clarify these issues based on previous relevant studies, and propose some recommendations for Vietnam. Keywords: Industrial Revolution, Industry 4.0, international trade, developing countries.

FOREIGN TRADE UNIVERSITYFACULTY OF ENGLISH FOR INTERNATIONAL BUSINESS

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RESEARCH PAPER

Impacts of the fourth industrial revolution on international trade

in services of developing countries

Topic: International Trade

Instructor: M.A Phan Kim Thoa

Ha Noi, May 2022

The 4th Industrial Revolution has invented advanced technologies to realize hyper-connections,integrate digitization-physics-biology between the world and the digital space, creating newproductive forces and relations of production Therefore, The Fourth Industrial Revolution hasbeen and will bring more and more great impacts to the global economy, especially theinternational trade industry - an area that is receiving significant attention from a large number ofcountries in the world Developing countries have taken advantage of the positive effects of thisrevolution, and have experienced changes in the structure and proportion of international trade inservices in recent years These changes also present new challenges for countries, especially inthe context of economic transformation after COVID-19 This study will clarify these issuesbased on previous relevant studies, and propose some recommendations for Vietnam

Keywords: Industrial Revolution, Industry 4.0, international trade, developing countries.

International trade is the purchase and sale of goods and services by companies in differentcountries Consumer goods, raw materials, food, and machinery all are bought and sold in theinternational marketplace International trade allows countries to expand their markets and accessgoods and services that otherwise may not have been available domestically

The 4th Industrial Revolution has invented advanced technologies to realize hyper-connectionbetween the world and the digital space, creating new productive forces and relations ofproduction

Therefore, the industrial revolution 4.0 has been and will bring more and more great impacts tothe global economy, especially the international trade industry - an area that is receivingsignificant attention from a large number of countries in the world, including In order to have anaccurate view of the situation, with a deeper analysis in the case of developing countries, we have

conducted research called “IMPACTS OF THE FOURTH INDUSTRIAL REVOLUTION

ON INTERNATIONAL TRADE IN SERVICES OF DEVELOPING COUNTRIES”.

This research is organized as follows:

SECTION 1: THEORETICAL FRAMEWORK AND LITERATURE REVIEW

SECTION 2: INTERNATIONAL TRADE IN SERVICES OF DEVELOPING COUNTRIES IN

THE CONTEXT OF INDUSTRIALIZATION REVOLUTION 4.0

SECTION 3: RECOMMENDATIONS FOR VIETNAM

The current research is based on available literature and online sources This concept derivesresearch propositions from literature review and desk research of recent business press papers,professional reports, company web pages, and blogs because this subject is relatively new in thetheory of economics and international business We searched through secondary literature withthe combination of two screening terms: ‘industrial revolution’ or ‘industry 4.0’ and

‘international trade’ As for the scientific approach, this research uses a qualitative design of thestudy, the method of indirect observation, cause-effect analysis, predictive synthesis, modeling,induction, and description

During the process of making this research paper, due to the limited amount of time and certain limits in understanding and data collecting, the report may hardly avoid mistakes despite all the efforts We are always willing to receive your comments so our group can improve and completethis paper.

SECTION 1: THEORETICAL FRAMEWORK AND LITERATURE REVIEW

1 Definition of The Fourth Industrial Revolution

1.1 The First Industrial Revolution (1IR)

It happened in 1784, near the close of the eighteenth century (1760 -1840), the time of thebuilding of railroads and due to discovering steam and harnessing it for the mechanical industry.The invention of the first mechanized loom, for example, was a turning point in history

1.2 The Second Industrial Revolution (2IR)

It began in the late 19th century and continued into the early twentieth (1870), which was because

of the huge invention of electricity and the assembly line that enabled mass production Thatleads to the industrial sector speeding up exponentially

1.3 The Third Industrial Revolution (3IR)

The 1960s marked the start of the third industrial revolution which is usually known as thecomputer or digital revolution It was the time of the invention of semiconductors, mainframecomputers in the 1960s, personal computing in the 1970s and 1980s, and the internet (1990s) As

a result, progressive automation became possible

1.4 The Fourth Industrial Revolution (4IR)

By 2014, the world started a new revolution that was built on the digital revolution The FourthIndustrial Revolution is ushering in profound changes in the way we live, and it's all happening at

an unprecedented, breakneck speed

(Rymarczyk, 2021) clarified that 4IR is characterized by a fusion of technologies that combinethe physical, digital, and biological spheres through its Artificial Intelligence: Internet of things,robots, augmented reality, virtual reality, big data, 3D and 4D printing

