Transcript Slide 1

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,
but is small compared to trade in goods
US $ billion
Trade of Goods and Services, 1995-2004
700
600
500
Exports of goods
400
300
Imports of goods
200
100
0
Imports of services
Exports of services
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
A wide definition of trade
MODES
EXAMPLE
1. Cross-border Trade
Software, insurance or telediagnosis across countries
2. Consumption Abroad
Hospital treatment or
education across countries
3. Commercial
Presence
Bank, telecommunications firm
or hospital sets up subsidiary
4. Movement of Natural
Persons
Engineer or doctor from B
provides services in A
China’s business services are now growing rapidly, although
travel and transportation are the largest exports
Composition of China's Services Export (1990-2003)
50
Transportation
45
40
35
30
Travel
Other business services
25
20
15
10
5
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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.
What is driving trade in services?
Fragmentation of goods
Fragmentation of Services
Hospital service fragments
 Call Centre for customer
service, etc.
 Medical transcription services
 Payroll management
 Web hosting services /
application service providers
(ASPs)
Business Services Exports: the OECD dominates,
but developing countries are catching up
600
1990
1995
2000
2001
515
531
In Billion US Dollars
500
400
375
300
266
200
130
114
91
100
58
21 19
11 14
3
4
14 17
6
11 16 15
0
Africa and the
Middle East
South Asia
LAC
East Asia and
the Pacific
OECD
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.
Comparative advantage in services
trade
Interplay between:
Endowments
 Infrastructure
 Institutions

Given today, but changeable tomorrow?
Source: Amin and Mattoo (2006).
s
tals
icals
n ess
ing
Tele
com
Bank
& dw
e llin g
s
Food
Tra d
e& H
otels
t ser
vices
Ch em
p arts
Pape
r
Tra n
sp or
t
Tans
por
Busi
c me
Meta
l p ro
d uct
Basi
Text
iles
Mine
r als
er
oduc
ts
rag e
s
Le at
h
Text
ile pr
Beve
Wo o
d
Many services tend to be skill
intensive
Skiil to labor ratios (% )
45
40
35
30
25
20
15
10
5
0
Human capital matters: Evidence
across Indian states
Services output and Education: averages over 1980-00
Services output per capita
6000
MH
5000
TN
4000
KR
AP
3000
GJ
RJ
OR
1000
HY
KN
WB
MP
2000
PJ
UP
BH
0
0
0.001
0.002
0.003
Tertiary educated per cpaita
Source: Amin and Mattoo (2006).
0.004
0.005
Institutions matter: Evidence across
Indian states
T&D Loss and Services per capita: averages over 1980-00
6000
MH
Services per capita
5000
GJ
PJ
4000
TN
KR
AP
KN
3000
HY
WB
RJ
MP
2000
OR
UP
BH
R2 = 0.45
1000
0
10
15
20
25
T&D Losses (%)
Source: Amin and Mattoo (2006).
30
FDI has had a direct and indirect
effect on services exports
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 measures
Preferential taxes and subsidies
 Preferential procurement
 Preferential access to essential facilities


Non-discriminatory measures
Qualification and licensing requirements
 Qualification and licensing procedures
 Technical regulations

Successful reform in services is associated with
more rapid growth
Linear prediction
GUY
.059
DNK
SW
E
SLV
GBR
NOR
USA
ISL
Growth
rate
(adjusted
for other
factors)
NIC
BRA
IND
CRI
DOM
MLT
MOZ
COL
THA
URY
PER
LKA
TUN
MAR
TUR
ZAF
JAM
CYP
KEN
SGP
ARG
CHL
PAN
MW I
HND
VEN
MYS
CAN
BEL
FRA
AUT
FIN
ESP
AUS
ITA
NLD
EGY
BOL
KOR
PRT
GRC
PHL
MEX
NZL
CHE
ECU IDN
AGO
-.024
1
Composite services liberalization index
Source: Mattoo, Rathindran and Subramanian (2001)
8.5
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 commitment
A. Wide sectoral and modal coverage
Commitments by Mode
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
DC
LD C
AC
Mode 1
C HN
DC
LD C
AC
Mode 2
Source: World Trade Org an izatio n
CHN
DC
LD C
AC
CHN
Mode 3
DC
LD C
AC
CHN
Mode 4
China is soon more open than most
large developing countries are today
Scope and Depth of Specific Commitments as a percentage of maximum
possible
High-income countries
Large developing nations
China
70
60
50
40
30
20
10
0
Coverage
Fully open
..and in some areas, its commitments go
further than those of any other WTO
Member.
China’s accession commitment
C. 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 scope
 Limitations on business scope
 Regulatory requirements

China’s accession commitment
D. 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




Dealing with adjustment costs



Making competition work in network-based
industries
Asymmetric information in intermediation and
knowledge-based services
Pursuing social objectives: achieving universal
service
Surplus labor in protected industries
Addressing geographic inequalities
Sequencing 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
negotiations

binding 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.