Conceptual Issues and Trends on Trade in Services

1. 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

2. Content of the presentation • What is trade in services? • Brief overview of trade in services global trends • Benefiting from services trade liberalization

3. Trade in Services Defined by “modes of supply” • Cross-border trade • Consumption abroad • Commercial presence • 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

4. CROSS-BORDER TRADE: MODE 1 Exportingeconomy X Importing economy Y Financialflow: payment Y client X provider Information(digital bits) Information Back-office operations Computerservices Professional services

5. COMSUMPTION ABROAD: MODE 2 Exportingeconomy X Importing economy Y X client provider Y Consumer: natural person money payment Tourism Health services Education

6. COMMERCIAL PRESENCE: MODE 3 Exporting Economy X Importing Economy Y Profits/licence fees Y X client provider Capital Know-how Potential in all services activities

7. Movement of Natural Persons: Mode 4 Exporting econmy X Importing economy Y Remittances y X client provider Natural person services provider Professional services Personal services

8. 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]

9. Trends in Services Trade

10. 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

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

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

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

14. Sectorial Breakdown of Services Exports [2005-2008]

15. Direction of Services Trade Percentage of Total Exports

16. 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]

17. 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.

18. 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”.

19. 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”.

20. 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

21. Benefiting From Services Trade

22. 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)

23. 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

24. 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.

25. 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.