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Setting the scene:

understanding the economic underpinnings of services


trade and investment
Pierre Sauv
World Trade Institute, Bern
pierre.sauve@wti.org
EUROPEAN TRADE POLICY AND INVESTMENT SUPPORT PROJECT (EU- MUTRAP)
Capacity building of Viet Nams negotiators on specific aspects of new generation of FTAs:
trade in services and investment
Hanoi, October 2014

What role will services play in addressing


major societal challenges?

Enhancing human capital [Y = f(K, L, (T))]


Reducing mass poverty
Mitigating climate change, green energies and their financing
Designing intelligent cities and work places
Nurturing the revolution in life sciences
Inventing intelligent forms of mobility (transportation)
Investing in the digital society: E-commerce, E-governance, E-health
Each one of these meta challenges will require major doses of innovation
in product design and delivery platforms, and the efficiency with which
services finance, ICT, business services, architecture, engineering,
design, R&D, education are delivered will be key in addressing these
challenges
Responding to these challenges will also create vast new trade and
investment opportunities, with or without trade agreements.

Key trends
Services trade offers enormous potential for welfare gains; in
the area of temporary labour movement alone, possibly
greater benefits than those flowing from the liberalization of
all barriers to trade in goods
Yet, there has been limited negotiating traction so far,
especially in the WTO (alongside far-reaching unilateral
reforms and deeper PTA commitments)
The political economy of noveltyeven after 25 years, we are
still in discovery mode
and the Uruguay Round is not yet finished in services
thirteen years into the Doha Round
Novelty breads precaution, especially in a world where many
stakeholders seek the protection of regulatory sovereignty

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GATS schedules, Doha offers and actual policy


TZA
IND

TTO

FRA DNK
BE L
ITA
SW E CA N
JP
N
CA N IRL
FRA
DEU
FIN
ES
PG RC
GB
R
DNK
NLD
SW
EAUT
CA N
ITA
FRA
BE
L
ITA JP N
AUS
SW
DNK
EAUT
BE
L
NZL ES PG RC
JP
N
DEU
AUS
FIN
GB
R AUT
NLD IRL
NZL ES PG RC
DEU
FIN
AUS
GB
R NLD IRL
NZL

20

40

60

80

ECU
TTO
PHL
LK A COL
TUN
TUN
SE
N
MAR
PAK
IDN
IND
LKEG
A COL
CHL
KE NIDN
MY
S
CHL
Y THA
GHA
NG A
THA
IND
MNG
MAR
BRA
PAKCHN
CHN
PHL
KOR
VE N
IDN
MEX
PE
TUN
THA
RBRA
MEX
VE N
EG Y
MY S
S AU
PRT
S
KOR
AU
ZAF
JOR
ARG
POL
ZAF ARG
KOR
RUS
TZA MAR
LKJOR
A COL BRA
MEXPOL
L TU HUN PRT
KHM
PAK
PE R VE N
KE
N
PRT
NG A
ARG L TU HUN CZE
KHM
GHA
HUN CZE
SE N
ECU
PE
RZAF
L TU
TTO CZE
UKR
CHL
POL
MNG UKR

10000

20000
30000
GDP per capita, PPP 2006

Restricti ve ness of GATS commitment

Fitted value s

Restricti ve ness of DOHA Offe rs

Fitted value s

Restricti ve ness of actua l p olicy

Fitted value s

Source: Gootiiz and Mattoo (2009)

40000

USA
USA

On the rise: Services to GDP ratios


80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0

73.4
64.6
43.1

44.5 45.8

1990

49.6 46.4

53.6

2008

Low income

Lower middle income

Middle income

High income

Source: World Bank, World Development Indicators

INTERNATIONAL TRADE IS NO LONGER EXCLUSIVELY ABOUT


GOODS CROSSING BORDERS
1600

25%

21%

1400

20%
1200
1000

16%

15%

800
10%

600
400

5%
200

1980=100
0%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Goods

Other Commercial Services

Share Total Services/Goods

Source: World Bank, World Development Indicators

Did I hear servicification?


Expressed on a BoP basis, cross-border trade in
services hovers around a fifth of world trade.
Expressed in value added terms using input-output
data that traces the value of services embedded in
goods and services, trade in services is estimated to
be as high as 45-50% of world trade. The rise of
global and regional value chains has played a
fundamental role in heightening the service intensity
of the world economy.

