Digital technology and service tradability: evidence from patent innovations and knowledge utilization

Digital technologies such as artificial intelligence and industrial robots have diminished employment opportunities in manufacturing trade, prompting stakeholders to explore alternative tradable sectors that capitalize on low-cost labor advantages. This paper analyzes the impact of digital technology innovations and spillovers on the tradability of services by matching input-output data and patent data from 76 economies spanning from 1995 to 2020. The empirical results indicate that patent innovations in the information industry itself will inhibit the tradability of domestic services, whereas domestic and international digital technology utilizations facilitate it. Given that the positive effects of domestic digital technology spillover outweigh the negative ones, digital technology is poised to comprehensively empower the tradability of services. The impact of different digital technology patents on service tradability exhibits heterogeneity. Information industry patents with low relevance to digital technologies struggle to improve services tradability, while among those with high relevance, data and algorithm patents are more effective than computing power patents in enhancing service tradability. Labor reallocation between the secondary and tertiary industries and the increasing returns to scale in the service sector, are potent mechanisms through which digital technology can empower service tradability. This study provides researchers, policymakers, and entrepreneurs in major manufacturing exporting countries with actionable pathways and knowledge to transition to service trade, navigate merchandise trade tariffs, and sustain labor’s continued access to trade benefits.