International trade in services Presented By: Keshav Goyal Roll no. 15 MBA (IB) (4 th 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

Mode of Trade in Services

MODEMEANINGEXAMPLE Mode 1 Cross-border trade Trade takes place from the territory of country A into that of B - Passing of information by means of fax or Mode 2 Consumption abroad Services consumed by nationals of country A in territory of country B - Tourism - Consumers who cross borders to obtain medical treatment Mode 3 Commercial 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 4 Movement 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 SupplyProxyrough estimate billion US$, (%) 1 - cross-border supply BOP : commercial services exports (excluding travel) 1,000 (28%) 2 - consumption abroad BOP : travel exports500 (14%) 3 - commercial presence FATS Statistics: Turnover 2,000 (56%) 4 – movement of natural persons BOP : compensation of employees 50 (2%)

Source: WTO Exports of goods and services

Some figures on FDI in services FDI 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 percent Philippines: 70 percent Thailand: 57 percent Mongolia: 41 percent Cambodia: 36 percent China: 31 percent

What explains trade in services?

Two major explanations Trade 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 differences Labor 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 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)

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: EU NAFTA Newer agreements: MERCOSUR ASEAN Bilateral 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)

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