Key determinants of service sector growth

Q: What meta factors influencing the structure


of the world economy account for the trends
we have just depicted?

A: ?

Key Determinants
Technological change
Production fragmentation
The growth of FDI
The supply of human capital
Changes in demand patterns
Ideology

10

Technological change
Technological innovation, especially (but not only) in
information and communication technologies, was
instrumental in:
Contributing to dramatic cost reductions in information processing;
and
Increasing the tradability of services transactions.

Technological developments have allowed a large and growing


number of developing countries:
To insert themselves into the new international division of labour in
services;
To exploit new sources of comparative advantage; and
To leapfrog entire stages of infrastructural development, notably
through the spread and rapid adoption of mobile technologies
(telephony and internet).
11

The fragmentation of production


The fragmentation of production and the intensification of competitive
pressures have altered the manufacturing process.
Key service functions, e.g. design, accounting, after sales services,
human resource management, that used to be performed within
manufacturing firms, are today outsourced, including on a crossborder basis.
This has led to a secular drop in the share of manufacturing in GDP and
employment and a commensurate rise in the share of services.
The rising strategic importance of logistics in the management of
supply chains in just in time delivery patterns is illustrative of the key
role of services in manufacturing efficiency.
Similar patterns of fragmentation and outsourcing are today at play in
service industries, e.g. professional services, finance, travel and
tourism, are increasingly relying on remotely supplied services.

12

The growth of foreign


direct investment
The growth FDI has far outstripped that of domestic output
and international trade in recent decades, making crossborder investment the most powerful vector of globalisation.
Two successive FDI waves have contributed to the
internationalisation of the service economy:
Starting in the late 1950s, the rise of the multinational firm
encouraged service suppliers to follow their manufacturing clients
abroad (pull factors); and
More recently, service industries have been pursuing their own
(endogenous) internationalisation strategies in an environment
characterised by trade and investment liberalisation, privatisation and
pro-competitive regulatory reforms (push factors).

13

The supply of human capital


Service activities typically imply physical (human) contact and proximity
between suppliers and consumers.
The service economy is diverse with segments of low-skill and low pay
activities alongside (more important) segments of high-skill and high pay
activities. The worlds richest economies are all service economies.
Services liberalization typically entails a rise in the demand for high-skilled
workers, driving up wages in these sectors and affecting overall income
distribution (strong returns to higher education)

To sustain high productivity growth, service-driven economies need to


devote increasing attention to the quality of human capital and to life-long
learning.
This has fed strong growth in cross-border trade and investment in
education and training services. More MILE students needed, please!
14

The supply of human capital (3)


Through international labour arbitrage, the increasing supply
of skilled workers from developing countries has vastly
increased competitive pressures in what is becoming a global
labour market in many sectors.
In turn, this has increased the importance of managing human
mobility, particularly skilled labour movement, including via
trade agreements (through commitments on temporary
labour mobility).
It has also raised controversy linked to migration and whitecollar job displacement in many advanced industrialized
countries, raising concerns of a service sector race to the
bottom (e.g. Polish plumbers and Indian software engineers).

16

Changes in demand patterns


Services are highly income elastic.
Rising incomes are closely associated with a rising
demand for various services education, health,
travel, entertainment
The globalisation of trade and investment leads to an
increasing degree of convergence in consumer tastes
(and hence demand) via the emergence of global
brands and their advertising, global retailers and
distributors + logistics )

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Ideological shifts
The collapse of centrally-planned economies and the rise of
the Washington consensus emphasising market-friendly
trade and investment policies resulted in a marked shift in
attitudes towards the boundary between the market and the
state.
The period since the late 1980s has witnessed a sustained
withdrawal of the state as owner-supplier of many services
and its emergence as a regulator of services, responding to
market failures and assuming the role of competition police in
newly-competitive markets.

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Ideological shifts (2)


The profound reassertion of governmental conduct in service
industries led, in turn, to a worldwide wave of privatisation,
investment liberalisation and the emergence of procompetitive regulatory regimes in key service industries.
All of the above developments have contributed to the
internationalisation of the service economy.
An interesting question for the future is whether and to what
extent the recent financial crisis and the strongly
interventionist forces it has unleashed constitute a cyclical or
structural reversal of the above trends.

