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 Exports of goods Imports of goods Imports of services Exports of services Trade of Goods and Services, US $ 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 Composition of China's Services Export ( ) Other business services Travel Transportation China’s business services are now growing rapidly, although travel and transportation are the largest exports

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 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?

Many services tend to be skill intensive Source: Amin and Mattoo (2006).

Human capital matters: Evidence across Indian states Source: Amin and Mattoo (2006).

Institutions matter: Evidence across Indian states Source: Amin and Mattoo (2006).

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 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 commitment A. Wide sectoral and modal coverage

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.

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 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 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.