Trade in services—economic considerations and policy implications

2007 China Trade in Services Congress, November 27, Shanghai

Louis Kuijs, World Bank Office Beijing

Outline:

• The determinants of trade in services

• Barriers to trade and the gains from eliminating them

• Policy implications

• Domestic reform considerations for China?

• International negotiations on services

China’s trade in services has grown rapidly, China’s trade in services has grown rapidly, but is small compared to trade in goodsbut is small compared to trade in goods

0

100

200

300

400

500

600

700

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Exports of goods

Imports of goods

Imports of services

Exports of services

Trade of Goods and Services, 1995-2004Trade of Goods and Services, 1995-2004US $ billion

A wide definition of trade

MODES

1. Cross-border Trade

2. Consumption Abroad

3. Commercial

Presence

4. Movement of Natural

Persons

EXAMPLE

Software, insurance or tele-

diagnosis across countries

Hospital treatment or education across countries

Bank, telecommunications firm or hospital sets up subsidiary

Engineer or doctor from B provides services in A

Note: "Other business services" includes: construction, computer and information, communications, government, insurance, financial, royal and license fees, merchandising and other trade related services, operational leasing services, and miscellaneous, business, professional, personal, cultural and technical services.Source: IMF Balance of payments and international investment position statistics August 2006.

0

5

10

15

20

25

30

35

40

45

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

CompositionComposition of China's Services Export (1990-2003)of China's Services Export (1990-2003)

Other business services

Travel

Transportation

China’s business services are now growing rapidly, although China’s business services are now growing rapidly, although travel and transportation are the largest exportstravel and transportation are the largest exports

What is driving trade in services?

Fragmentation of goods

Fragmentation of Services

Hospital service fragmentsCall Centre for customer

service, etc.Medical transcription servicesPayroll managementWeb hosting services /

application service providers (ASPs)

Business Services Exports: the OECD dominates, but developing countries

are catching up

Source: IMF Balance of Payments Statistics; Note: -The “Business Services” category includes Total Services minus Transportation, Travel and Government Services. Alternatively, Business Services consist of: Communication, Construction, Insurance, Financial, Computer & info, Other business, Personal, cultural and recreational services, as well as Royalties and License fees.

11 3 6

58

266

14 4 11

91

375

21 14 16

114

515

19 17 15

130

531

0

100

200

300

400

500

600

Africa and theMiddle East

South Asia LAC East Asia andthe Pacific

OECD

In B

illio

n U

S D

olla

rs

1990 1995 2000 2001

Comparative advantage in services trade

Interplay between:

EndowmentsInfrastructureInstitutions

Given today, but changeable tomorrow?

Many services tend to be skill intensive

Skiil to labor ratios (%)

05

1015202530354045

Source: Amin and Mattoo (2006).

Human capital matters: Evidence across Indian states

Services output and Education: averages over 1980-00

OR

AP

BH

HY KNKR

TN

UPWB

GJ

MPRJ

PJ

MH

0

1000

2000

3000

4000

5000

6000

0 0.001 0.002 0.003 0.004 0.005

Tertiary educated per cpaita

Ser

vice

s o

utp

ut

per

cap

ita

Source: Amin and Mattoo (2006).

Institutions matter: Evidence across Indian states

T&D Loss and Services per capita: averages over 1980-00

BH

OR

TN

WB

PJ

KN

UP

MP

KR

GJ

AP

HY

RJ

MH

R2 = 0.45

0

1000

2000

3000

4000

5000

6000

10 15 20 25 30

T&D Losses (%)

Se

rvic

es

pe

r c

ap

ita

Source: Amin and Mattoo (2006).

FDI has had a direct and indirect effect on services exports

-

2,000

4,000

6,000

8,000

10,000

12,000

- 200 400 600 800 1,000 1,200 1,400 1,600 1,800

FDI in US$ millions

Maharashtra

Tamil Nadu

Uttar P radesh Delhi

Andhra P radesh

West Bengal

Hayana

Karnataka

Positive association between FDI and exports in IT sector

Source: World Bank (2003), based on NASSCOM Data.