19

A priori expectations
about service sector reforms
The gains from liberalising services may be
substantially greater than those from liberalising
trade in goods.
Why is this so?
Because current levels of protection are higher in services
and
Spill-over benefits result from the oft-required movement
of capital and labour
20

The key role of services as intermediaries


Infrastructural services (producer services)
such as energy, telecommunications, finance
and transport are crucial determinants of
overall economic efficiency and growth
Increasing focus on servicification, showing
the rising services content of services in
agriculture, mining, manufacturing or other
services (using input-output analysis)

A priori expectations
Additional gains from trade liberalization are
associated with the fact that services protection
tends to rely on quota-type restrictions, which
tend to be:
Less-transparent (involving administrative
discretion in licensing decisions for instance)
More distortive of competition and
Less economically efficient (mostly nonrevenue bearing) than tariffs in merchandise
trade.
24

Defining characteristics of services


Intangible
Non-storable
Intermediates
Protected behind borders
Highly regulated
Diverse

33

Intangible
What is the value of a service? This is arguably harder to
assign and measure than for physical goods.
Data limitations at both the national and international levels
are pervasive in the services field.
Weak data means that the predictive value of economic
models of services reforms is itself weaker.
Can you negotiate what you cannot properly measure? Weak
data induces negotiating precaution, especially on the part of
developing countries.
Negotiating implications: lack of precise data inhibits the
quest for workable emergency safeguards provisions in
services trade (need to document import surges and establish
causation/injury).

34

Non storable
Unlike goods, the simultaneity of production and consumption
distinguishes many services transactions.
Yet, we observe the increasing commoditization of many services
that are embedded in goods or stored and delivered electronically.
There remains, nonetheless, a critical need for factor mobility, and
its complex political economy in home and host countries:
Movement of capital remains controversial in many host
countries, especially developing countries; and
Movement of labour (for work purposes) is resisted in most
recipient countries, especially (but not only) in developed
countries.
Definitional and negotiating implications: non-storability alerts us to
the need to adopt a modal approach to defining services trade,
with two modes of supply Modes 3 and 4 focusing specifically on
factor movements.
35

Intermediates
Services are inputs into all that a nation produces, brings to
market, trades or invests in.
This is arguably the most central insight by far, with farreaching implications for policy design and engagement in
trade negotiations.
An inefficient service sector acts like a prohibitive tax on
economy-wide performance.
Services trade policy should thus be designed like that
affecting imports of capital goods.
Gains from trade come from both imports and exports, such
that countries may have an incentive to engage in
negotiations to secure access to (or reduce the price of) key
inputs that may be lacking or that are inefficiently produced
at home.
36

Protected behind borders


Domestic regulation, not tariffs, is the main instrument of protection in
services.
Services negotiations are thus akin to dismantling non-tariff barriers:
experience teaches us that this is slow and ponderous.
Absent a tariff/border tax, national treatment could not be a general
obligation in services trade (i.e. applied without exceptions as in the
GATT).
While a general obligation under GATS, even MFN is subject to exceptions
in services trade (unlike in GATT).
Competition in services markets is very often quantitatively constrained:
the maintenance of quantitative restrictions is allowed under GATS
whereas it is outlawed under the GATT.
The regulatory intensity of services trade heightens the importance of
disciplines on transparency.

37

Highly regulated
The ubiquity of market failure in the provision of services
justifies the high level of domestic regulation found in
services markets.
There are four main types of market failure in services
trade:
Monopolies and oligopolies (especially prevalent in networkbased industries);
Information asymmetries (finance/prudential standards and
professional licensing regimes);
Externalities (transportation and environmental services, cultural
diversity); and
Universal services/public goods (health, education).

38

Highly regulated (2)


The trade effects of the domestic regulatory response will vary depending
on the type of market failure:
Oligopolies/monopolies: need to correct the scope for access inhibiting
conduct at the source, e.g. Reference Paper on Basic Telecommunications;
For the three other types of market failure: need to ensure that legitimate
regulatory objectives are achieved in the least trade-restrictive manner
whenever possible, so-called efficient regulation;
A key aim of trade disciplines is thus to ensure proportionality between
regulatory objectives and the means to achieve them:
Example: examination rather than re-qualification in professional
licensing; and
Importance and controversial nature - of the GATS Article VI:4 work
programme on the development of a necessity test for services trade.

