International trade in services

Presented By:Keshav GoyalRoll no. 15MBA (IB) (4th sem)

AGENDA

Introduction

Classification of services.

Modes of trade in services

Services and overall economic performance

Explanation for trade in services

Services and liberalization

Introduction : International trade and investment in services are

an increasingly important part of global commerce.

More and more people are travelling abroad to consume tourism, education, and medical services and to supply services ranging from construction to software development.

In fact, services are the fastest growing components of the global economy and FDI in services have grown faster than in goods over the past decade.

The Growing Importance of Services

Services are becoming the largest sector in most economies

They are important contributors to GDP

In 2010 services contributed on average:

- 72% of GDP in industrialized economies

- 49% of GDP in developing countries (DCs)

They also contribute largely to employment

The Growing Importance of Services (2)

Services play a key role in infrastructure building, competitiveness and trade facilitation

They are also vital inputs into other goods and services

The potential gains from more open service trade are greater than those from liberalizing goods

Classification of Services Proposed by the GATT

1. Business services 7. Financial services

2. Communication services 8. Health services

3. Construction services 9. Tourism services

4. Distribution services 10. Recreational

5. Educational services 11. Transport services

6. Environmental services 12. Other services

Source: Economic Survey 2010-12

Mode of Trade in Services

MODE MEANING EXAMPLE

Mode 1Cross-border trade

Trade takes place from the territory of country A into that of B

- Passing of information by means of fax or email

Mode 2Consumption abroad

Services consumed by nationals of country A in territory of country B

- Tourism- Consumers who cross borders to obtain medical treatment

Mode 3Commercial presence

A service supplier of country A crosses the border to establish and provide a service in country B

- Establishment of a private hospital by a European company in India

Mode 4Movement of natural persons

Temporary movement from country A to B to supply a service

- Doctors moving to another country to temporarily provide their services

Modes of trade defined by GATT

Sales by GATS Modes of Supply:Statistical Approximation

Mode of Supply Proxy rough estimatebillion US$, (%)

1 - cross-border supply

BOP : commercial services exports(excluding travel)

1,000(28%)

2 - consumption abroad

BOP : travel exports

500(14%)

3 - commercialpresence

FATS Statistics: Turnover

2,000(56%)

4 – movement ofnatural persons

BOP : compensation of employees

50(2%)

Source: WTO

1988 90 92 94 96 98

2000

2002

2004

2006

2008

2010

0

50

100

150

200

250

300

350

400

450

0

1500

3000

4500

6000

7500

9000

10500

12000

Exports of Goods and Services, 1980-2002

Services growth GDP growth

(19

80

=1

00

)

Bill

ion

$

Exports of goods and services

Some figures on FDI in servicesFDI in services as grown by 13 percent annually from 1998 to 2008, reaching $4 trillion

In recent years, services accounted for about two-thirds of total FDI flows

Share of services in total inward FDI stock rose to some 60 percent in 2008, from less than 50 percent in 1998

Developing countries’ share of inward FDI stock in services rose from 17 percent in 1998 to 25 percent in 2008

Share of services in FDI

Hong Kong: 93 percentPhilippines: 70 percentThailand: 57 percentMongolia: 41 percentCambodia: 36 percentChina: 31 percent

What explains trade in services?

Two major explanationsTrade based on differences between countries (comparative advantage-based trade)

Trade based on different forms of increasing returns to scale

Comparative advantage based trade

Sources of differencesLabor costs (e.g., call centers)

Natural endowments (e.g., tourism)

Technology (e.g., health services)

Regulation (e.g., financial services)

Price differences create incentives to trade

Trade based on increasing returns

Comparative-advantage based trade cannot explain trade between similar countries

Sources of increasing returns:Fixed costs combined with market niches

Firm-specific intangible assets

Networks

Services and overall economic performance

Share of services in GDP vs. income

10

20

30

40

50

60

70

80

90

4 5 6 7 8 9 10 11

ln(GDP per capita)

Perc

enta

ge s

hare

of s

ervi

ces

in G

DP

Source: Fink (2005)

Explanations for positive correlation

Demand effect:As economies grow richer, consumers spend a larger share of income on services

Supply effects:Increased “domestic outsourcing” of services

Faster productivity growth in goods than in services (Balassa-Samuelson effect)

Services and liberalization

Services liberalization and growth

Source: Mattoo, Rathindran, and Subramamian (2007)

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)

Barriers affecting services trade

Entry restrictions (e.g., public monopolies)

Quantitative restrictions on:Output or market share by foreign providers (e.g., cargo reservation, capacity limitations in bilateral trade)The number of individual service providers (e.g., quotas on the number of foreign workers)

The type of legal entity permitted to provide services (e.g., subsidiaries, branches)

Limitations on foreign equity ownership

Regulatory measures (e.g., qualification requirements, access to networks)

What are elements of successful services liberalization programs?

Phasing out of explicit barriers

Development of regulatory framework to address market failures and advance social objectives

Strengthening of competition policies

Ensure credible and stable policies

Appropriate sequencing of reforms

Examples of RTAs in services

Early agreements: EUNAFTA

Newer agreements:MERCOSURASEANBilateral FTAs: US-Vietnam, Thailand-Australia, Japan-Mexico, Singapore-Japan, many others

Many more service agreements are being negotiated

Example of preferences in services

Bilateral air service agreements: preferential allocation of output quotas

Preferential relaxation of foreign equity limitations (e.g., Thailand-US)

Preferential access to certain regions within a country (e.g., Hong Kong-China FTA)

Preferential recognition of foreign qualifications (e.g., EU mutual recognition)

Thank You