2 International trade in services

2.1 Definition

Stern and Hoekman (1987) defined international trade in services as ‘occurring when domesticfactors receive income from non-residents in exchange for their services’ The advantage of thisdefinition is that it is not conditional on the location where the service is produced The servicesector is key to economic growth, export competitiveness, and poverty reduction Trade inservices has grown more rapidly than trade in goods, and the share of trade in services in overalltrade has been increasing for much of the last three decades (Olivier Catlanneo, 2010)

2.2 Classification of International Trade in Services

Services are intangible, value-added activities that a company provides to its customers They arethe core of what a company does to create value for its customers and generate revenue Servicesencompass a broad range of intangible economic activities, including transportation, tourism,finance, telecommunications, consulting, software development, education, healthcare, and more

 Import services: Helpman, E (1984) defined that import services refer to the

cross-border purchase of services by a country from foreign sources Importing servicesprovides countries with access to specialized knowledge, expertise, and resources thatmay not be available domestically, thereby enhancing their competitiveness andsupporting economic growth (Sauvé, P, 2002)

 Export services: Export services refer to the provision of services by a country's service

providers to clients or consumers in foreign markets (Helpman, E, 1984) Exportingservices provide considerable opportunity for countries to grow their economic activity,create foreign exchange gains, and support economic development

 Mode of services: The definition of services trade under the General Agreement on Trade

in Services (GATS) is four-pronged, depending on the territorial presence of the supplierand the consumer at the time of the transaction The four modes of supply are as follows(UN Statistics):

 Mode 1: Cross Border

Services that themselves cross-frontiers from one country to another (E.g Distance

learning, consultancy, BPO services)

 Mode 2: Consumption abroad

Services, which are made available within a country for foreign consumers (E.g Tourism,

educational students for students, medical treatment, etc.)

 Mode 3: Commercial Presence

Services supplied by an entity of one country, which is commercially pressed in another

(E.g Banking, hotel, etc.)

 Mode 4: Movements of natural persons

This is a foreign national providing services (E.g doctor, nurse, IT engineer, etc.)

functioning as a consultant, or employee, from one country to another

2 3 Regional trade agreements (RTAs)

 Definition:

Regional Trade Agreements (RTAs) are agreements among countries within a specificgeographic region that aim to promote trade and economic integration among the participatingnations RTAs establish preferential trade arrangements, often granting reduced tariffs and othertrade concessions to member countries, while also addressing various trade-related issues such asinvestment, services, intellectual property rights, and dispute settlement mechanisms RTAs cantake different forms, including free trade areas, customs unions, common markets, and economicunions, depending on the depth of integration and the level of cooperation among membercountries (Hayakawa, 2020)

 Two remarkable RTAs:

The USTR claims that The Trans-Pacific Partnership (TPP) is a free-trade agreement (FTA)between 11 countries around the Pacific Rim: Canada, Mexico, Peru, Chile, New Zealand,

Australia, Brunei, Singapore, Malaysia, Vietnam and Japan The goal of the negotiating process

of the Trans-Pacific Partnership (TPP) Agreement is to create a platform for economic integrationacross the Asia Pacific region The countries participating in the negotiations of the TPP intend todesign a high-quality, inclusive agreement that lays the foundations for economic growth, thedevelopment and generation of employment in the member countries, and that in turn become thebasis for the future Asia-Pacific Free Trade Agreement (FTAAP)

Japan – Mongolia Economic Partnership Agreement (EPA) entered into force on 7 June 2016.The EPA consists of 11 chapters covering topics such as trade in goods and services, customsprocedures and trade facilitation, electronic commerce, investment protection, movement ofpersons, competition, protection of intellectual property, dispute resolution, and the improvement

of the business environment The EPA does not regulate matters related to taxation There iscurrently no double taxation agreement between Japan and Mongolia (Conventus Law, 2017)

International trade holds significant importance for developing nations It facilitates their ability

to extend their markets, get access to international resources, and encourage economic progress(Dunning, J H, 1977) Through international commerce, developing nations can profit fromeconomies of scale, technical breakthroughs, and more competition According to Karsenty, G,(2002), developing nations may diversify their economies, lessen their reliance on small homemarkets, and improve their competitiveness internationally International commerce alsopromotes the exchange of innovation, technology, and information, all of which may aid in long-term sustainable development

 Impacts of the Fourth Industrial Revolution on international trade:

The World Bank Group (Digital Dividends, 2016), in its major study on the implications of thedigital economy for inclusive growth, has observed: Digital technologies have spread rapidly inmuch of the world Digital dividends - the broader development benefits from using thesetechnologies - have lagged In many instances, digital technologies have boosted growth,expanded opportunities, and improved service delivery In practice, it is too difficult to estimatetheir impact on international trade, because of their widely dispersed and indirect growth impacts.Despite these

difficulties, some scientific calculations are approving that the rapid adoption of digitaltechnologies in the economy is beneficial.