39

Diverse
Complex political economy: industry is usually closer to sectoral
regulators than to trade ministries; regulatory agencies can be powerful
political actors.
Limits to reciprocal bargaining as a result of cross-country differences in
specialization patterns.
Services negotiations entail the need to master many different
regulatory languages and bureaucratic cultures (challenge of interagency coordination).
Building user coalitions may also be needed to overcome producer
resistance to market opening:
Financial industry lobbied hard for telecommunications liberalisation in
Uruguay Round; and
Manufacturers/distributors lobby for more liberal logistical/transportation
services.

Acknowledging the need for sectoral specificity dual architecture of


GATS: horizontal disciplines and annexes addressing sectoral specificities.

40

Negotiating issue
Modes of supply

Treatment in GATT

Treatment in GATS

Cross-border ; limited coverage of


investment matters (TRIMs); no
inherent need for factor mobility
in goods trade

Inherent need for addressing


factor mobility in services trade;
reliance on four modes of supply:
cross-border supply; consumption
abroad; commercial presence;
movement of natural persons

Quality of data, measurement, Comprehensive, disaggregated


robust
modelling

Partial, aggregated, weak


Problematic for emergency
safeguard determination

National treatment

General obligation, no exceptions

A la carte in scheduled sectors and


modes, subject to limitations;
right to not schedule

Most-favoured nation
treatment

General obligation without


exception

General exception subject to one


time exception upon GATS entry
into force or accession; with a
weak/non-credible sunset clause

Quantitative restrictions

Prohibited; per se offense

Allowed, subject to listing in


scheduled sectors and modes

Diversity

One size fits all; common rules to


all sectors subject to goods
disciplines

Co-existence of horizontal and


sector-specific disciplines in
annexes
41

Key patterns in world services trade,


GATS commitments and DDA
negotiating offers

42

Sales by GATS Modes of Supply

Source: WTO estimates.

43

WTO Members share in world commercial services


trade (excluding intra-EU(27)), 2012

44

Structure of Commercial Services Exports


by Region, 2011

45

na
nc
ia
l

is
m

ur

43%
41%
41%

44%

ca
tio

46%

du

49%

Developed
Developing and Transition

81%
78%

100

58%
54%
80

39%
39%
60

# of Members

95%

H
ea
lth

B
Te
us
le
in
co
es
m
s
m
un
ic
at
io
n
C
on
st
ru
ct
O
io
th
n
er
Tr
an
sp
or
R
t
ec
re
at
io
na
l
A
ir
Tr
an
sp
or
E
t
nv
ir
on
m
en
t
D
O
is
th
tr
ib
er
ut
C
io
om
n
m
un
M
ic
ar
at
iti
io
m
n
e
Tr
an
sp
or
t

Fi

To

Sectoral distribution of current


GATS commitments (current)
160

140

120

71%

40

20

46

To
ur
is
m
R
ec
re
M
at
ar
io
iti
na
m
l
e
Tr
an
sp
or
A
t
ir
Tr
an
sp
O
th
or
er
t
Tr
an
sp
or
t

ea
lth

B
Te
us
le
in
co
es
m
s
m
O
un
th
er
ic
at
C
io
om
n
m
un
ic
at
io
C
n
on
st
ru
ct
io
n
D
is
tr
ib
ut
io
n
Ed
uc
at
io
En
n
vi
ro
nm
en
t
Fi
na
nc
ia
l

Proportion of Acceding Members with


Commitments in Selected Service Sectors

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

47

Nature of GATS Market access


commitments (all Members)
100%
90%
80%
70%
60%

Unbound
Partial
Full

50%
40%
30%
20%
10%
0%
Cross-border

Consumption Abroad

Commercial Presence

Mode
48

Understanding the nature of market


access commitments
Mode 1 trade (cross-border supply) is the least committed of three modes shown
in the previous figure (highest share of unbound commitments), reflecting the
relative discomfort of host countries to allow the cross-border supply of services
over which they have little or no jurisdictional reach. It also reflects the fact that
many services cannot be meaningfully supplied on a cross-border basis.
Mode 2 trade (consumption abroad) is the mode of supplying services with the
highest share of full commitments (i.e. no limitations on market access). This
reflects specific sectoral realities, e.g. travel and tourism, where few barriers are
maintained, as well as the sheer technical difficulty of enforcing restrictions on the
sovereign choice of consumers to purchase services while abroad.
Mode 3 trade (commercial presence) reveals two important realities: it is the
mode of supply with the lowest share of unbound commitments, reflecting the
general desire of WTO Members to receive greater FDI flows. But it is also the
mode of supply with the highest incidence of partial commitments, reflecting the
fact that FDI in services is subject in most countries to a large number of
restrictions even as FDI is allowed.

