Trade in Service

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AUGUST 2007,FIRST DRAFT

Services provisions in regional trade agreements: stumbling or building blocks for multilateral liberalization? Carsten Fink World Bank Marion Jansen* WTO

Paper presented at the Conference on Multilateralising Regionalism Sponsored and organized by WTO - HEI Co-organized by the Centre for Economic Policy Research (CEPR) 10-12 September 2007 Geneva, Switzerland

The views expressed in this paper are the authors’ own and cannot be attributed to the World Bank, the WTO Secretariat, or WTO Members.

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Introduction A remarkable feature of the recent wave of regional trade agreements (RTAs) is the inclusion of a trade in services component in many agreements. At the end of 2006, the WTO counted 54 such services accords, of which only 5 predate the conclusion of the Uruguay Round.1 The rising interest in services trade agreements reflects a number of developments. First, as tariffs have come down, policymakers have turned their attention to other barriers restricting international commerce. The growth of world goods trade and the emergence of international production networks have highlighted the importance of an efficient services infrastructure—whether in telecommunications, finance, logistics, or legal advice. Market opening in services offers the prospect of performance improvements in services and allows goods producers to draw on multinational service networks in organizing their business. Second, technological progress has vastly expanded the range of services that can be traded crossborder. The well-known outsourcing phenomenon has led to the emergence of new dynamic export industries in services, which hold significant potential for low-wage developing countries. Finally, many governments have transferred the provision of infrastructure services to the private sector, expanding the scope for foreign participation in services. Indeed, services FDI has grown faster than total FDI in recent years, as service providers from high and middle income countries seek out new commercial opportunities in foreign countries. Economists have long worried about the systemic consequences of RTAs. Will these agreements undermine the multilateral trading system—one of the cornerstones of the post-war growth in world trade and rise in economic prosperity? Or will they actually be helpful for stimulating further multilateral integration? This so-called “building blocks versus stumbling stones” debate has so far been mainly confined to the liberalization of goods trade. However, the different nature of services trade warrants separate thinking, which is the objective of this paper. To preview our conclusion, we find that we can be overall more optimistic about the building block properties of services RTAs than in the goods case. However, certain forms of regional integration raise concern about their discriminatory impact, suggesting a disciplining role for the WTO. The paper is structured as follows. After a brief introduction into the nature of trade in services (Section 1), we will review the main features and liberalization accomplishments of recent RTAs in services (Section 2). This review will point to a relatively modest degree of discrimination established in these agreements, for which we offer several political economy explanations (Section 3). With these considerations in mind, we will explore whether services RTAs are more likely to be building blocks or stumbling stones for the multilateral cause (Section 4). We then discuss what role the WTO can play a constructive role in ensuring that RTAs fit comfortably within the multilateral trading system (Section 5). Our final section offers brief concluding remarks (Section 6).

1. (a)

What is trade in services? Four modes of services trade

Services are often seen as intangible, invisible and perishable, requiring simultaneous production and consumption. It is because of the latter characteristic that services trade often requires...
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