Copyright © The Author 2007. Published by Oxford University Press.
The political economy of services trade liberalization: a case for international regulatory cooperation?
* World Bank and CEPR, e-mail: bhoekman{at}worldbank.org
** World Bank, e-mail: amattoo{at}worldbank.org
*** Université Libre Bruxelles, BRUEGEL, and CEPR, e-mail: asapir{at}ulb.ac.be
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Little progress has been made since the creation of the WTO on expanding and deepening the coverage of services liberalization commitments. This paper identifies and discusses five hypotheses that may explain the absence of dynamism: (i) technological changes allowing ever more services to be traded cross-border unaffected by policy; (ii) strong incentives to pursue liberalization on an autonomous basis (unilaterally); (iii) perceptions that bilateral or regional cooperation are a good substitute for the WTO; (iv) standard political-economy factors, such as adjustment costs and resistance by incumbents to erosion of rents; and (v) concerns that the WTO will affect the ability of regulators to enforce national norms. We argue that all of these explanations play a role, and that some of these factors significantly impede the scope for reciprocal exchanges of ‘concessions’—the engine of WTO negotiations.
Key Words: GATS • WTO • services trade • trade negotiations • Doha Round
The views expressed are personal and should not be attributed to the World Bank. We are grateful to Rolf Adlung for valuable comments.
1 Four ways or ‘modes’ of engaging in trade in services are distinguished in the GATS: cross-border (mode 1); through movement of the consumer to the location of the provider (mode 2); through longer-term cross-border establishment of commercial presence via FDI (mode 3); and temporary movement of providers (natural persons, as opposed to legal entities) (mode 4).
2 The leader in this area was Ireland, with an annual rate of business services export growth of 31.6 per cent.
3 For example, Arnold et al. (2006a) is a firm-level analysis of the Czech Republic for the period 1998–2003 that finds a positive relationship between FDI in services and the TFP performance of domestic firms in manufacturing. They conclude that the presence of foreign services providers is the most robust services variable affecting TFP in user firms. Arnold et al. (2006b) report similar findings for a sample of African economies.
4 Hoekman and Messerlin (2000) suggest a number of arguments why unilateral liberalization of services is more likely to occur than unilateral liberalization of trade in goods.
5 See Hoekman (2006) and Mattoo et al. (2007). No comprehensive, cross-country, comparable datasets exist that allow a summary assessment of the prevailing levels of services trade and investment barriers.
6 For example, about 40 per cent of all US cross-border service exports go to the EU-25, while some 35 per cent of all EU service exports go to the USA. These ratios are much higher than for goods trade: 21 per cent of US exports of goods go to the EU, whereas the USA accounts for 24 per cent of EU exports. Similarly, some 40–45 per cent of total annual outward and inward FDI flows for the EU-25 go to (or come from) the USA. For the USA, the ratio between the ‘foreign affiliate trade in services’ (FATS) generated by the FDI flows and total cross-border trade in services is much higher in the bilateral relationship with the EU (2:1) than it is for overall US exports of services (1.6:1). These data suggest that the EU and the USA are more open to trade and FDI in services than the rest of the world.
7 A number of studies have shown that there is often a major gap between the actual level of openness of sectors and the level of commitments in the GATS. For example, Barth et al. (2006) compare data on specific GATS commitments for financial services with measures of actual policy in this sector for 123 countries. They conclude that, in practice, applied policy is much more liberal than the commitments made in the GATS.
8 Rush Portuguesa Lda v. Office National d'Immigration.
9 It made commitments in 115 sectors, compared to 110 for the United States and only 37 for India.
10 This index is a weighted average measure of the depth of the commitments on national treatment and market access, the maximum—no limitations and no exceptions—being 100.
11 A conditional revised services offer in June 2005 added little to the initial offer of April 2003 other than extending its coverage from 15 to 25 member states, following the accession of 10 new member states to the EU in May 2004.
12 Whether electronic transmissions are covered by mode 1 and/or mode 2 has never been clarified among WTO members—see attachments 2 and 3 to WTO doc S/L/92. This lack of clarity may inhibit openness vis-à-vis mode 2 also.
13 For example, there are 100,000 chartered accountants in India and 43,000 audit firms, with an average of two chartered accountants per firm compared to an average of between 350 and 1,500 chartered accountants in the ‘big four’ accounting firms in India. In retail distribution, the penetration of supermarkets in India is only 2 per cent, compared to 55 per cent in Malaysia and 36 per cent in Brazil.
14 The first author who introduced this idea in the economics literature seems to have been Fuchs (1968).
15 National treatment under the GATS applies only to those sectors and modes that a member schedules; the same is true for market access. Both are so-called ‘specific commitments’.
16 There is inadequate appreciation of the powerful role that the national treatment obligation will inevitably play in addressing a range of regulatory measures, such as licensing and qualification requirements, which discriminate in effect against foreign services or providers.
17 Where it is politically feasible and economically desirable, members can assume further, clearly separate, obligations with regard to non-discriminatory measures and regulations, such as mutual recognition to lower the costs of regulatory heterogeneity and redundant or duplicative regulatory requirements. That there are potential gains from this is clear, but equally clear is that moving down this path is difficult. The EU illustrates the challenge. Numerous analyses have shown that national regulatory regimes continue to segment EU services markets.
18 The text of the GATS mentions the word ‘sector’ 21 times; it is never mentioned in the GATT (Sapir, 1999). Where the GATT refers to ‘products’, the GATS refers either to ‘services and service suppliers’ or to ‘sectors’.
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