The internet enables many small firms to participate in global trade, thus leading to moreinclusion; it enables more products to be exported to more markets, often by newer and youngerfirms Online platforms overcome trust and information problems through feedback and ratingsystems and by offering escrow and dispute resolution mechanisms Easier trade of intermediateproducts encourages further “unbundling” of production processes, not just in the markets forgoods but also for services (Digital Dividends, 2016) The role of the Internet is highlighted inmost works examining the impact of digitalization on trade: the Internet greatly increases firms’potential to produce new goods and services and serve new markets The Internet reducestransaction costs – communication, information, and coordination – through the use of emails,websites, dedicated platforms, and online marketplaces, making it easier for firms to participate

in international trade Online platforms can reduce the matching and information costs that canaffect international trade more than domestic trade, and provide mechanisms such as feedbackand guarantees that improve consumer trust in online sellers (Shawn, 2017)

Other work examines the links between the number of broadband users in a country to its volume

of international trade in goods and services Based on the model researcher concludes that eachcountry’s openness to trade will be affected by expected future growth in broadband use: thetrade- to GDP ratios will increase an additional 6.88 percentage points on average in the high-income countries and an additional 1.67 percentage points on average in the developing countriesdue to further growth in broadband use over the next five years (Riker, 2014)

The discussions around digital trade facilitations comprise the issues of the application of moderninformation and communication technologies (ICTs) to simplify and automate international tradeprocedures Duval & Mengjing (2017) examine the paperless trade 447 measures, included inregional trade agreements (RTAs) Their analysis reveals that the number of paperless trademeasures in RTAs entered into force globally since 2005 essentially doubled, with a largemajority of RTAs now featuring one more measure aiming to exchange trade-related data andinformation electronically In many cases, recent RTAs are found to go further than the WTOTFA in promoting digital trade facilitation and the application of modern information andcommunication

technologies to trade procedures – with the possible exception of e-payment of duties and fees,which is not specifically mentioned in any of the RTAs reviewed.

Mishra (2017) highlights the delicate and complex relationship between international trade andthe Internet: Recent preferential trade agreements (PTAs) such as the Trans-Pacific PartnershipAgreement (TPP) and the Japan – Mongolia Economic Partnership Agreement (Japan –Mongolia FTA) contains legal provisions on cybersecurity, data protection, data localization,consumer protection, net neutrality, spam control, and protection of online intellectual property,intended to facilitate electronic commerce and enable cross-border data flows Many issuesrelated to Internet policy are also central to trade in the digital economy Issues of cybersecurity,privacy, and data protection can not only act as barriers to electronic commerce but also facilitateelectronic commerce – this perspective necessitates a reorientation of legal provisions in tradeagreements

New methods of trading, such as e-commerce, create both new opportunities and new challengesfor traders and policymakers E-commerce promotes the ability of small and medium-sizedenterprises (SMEs) to go from being small players in the domestic market to becoming globalexporters But a variety of impediments in policies, and in the business environment, can prevente-commerce from reaching its full potential (Trade & Competitiveness, 2017) Based on thesurvey of export-oriented firms in the Canadian IT service industry and consultations withindustry associations Dong et al revealed that IT service firms experience strong sales growth andtend to be very positive about their outlook, driven by the solid exports that comprise the majority

of their sales; because of the knowledge-intensive nature of the industry, firms report investing inhuman capital more than in physical capital (Dong et al, 2016)

Towards a stronger and more resilient digital economy, the discussions in the preceding sectionsindicate that international trade agreements are important tools in shaping the future of the digitaleconomy As cross-border data flows are indispensable to the digital economy, international tradeagreements should be equipped to respond to the 448 challenges of cyber sovereignty, frequentlyenforced through disproportionate and burdensome regulatory measures such as data localization,unreasonable cybersecurity requirements, and lack of interoperability of domestic privacy andconsumer protection laws Thus, understanding the linkages and developing mechanisms tosynergize international trade and the Internet is not just desirable, but absolutely vital to create a

robust digital economy Negotiation of international trade agreements enables countries to gain a

greater understanding of common areas of interest and discord, identification of priority areas,and policy rationale behind variable domestic approaches (Mishra, 2017).

