Regionalism in Services

Regionalism in Services “Regional Trade Agreements & the WTO” WTO Secretariat, Geneva, November 14, 2003 CARSTEN FINK

Examples of RTAs in services • Early agreements: • EU • NAFTA • Newer agreements: • MERCOSUR • ANDEAN Pact • ASEAN • US bilateral FTAs (Chile, Jordan, Singapore, Vietnam) • More agreements are being negotiated • Post-Cancun proliferation of RTAs?

Why negotiate? • Foster deeper liberalization at home and abroad through reciprocity-based market access negotiations • Enhance credibility of • current trade regime • commitment to future reforms • Regulatory cooperation

Will there be trade preferences? Protection PG PF GATS PM FTAA MERCOSUL T3 T1 T2 Time

Are preferences in services feasible? • Measures affecting services trade are typically not tariff-like instruments, but: • Limitations on entry of firms • Foreign equity limitations • Quotas on outputs and foreign service workers • Requirements regarding the legal form of establishment • Regulatory measures • Can there be exclusionary rules of origin?

Example of preferences in services • Bilateral air service agreements: preferential allocation of output quotas • Preferential relaxation of foreign equity limitations (e.g., NAFTA) • Preferential access to certain regions within a country (e.g., Hong Kong-China FTA) • Preferential recognition of foreign qualifications (e.g., EU mutual recognition)

Welfare effects of trade preferences • Lesson from goods trade: • Trade creation: consumers gain from lower prices • Trade diversion: loss of fiscal revenue, possibly loss of quota rents • Preferential liberalization in services is more likely to lead to welfare gains: • No (static) cost of trade diversion, as measures do not generate benefits for the importing country • “Go with the Living Ism ”?

But gains are larger from MFN liberalization • Non-preferential liberalization offers access to the most competitive service providers • MFN liberalization avoids complexity for negotiators, administrators and businesses • Other gains from trade (economies of scale, more intense competition, knowledge spillovers) are likely to bigger if liberalization is non-discriminatory

And trade diversion can be costly in a different way • Due to the importance of location-specific sunk costs in services: • second-best providers may benefit from first mover advantages • sequence of liberalization matters, benefits from eventual MFN liberalization may be smaller

Why then negotiate regionally? • Political imperative • More efficient bargaining • Negotiations may be less complex • Less scope for free riding on MFN principle • Certain forms of regulatory cooperation are more feasible and desirable within a smaller group of countries (regulatory harmonization, mutual recognition). • Innovation in rule-making

Rules of origin (denial of benefits) • From an economic perspective a liberal rule of origin is to be preferred, but then regional liberalization approaches MFN liberalization • Possible approaches: • Local incorporation • Local incorporation and substantial business operation • Domestic ownership and control

Example 1: Mexico’s NAFTA commitment in financial services FDI in millions of US$ 25,000 US Includes investments of U.S. based European banks Spain 20,000 Holland Canada 15,000 10,000 5,000 0 1994 1995 1996 1997 1998 1999 2000

Example 2: Rules of origin adopted in Hong Kong-China FTA • Detailed Annex on “Definition of Service Supplier and Related Requirements.” Criteria for Hong Kong service suppliers include: • Incorporation and possession of valid operating license • Substantive business operations for 3 years of more (5 years for certain services) • Must have paid profit tax in Hong Kong • More than 50 percent of employed staff must be local residents

What have RTAs achieved so far? • Few commitments beyond status quo • Where regional commitments go beyond GATS, few actual preferences exist • Some innovation in rule-making • Some success in promoting regulatory cooperation. • Will future agreements achieve more?

Regionalism in Services