Services: Exploring the (Still) Understudied Dimension of International Trade

October 12, 2016

Pierre Sauvé and Martin Roy introduce their new book aimed at better understanding trade in services.
Services represent the greatest share of domestic production and employment in a large majority of economies, and account for about two thirds of the world’s foreign direct investment stock. While services have been traded internationally for centuries (for example, via maritime transport or postal services), their tradeability has exploded with recent advances in information and communications technology and the global expansion of the Internet. Services are the backbone of e-commerce, constitute essential inputs for trade in goods, ensure the functioning of global supply chains, and also constitute ‘final exports’ for direct consumption abroad. Basically, services help keep the world connected and underpin economic growth and development.

Despite this, trade in services remains an under-researched area in scholarship on international economics, law, and political economy. The Edward Elgar Research Handbook on Trade in Services, composed of 22 chapters by expert contributors, sheds analytical light on a number of issues, old and new, that confront those interested in the services economy and its increasing salience in international trade and investment.

On the economics side, the book’s contributions underscore key emerging trends and explore the latest research questions. The chapter by Roy (free to read via Elgaronline) highlights recent policy trends in trade in services and points out that governments in both developed and developing countries have engaged in more liberalization than in new protectionist policy measures, including during the latest economic downturn. Chapter 2, Measuring trade in services in a world of global value chains, by Maurer, Magdeleine and Lanz, complements this picture by depicting trends in services trade flows, documenting the growing role of services in global value chains (GVCs).

Chapter 3: Trade costs and global value chains in services by Miroudot and Shepperd provides further analysis of the role of services in GVCs, adducing evidence that trade costs in services are quite high. The authors show how governments’ restrictive trade policies contribute to such costs, and explain how the link between trade restrictions and trade costs varies across sectors. A key finding is that intermediate trade costs are more sensitive to trade restrictions. Given the importance of trade in services in the GVC era, this has centrally important policy implications.

Van der Marel (Chapter 4: Ricardo does services: Service sector regulation and comparative advantage in goods) explores the extent to which policy affecting services may constitute a source of comparative advantage for trade in goods. He shows how countries possessing institutions capable of enacting sound regulatory policies in key service input industries once liberalization has taken place will experience greater ease in exporting goods which are more dependent on such services.

Other fundamental economic issues covered by the book include the impact of preferential services agreements on trade in services (in the Chapter by Shingal), the role of services in enhancing the competitiveness of developing economies (Sáez and Taglioni), and the challenges and opportunities of regulatory reform in service industries (Sáez and Molinuevo).

The Research Handbook’s second section explores a range of legal and rule-making challenges that confront policy-makers in services trade. The section’s seven chapters take stock of the limited degree of judicial activism displayed to date in services trade and the reasons for the stark contrast observed with respect to trade in goods. In his contribution, Leroux assesses two decades of services trade jurisprudence in the WTO, noting that, absent negotiating progress, the vast majority of significant developments under the General Agreement on Trade in Services (GATS) have resulted from WTO Panel and Appellate Body reports. While limited, the jurisprudence has tackled important and basic issues. Asking whether WTO adjudicatory bodies have succeeded in clarifying the areas left grey by the negotiating process, Leroux posits that, on balance, the GATS reveals attributes of quality wine – getting better, if ever so incrementally, over time.

The multilateral rule-making agenda in services, and possibly to a lesser extent the preferential one, remain works in progress. The growth of services trade has further amplified the gap between international rules and reality on the ground. This section of the book delves into a number of these issues. Krajewski’s chapter explores the development of rules for non-discriminatory domestic regulations, a long-standing negotiating item on the WTO agenda, and a key feature in a number of preferential trade agreements. For their part, Hoekman and Mavroidis explore the scope that may exist for the adoption of disciplines targeting the form and substance of standard-setting in service industries. Delimatsis pursues this conversation by looking into issues raised by standardisation efforts in the European Union, particularly in the fields of professional and financial services.