Despite the virtues of PTAs of moving faster and easier forward, addressing new pressing issues(such as localization measures), and providing legal certainty, PTAs fail to provide both acomprehensive framework for digital trade and a workable interface with IG rules (Burri, 2016).Reducing trade costs is essential for developing economies to participate in internationalproduction networks and to effectively use trade as an engine of growth and sustainabledevelopment This can be accomplished by tackling non-tariff sources of trade costs andaddressing cumbersome regulatory procedures and documentation requirements Indeed, tradefacilitation including paperless trade has taken increasing importance, as evidenced by the entryinto force of the WTO Trade Facilitation Agreement (TFA) in February 2017 and the growingnumber of regional and subregional initiatives in this area

Ha and Lim (2014) discuss how to facilitate the integration of international supply chain usingpaperless trade in the Asia-Pacific Region They define paperless trade and describe howpaperless trade can improve the efficiency of the international supply chain Based on the review

of 449 paperless trade initiatives and assessment of the paperless trade readiness of economies inthe Asia- Pacific Region, researchers identify critical challenges in facilitating cross-borderpaperless trade and elaborate on how those challenges can be lessened Digitalization offersimmense potential to improve trade facilitation implementation and further reduce trade costs

Figure 1 shows the implementation of trade facilitation as a step-by-step process, based on the

groups of measures included in this survey

Figure 1.

Moving up the trade facilitation ladder toward international supply chains

Source: Trade Facilitation, 2017

Trade facilitation begins with the setting up of the institutional arrangements needed to prioritizeand coordinate the implementation of trade facilitation measures The next step is to make thetrade processes more transparent by sharing information on existing laws, regulations, andprocedures as widely as possible and consulting with stakeholders when developing new ones.Designing and implementing simpler and more efficient trade formalities is next The re-engineered and streamlined processes may first be implemented based on paper documents, butcan then be further improved through information and communications technology and thedevelopment of paperless trade systems (Trade Facilitation, 2017)

Trade facilitation-understood broadly as policy measures that reduce all types of trade costs-is avital area for analysts and policymakers going forward As the recent WTO Trade FacilitationAgreement 450 makes clear, the costs of implementing trade facilitation can sometimes besignificant That is also the case implementation of paperless trade As a result, Aid for Trade andcapacity building to support the reform process have to be an integral part of ongoingdiscussions The key for policymakers going forward will be to combine reformist will withadequate human, technical, and financial resources A strong regional arrangement on cross-border paperless trade facilitation would certainly help in this regard (Estimating the Benefits,2014)

Despite the enormous potential benefits, the use of the Internet is relatively limited in Europe andCentral Asia (ECA) Fewer firms in the ECA countries use the Internet to sell their products andservices compared to other regions The countries in Western and Northern Europe have smallershares of e-commerce sales in GDP than the United States and Japan ECA firms that use theInternet to sell products tend to sell more to domestic rather than foreign markets, missingopportunities to expand their markets And the export of digitally enabled services is particularlylow in many ECA countries (Tan, 2017).

SECTION 2: INTERNATIONAL TRADE IN SERVICES OF DEVELOPING COUNTRIES IN THE CONTEXT OF INDUSTRIALIZATION REVOLUTION 4.0

I IMPACTS OF THE 4IR ON INTERNATIONAL TRADE IN SERVICES IN

DEVELOPING COUNTRIES

The Fourth Industrial Revolution is changing the way businesses operate around the world.Professor Klaus Schwab, Founder and Executive Chairman of the World Economic Forum,described 4IR as a “current and developing environment in which disruptive technologies andtrends such as the Internet of Things, robotics, virtual reality, and Artificial Intelligence arechanging the way people live and work”

In the case of developing countries, which are still more human-oriented and low on technology,they do not seem to benefit much from 4IR In addition, technologies related to the 4IR appear to

be concentrated in a few major nations Despite this, the adoption of 4IR technologies presents achance for economies that are still developing to quicken their development by avoiding some ofthe intermediate stages of industrialization As a result, they can “leapfrog” right into utilizingcutting-edge technology and benefit from some of its impacts

Analyzing the impact of 4IR on international trade in services in developing countries, this part

of the paper is focusing on three of its aspects: scale, structure, and modes of service, as well as

the challenges which developing countries have to face in the domain

1 Promoting an increase in the scale of international trade in services

The scale of international trade in services refers to the volume of cross-border transactionsinvolving the provision of services between nations Before the outbreak of 4IR, the scale ofinternational trade in service in developing countries was generally smaller than that of developedcountries as the services sector in these countries was often less developed and relied moreheavily on traditional industries such as agriculture and manufacturing

The 4IR has had a positive impact on the scale of international trade in services in developingnations New opportunities have emerged for developing countries to participate in global valuechains and export services The scale of international trade in service in developing countries isreflected by its total trade

Figure 2.