Trade barriers in services and gains from removing them

Types of trade barriers used around the world

Tariffs are relatively uncommon. Quotas are pervasive

Limits on the number of foreign firms; limits on percent foreign ownership in banking, insurance, etc.

Foreign providers completely shut out in some sectors (transport within a country)

Foreign exchange restrictions can limit consumption abroad (tourism, education)

Limits on movement of foreign personnel Local content requirements in broadcasting

Trade Barriers (2)

Discriminatory measuresPreferential taxes and subsidiesPreferential procurementPreferential access to essential facilities

Non-discriminatory measuresQualification and licensing requirementsQualification and licensing proceduresTechnical regulations

Successful reform in services is associated with more rapid growth

Linear prediction

1 8.5

-.024

.059

ITA NZL

SLV

PAN

PRT

FIN

ISL

ARG

CHE

ESP

BEL NLD

NOR USA CAN SGP

EGY

FRA

SWE

GRC

GUY

AUS

GBR

AUT

CYP JAM

BOL

DNK

MLT

MWI

CRI

ZAF TUR

MOZ

KEN

IND

MAR

VEN

MEX PHL

NIC CHL

URY KOR PER

MYS

ECU

AGO

THA

HND

COL

TUN LKA

BRA

IDN

DOM

Composite services liberalization index

Growth rate (adjusted for other factors)

Source: Mattoo, Rathindran and Subramanian (2001)

Services reform has an impact on manufacturing productivity

Empirical exercise: relating TFP of Czech firms in manufacturing to a measure capturing progress in services liberalization, weighted by the dependence on services inputs and controlling for other aspects of openness.

Key finding: 10% increase in FDI in each services sector led to a 3% increase in the average productivity of Czech manufacturing firms.

What are the policy challenges?

China’s accession commitmentA. Wide sectoral and modal coverage

Commitments by Mode

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

DC LDC A C C HN DC LDC A C CHN DC LDC A C CHN DC LDC A C CHN

Mode 1 Mode 2 Mode 3 Mode 4

Source: World Trade Organization

China is soon more open than most large developing countries are today

..and in some areas, its commitments go further than those of any other WTO Member.

Scope and Depth of Specific Commitments as a percentage of maximum possible

0

10

20

30

40

50

60

70

Coverage Fully open

High-income countries Large developing nations China

China’s accession commitmentC. Remaining barriers to services trade

Modes 1&2 either fully open or unbound

Mode 4 specified horizontally

Some key limitation found under Mode 3:Form of establishment (e.g., requirement to

from a joint venture)Limitations on geographic scopeLimitations on business scopeRegulatory requirements

China’s accession commitmentD. Some key examples

Far-reaching liberalization of professional services (cross-border, commercial presence)

Opening of financial services to foreign suppliers

Introduction of competition in key infrastructure services (e.g., telecoms, transport)

How are policy reforms best managed?

Emphasis on competition Responding to the regulatory challenge

Making competition work in network-based industries

Asymmetric information in intermediation and knowledge-based services

Pursuing social objectives: achieving universal service

Dealing with adjustment costs Surplus labor in protected industries

Addressing geographic inequalitiesSequencing regulatory reform and trade

and investment liberalization

A key challenge: harnessing trade and investment liberalization to advance social goals

Conflicts between efficiency and equity could arise as, e.g.:

essential services are liberalized services exports increase standards gravitate towards international levels

What are the most efficient instruments to attain social goals in different areas?

What do international negotiations offer China?

Negotiations, multilateral and regional, can be used as a forum for meaningful reciprocity-based

negotiationsbinding and precommiting to liberalization regulatory cooperation

Conclusions Success as producer and exporter of services

depends on endowments of human capital, institutions and infrastructure.

Open, competitive services industries are good for overall productivity and growth

China has room for strengthening regulatory mechanisms and policies to widen access to essential services.

China can use international negotiations to secure better access to foreign markets and lend credibility to domestic reform.