The remaining chapters of this section address some of the paramount ‘new’ topics that are fuelling discussions among trade negotiators and that appear as motivations for a number of recent preferential trade agreements (PTAs). One such issue is the rising influence of state-owned enterprises on trade in services. In their contribution, Hufbauer and Stephenson highlight the important role that SOEs play in the services sector around the world in key sectors and discuss their significance in relation to cross-border trade (GATS Mode 1) and commercial presence (GATS Mode 3). They then proceed to identify some of the major gaps in the WTO and selected PTAs with respect to disciplines on the potentially trade, investment and competition-impairing effects of SOE practices, both domestically and in their international operations.

A second topic of paramount importance in discussions of new trade rules for services pertains to digital trade and, more specifically, to cross-border data flows. Burri documents the impact of the Internet revolution and the expansion of the digital environment, which has both enabled services trade and been enabled by services reforms. The chapter shows how these technological developments have yet to be fully reflected in international economic law, and discusses how and whether WTO rules can accommodate such new realities. The contribution by Tuthill analyses the new trade obstacles that on-line information-oriented service suppliers are facing. Tuthill then reviews the existing and proposed trade rules that industry and governments hope will govern cross-border data flows, including multilateral provisions in the context of the GATS.

The final section of the book addresses a range of political economy challenges that reveal the extent to which services and the process of economic development have become intertwined. For example, Chanda’s chapter highlights the links between demography, trade and migration, and the consequent implications for trade in services through the temporary cross-border movement of labour. The author argues that sending and receiving countries need to actively pursue bilateral labour arrangements as well as broad-based economic agreements that cover services, investment and labour mobility, so as to benefit from their demographic complementarities.

The chapter by Wilson looks at the fundamental, yet understudied, interaction between services trade and competition policy. Looking at examples from his native Pakistan, the author shows how negotiated market opening for trade in services, while necessary, will rarely be sufficient to secure the hoped-for efficiency and consumer-welfare gains.

Berry, Bohn, and Mulder look into the growing involvement of emerging economies in global trade in business services and value chains over the last two decades. They identify contributing factors, and the underlying policy choices, that have facilitated growing developing country involvement in business trade services and their growing integration in GVCs.

Sauvé and Ward, for their part, discuss the WTO services waiver for least developed countries (LDCs). Noting the difficulties in operationalising the waiver, they argue for feasible, mutually acceptable, commercially relevant, and development-friendly advances. To benefit from preferences granted, the chapter posits that LDCs will have to address export difficulties that often have a regional or neighbourhood character, and to tackle their own supply-side constraints with the help of the Aid for Trade initiative.

Preferential trade agreements (PTAs) on services have proliferated over the past 15 years, and present both a challenge and an opportunity for the WTO and its members. VanGrasstek and Mashayekhi explore the reasons for the very different approaches taken by developing countries in the negotiation of such agreements. Meanwhile, Broude and Moses look at services PTAs from a different angle. Using insights from cognitive psychology and behavioural economics, they explore negotiating dynamics in services negotiations, focusing on governmental preferences for ‘negative’ vs ‘positive’ listing, a key structural issue in services agreements.

Gari’s concluding chapter draws attention to the underlying factors that account for the limited successes of multilateral negotiations on trade in services to date and discusses various ways to improve the GATS’ effectiveness. Key factors taken up in this regard relate to the nature of services trade – for example the fact that services restrictions cannot be negotiated as straightforwardly as tariffs -, the emergence of new trading powerhouses, and an increasingly complex trade agenda. Among possible ways forward, Gari suggests that Members willing to move forward on the liberalization of trade in services be allowed to do so within the WTO framework but on a variable geometry basis, whereby negotiations are conducted in an open and transparent manner, and with a view to extending negotiating outcomes to non-participants on an MFN treatment basis, in a manner similar to that used in the WTO’s Information Technology Agreement or negotiations on environmental goods.