Total trade in services in developing economies in the period 2011 - 2021

Source: UNCTADstat (UNCTAD, 2022).

Since 2014 - the outbreak of 4IR, the change in the scale of international trade in service indeveloping countries is gradually increasing with the increasing trend of its total trade

Explaining this trend, the digital technologies of 4IR make “the costs of cross-border servicetrade decrease” (Ismail, 2020) These costs include information, transport, cross-bordertransaction costs, etc

 The key issue is to acquire a smooth and inexpensive flow of reliable information onmarkets and potential partners for exporting or importing goods, current customprovisions, standards required in a given country, and consumer preferences Digitaltechnology, especially online platforms play an enormous role in providing information.The platforms help to overcome the barrier of information asymmetries as regards thequality of goods and reliability of their providers, thus increasing trust and confidencebetween partners A great number of platforms act as intermediaries between buyers andsellers, ensuring that delivered products will be exactly as described, in addition tomanaging buyers’ claims and protecting them against rogue sellers (Tan, 2017, p 8; Linz

et al., 2017, pp 12-26; WTO, 2018, pp 72-77; Manyika et al., 2016, pp 31-36)

 Digital technology makes the conduct of trade negotiations and signing contracts,transport, storing, and tranship goods, provides cross-border clearance, and makespayments easier Online platforms are becoming the largest and most effective marketsfor global trade with their greater transparency and easiness with which one can obtaininformation, and transaction costs are reduced.

 Over the past 20 years, the global trading system has witnessed the great benefits of free electronic transmission The WTO's ban on customs duties on electronic transmissionlines helps reduce service trade costs, thereby helping to develop the scale of internationaltrade in service

tax-2 Changing the structure of international trade in services

The structure of international trade in services in developing countries also undergoes significantchanges since the advent of the Fourth Industrial Revolution

 Digitalization: 4IR means the digitization of the manufacturing sector, and international

trade is also on the run The increasing use of digital technologies in delivering services islikely to enable developing countries to participate more fully in international trade inservices Digital platforms and online marketplaces could connect service providers indeveloping countries with customers around the world, enabling them to offer theirservices more efficiently and at lower costs

 New service sector: The 4IR led to the creation of new service sectors that did not exist

before, such as artificial intelligence (AI), blockchain, and the Internet of Things (IoT)

As competition in international trade in services increases, there may be a greateremphasis on high-value-added services that require specialized skills and expertise.Developing countries that can provide these services could benefit from increased demandand higher prices Developing countries that can build expertise in these areas couldbecome important players in international trade in services

 New demand for jobs: With the introduction of machines and new technologies, notably

AI, many sectors within international trade like manufacturing, logistics and retail, andwholesale, and some of the lower-skilled occupations are at risk of being replaced On the

economies, the change has not been too significant compared to developed economies due

to national economic and political characteristics

 New trade partners: The rise of 4IR technologies opens the door for developing nations

to new trade opportunities with leading countries in these areas, such as the United States,Japan, and the European Union This could lead to new trade partnerships that can buildthe right capabilities in these areas, as well as an economic boost

 Increased competition: The rise of new technologies and service sectors could also

increase competition in international trade in services, making it more difficult fordeveloping countries to compete on price or quality This could lead to a greater need forinvestment in skills and infrastructure to compete effectively

3 Alternating the modes of service

The 4IR has brought significant changes in the modes of service:

 Cross-border is becoming more popular in developing countries thanks to the

development of digital technology Through the Internet, email, and online platforms,various services can be provided by this mode under any circumstances The reason is thatthe main supply areas under this mode are air passenger transport services; transportationand distribution services related to trade in goods (accounting for about one-fifth of globalservices exports) These sectors, thanks to the 4IR, also diversified

 Consumption abroad is heavily influenced by the 4IR The main supply sectors under

this mode are education, travel, tourism, and associated hotels, and restaurant services.Meanwhile, the 4IR brings the presence of AI and digitization - which have been and arebeing applied more and more in these fields For instance, in tourism services, with theadoption of Virtual Reality (VR) and Augmented Reality (AR) technologies, manytourism businesses are capable of offering immersive experiences for tourists, especially

in remote or hazardous locations For example, visitors to national parks or museums canexperience these places without the need to physically be there through virtual tours.Augmented reality can enhance these experiences further by providing tourists withinteractive information about the places they're visiting