Conceptual Issues and Trends on Trade in Services

Luis Abugattas

JSMP TA Team Leader

National Conference

“Harnessing Services for Sustainable Development: Opportunities and Challenges for Jordan”

21-22 September 2010

Grand Hyatt Hotel, Amman

Content of the presentation

What is trade in services?

Brief overview of trade in services global trends

Benefiting from services trade liberalization

Trade in Services

Defined by “modes of supply”

1. Cross-border trade

2. Consumption abroad

3. Commercial presence

4. Temporary movement of natural persons services providers

Elaborated by Sampson and Snape (1985), Baghwati (1987), modified by Sapir and Winter (1994), incorporated in the GATS

Exporting economy X Importing economy Y

clientprovider

Information (digital bits)

CROSS-BORDER TRADE: MODE 1

InformationBack-office operations

Computer servicesProfessional services

YX

Financial flow: payment

Exporting economy X Importing economy Y

Consumer: natural personmoney

provider client

COMSUMPTION ABROAD: MODE 2

TourismHealth services

Education

YY

X

payment

provider client

CapitalKnow-how

Exporting Economy X Importing Economy Y

COMMERCIAL PRESENCE: MODE 3

XY

Potential in all services activities

Profits/licence fees

Exporting econmy X Importing economy Y

Natural person services provider

provider client

X

y

Remittances

Professional servicesPersonal services

Movement of Natural Persons: Mode 4

Services Trade

A Service can be delivered by any mode of supply

In many cases different modes of supply are involved in a trade transaction

There are positive (complementarities) and negative (substitution) linkages between modes (OECD, 2006).

Barriers to trade in services emerge from “behind the border measures” [domestic regulation, discrimination against foreign providers denial of national treatment, and non-quantitative market access limitations]

Trends in Services Trade

Statistical Limitations

Statistics improving, but no available data by mode of supply [Balance of payments data and FATS]

Level of disaggregation not adequate in many countries

Direction of trade data missing

Methodological developments Manual of Statistics on Trade in Services but few developing countries are implementing

Trade in Services: BOP and FAT(billion US Dollars and %)

Total 2000 2008

Transport 750 9.2 23.5 23.6

Travel 855 10.4 32.0 25.2

“Other” 1685 20.4 44.5 51.2Commercial presence [FATS]

4935 60.0

Total 8225 100.0

Long-term Trends in Trade in Services (Balance of payments data)

Trade in Services: Average growth rate by BOP category (2000-2007)

Computer and information 16.5

Financial 13.0

Insurance 12.6

Other business services 12.0

Communication 10.5

Total services 9.8

Transport 9.0

Construction 7.0

Travel 6.0Cultural/personal 4.5

Sectorial Breakdown of Services Exports [2005-2008]

Developed Developing

Total 81 19

Transport 82 18

Travel 71 29

OtherServices

86 14

As % of world total

Develop Developing

Transport 22 21

Travel 24 41

Other services

54 39

As % of the total by area

Direction of Services Trade Percentage of Total Exports

Importer/

exporter

OEDC Non-OECD Asia/no-0ECD LA/no-OECD

OEDC 80.0 20.0

Non-OECD 54.0 46.0

Asia 42.5 57.5 91.9

LA 85.3 14.7 66.7

Trends in Trade In Services: Global Trade

Services share of total world trade (BOP) has remained practically constant since 1970 (around 20%)

Mayor change occurring in the structure of services trade: ”other commercial services” the most dynamic”

Trade concentrated on commercial presence.

Intra-industry trade [services differentiation] Grubel-Lloyd index high and stable 0.75

Increasing intra-firm trade [trade-FDI linkage]

Trends in Trade in Services: Global Trade II

Dominated by developed countries: 81% of total exports, 86% in “other” services, North-North trade. (EU, Canada 80%, US 65%)

Increasing industry concentration leading to global oligopolistic competition

Accelerated internationalization of firms

Significant levels of state support to domestic firms.

Trends in Services Trade: Developing Countries

Increasing participation in trade. Reliance on travel and transport.

Asia accounts for 76% of total exports of developing countries.

Asia share of total world exports increasing (10.7% in 1980 to 19% in 2008). All other developing regions have lost participation.

High concentration: 12 countries 75% of total exports of developing countries. 9 Asian.

Concentration of exports to the region (except India)

Most developing countries are now promoting services exports. Increased competition, risk of “fallacy of composition”.

Trends in Services Trade: Developing countries

Increasing participation in trade

Asia accounts for 76% of total exports of developing countries.

Asia share of total world exports increasing (10.7% in 1980 to 18.6% in 2007). All other developing regions have lost participation.

High concentration: 12 developing countries 75% of total exports. 9 Asian.

Concentration of exports to the region (except India)

Most developing countries are now promoting services exports. Increased competition, risk of “fallacy of composition”.

Trends in Services Trade: Offshoring

Most outsourcing still domestic: 85-94% of total.

Offshoring market growing, but quantification difficult (157 billion in 2008, OECD).

Concentration: US and UK 70% of purchases.

North-north trade (85% US imports from OECD countries)

Captive offshoring (US 70% of trade intra-firm)

Sellers concentration: 5 countries 84% (India 33%) (Ireland, Canada and Israel 43%).

Opportunities for incumbents (incumbent advantages, agglomeration economies); niches for new entrants (location, cultural, language advantages)

Success depends on flanking policies

Benefiting From Services Trade

Exporting: Potential Sources of Competitive

Advantage

Labor-intensive services (construction, off shoring) Natural-endowment-intensive services (tourism, ports,

shipping) Exploiting market-niche effects (health, offshore finance,

wellness industry) High-end business services [requires developing firm

intangible assets]. Firm internationalization (distribution and restaurant

services) Mode 4 (variety of services)

Benefits from Services Trade Liberalization: Importing

A. Static: Resource allocation efficiency gains: “creative destruction”; Most studies show limited effects [1-2 percent GDP]

B. Dynamic gains: Increasing investment [market-seeking and efficiency-seeking] Firm level and technological upgrading [competition-driven;

and export-driven] Positive spillovers of FDI [absorptive capacity]

Empirical studies are not conclusive about static or dynamic effects: liberalization has not been unambiguously and universally linked to subsequent higher sustainable growth rates, results are highly country specific

Problems In Quantifying The Effects of Services Trade Liberalization

Extrapolation of conventional theory to trade in services albeit significant intrinsic differences (Deardorff,1985; Dee 2001; Brown et.al, 1995; Markunsen, 2005; Mattoo, 2000; Horst and von der Ruhr, 2001).

Difficulties in quantifying “barriers “ to trade in services to be fed into CGE models. Estimation of tariff equivalents. (Dihel & Shepper, 2007)

Modeling results are highly sensitive to assumptions, model specification and data, and fail to adequately capture dynamic effects. Not adequate for policy formulation (Taylor and Von Armin 2007; Dihel, 2002)

Conclusion: Results depend on methodology, are country specific, depend on emergence or not of dynamic effects, effects conditioned to sequence and phasing of trade and other reforms. Still many questions to be answered.

Benefiting From Services Trade Liberalization

Literature suggest that the effects of liberalization depend on:

Speed and sequence of liberalization [between different services sectors].

Sequence of liberalization within specific services activities by mode of supply.

Prevailing regulatory framework [pro-competition].

Overall macroeconomic and business environment.