The rapid spread of digital technologies is bringing about a reshaping of the global business landscape, in which the roles of services have been diversified in the global value chain  (GVC). As a matter of fact, the share of global manufacturing goods trade, which stood at 80% of total trade in 2006, fell to 70% in 2013 and remained at 76.8% as of 2017. On the other hand, the share of service trade gradually increased from 19.8% in 2006 to 23.2% in 2017.
   Against this backdrop, we attempt to verify how innovating digital technologies can significantly affect trade costs in services by conducting rigorous empirical experiments. Our empirical investigation may contribute to better understanding about global trade patterns currently in action and allow the designing of more practical policy options to take in the digitalizing global economy.
   In this study, we attempt to examine the case with diverse approaches. First, we introduce digital economy strategies launched by major economies, then review ongoing cooperation agenda discussed in the global community, including the WTO, OECD and APEC, in response to digitalization. Next, we examine how manufacturing and service trade costs have changed in Korea from 2000 to 2014, and trade costs between Korea and its major trading partners. Following this, we analyze the determining factors of service trade costs using the gravity model. Next, we analyzed Korea's service trade patterns, characteristics and its global competitiveness in each service sector.
   One of the initial outcomes we found is that the international competitiveness of Korea’s service trade is very low compared to its manufacturing trade. The empirical evidence clearly suggests the weak international competitiveness in Korea’s service trade field is due to low productivity in its service industry. The share of the service sector in Korea is 70.4%, accounting for a larger portion than the manufacturing sector. However, the value added portion of the service industry is 59.2% (as of 2016), and the increase in labor productivity is only 2.4% of the manufacturing industry.
   Next, we analyze and measure the factors affecting the changes in the service trade cost in the digital economy. In the first phase of the analysis, the bilateral service trade costs for five service industries in 43 countries and in the world between 2000 and 2014 are compared with those of domestic transactions and international transactions introduced in Novy (2013). We used a top-down trade cost estimation method with relative difference. In the second stage, the effect of proliferation of digital technology on the measured bilateral trade cost using the gravity model was quantitatively analyzed.
   Our estimations of trade costs indicated the service trade cost value was about 265% in 2000 and estimated at 231% in 2014. On the other hand, the trade cost measure of the manufacturing industry was 151% in 2000, which is lower than the service industry, and estimated at 128% in 2014. These results quantitatively verify the qualitative evaluation of existing studies that point to high service trade costs as a cause of the relatively low share of trade, even though the service industry produces a relatively high added value as compared to the manufacturing industry. The service industry, which has the highest service trade cost by industry, is a distribution service and the trade cost of transportation service is the lowest. Similar to the service costs of the entire service industry, the service cost of each industry gradually decreases in the period of 2000-2014.
   In the analysis of the determinants of trade costs, we used the International Telecommunication Technology Development Index (ITI) provided by the International Telecommunication Union and the Digital Trade Restriction Index (DTRI) provided by the European Center for International Political Economy (ECIPE). The first variable represents the level of digital technology in each country and is most widely used in measuring the information society. The second variable is used to reflect the regulations that accompany digitization. The results show the service trade cost reduction effect of the ICT development index is significantly higher than the reduction effect of the manufacturing trade cost, is continuously increasing during the past 10 years and proved statistically significant.
   We also analyze that the reduction of service and manufacturing trade costs caused by the advancement of digital technologies will not be stronger than the negative effects of digital trade regulation. Therefore, in order to minimize the effect of the DTRI, which greatly exceeds the trade cost reduction effect of the ICT development index and has high statistical significance, it is necessary to establish international norms for relaxation of regulations and standardization of digital trade restriction factors. In particular, when considering the empirical analysis that it is the most effective to mitigate policies that limit the access to finance and market access in the case of service trade, policies to limit foreign direct investment, intellectual property rights, data policy, content access, standards and online sales and transactions and international efforts for standardization should be mitigated. However, the unconditional easing of regulations restricting digital trade would not be a desirable approach, and appropriate regulation and efficiency improvement through institutional maintenance should be considered together.
   More specifically, examining the policy implications of the results of the empirical analysis, the trade cost of the Korean service industry is considerably higher in the service industries and the productivity of digital technologies in the five service industries is at an advanced level. The factor analysis shows that the growth of service trade in Korea is led by growth in the service industry. However, unlike in the US, the effects of trade diversion to third countries were significant, reflecting the competitiveness of the Korean service industry, especially in developed markets, not yet comparable. In order to develop the service industry in Korea, the above-mentioned digital infrastructure should be developed quantitatively, and institutional improvement and regulation should be prioritized to enhance its competitiveness. In particular, it seems to be more effective to improve financial and market accessibility through support policies such as taxes and subsidies to promote the service industry and improvement in government procurement-related policies.
   As a strategy to enhance Korea’s international competiveness in the service industry, this paper suggests firstly improvement of the digital regulatory environment, second, expansion of international cooperation such as by enhancing FTA networks, and third, improvement of R&D operating mechanisms and human resource development.