49

Restrictiveness of service trade/FDI policies


by income groups

Index of restrictiveness

60.0

56.6

50.0

40.6

40.0
30.0

24.0
17.3

20.0
10.0
0.0

Low income Lower middle Upper middle High income


Source: Gootiiz and Mattoo (2009)

70

STRI by p.c. income


60

IND

50

PHL
IDN

MYS

40

CHN
EGY
TUN
THA

SAU

30

JOR
LKA
TZA

FRA

MAR

VENMEX
RUS

20

KEN

10

PAK
KHM
SEN
GHA
NGA
MNG

BRA
ZAF
PER
UKR
COL

PRT

KOR

CZE

ARG

LTU
POL

ITA
GRC
ESP

NZL

TTO

BELDNK
CAN
AUT
DEU
JPN GBR
SWE
FIN
AUS

NLD

IRL USA

CHL

ECU

HUN

10000

20000
30000
GDP per capita, 2007

Note: GDP per capita, PPP (constant 2005 international USD)

Source: Gootiiz and Mattoo (2009)

40000

Restrictiveness by sector
100.00
90.00
80.00
70.00

Fin/Serv

60.00

Telecom

50.00

Retail

40.00

Transport

30.00

Professional

20.00
10.00
0.00
Low
income

Source: Gootiiz and Mattoo (2009)

Low er
middle

Upper
Middle

High
income

Services Trade Restrictiveness


by Sector and Region

Banking Services: STRI by Regional Groupings


GCC

44.78

SAPTA

39.24

ASEAN

36.90

EAC

30.16

MERCOSUR

28.90

TPP

27.81

NAFTA

17.97

OECD

EU

6.84

2.69

Insurance Services: STRI by Regional Groupings


GCC

60.00

SAPTA

36.32

ASEAN

31.67

TPP

26.39

MERCOSUR

24.66

NAFTA

21.13

EAC

EU

OECD

20.68

13.46

12.30

Fixed-line Telecommunications Services:


STRI by Regional Groupings
GCC

75.00

SAPTA

50.00

ASEAN

37.50

NAFTA

33.33

TPP

30.56

MERCOSUR

30.00

EAC

25.00

OECD

EU

12.07

3.57

Mobile Telecommunications Services:


STRI by Regional Groupings
GCC

50.00

SAPTA

40.00

ASEAN

37.50

EAC

35.00

TPP

27.78

NAFTA

25.00

MERCOSUR

20.00

OECD

EU

11.21

3.57

Air Transport (Intl) Services:


STRI by Regional Groupings
SAPTA

57.76

EAC

54.76

GCC

48.50

MERCOSUR

38.76

EU

31.43

ASEAN

30.63

OECD

26.21

TPP

25.84

NAFTA

21.27

Retail Distribution Services:


STRI by Regional Groupings
GCC

45.00

ASEAN

33.33

SAPTA

30.00

EAC

15.00

TPP

11.11

OECD

7.76

EU

7.14

MERCOSUR

NAFTA

5.00

0.00

Maritime Transport (Intl) Services:


STRI by Regional Groupings
ASEAN

37.08

NAFTA

35.83

SAPTA

33.75

TPP

27.22

GCC

17.00

OECD

16.15

MERCOSUR

8.13

EU

EAC

6.00

0.00

Accounting and Auditing Services:


STRI by Regional Groupings
ASEAN

61.67

SAPTA

52.50

GCC

43.00

OECD

42.24

EU

40.00

NAFTA

38.33

EAC

38.00

MERCOSUR

37.00

TPP

36.67

Legal Services: STRI by Regional Groupings


ASEAN

68.48

SAPTA

66.16

GCC

62.32

EAC

52.84

NAFTA

50.83

TPP

48.52

OECD

48.37

EU

46.09

MERCOSUR

46.00

Thank you!
Pierre Sauv
pierre.sauve@wti.org

Contact :
EU-MUTRAP Project Management Unit

1203, 12th Floor, Office Building, Hanoi Tower,


49 Hai Ba Trung, Hoan Kiem, Ha Noi
Tel: (84 - 4) 3937 8472

Fax: (84 - 4) 3937 8476


Email: mutrap@mutrap.org.vn
Website: www.mutrap.org.vn

(Training materials are available on this Website)

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