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Trade liberalization in the services sectors: a promising competitiveness policy for European countries

In France, like in most Western European countries, the debate on competitiveness is entirely focused on manufacturing industries. The case of services sectors remains in the shadows, even though they undoubtedly are an important source of employment and constitute a clear comparative advantage.
By Cristina Mitaritonna, Matthieu Crozet
 Post, April 19, 2012

In France, like in most Western European countries, competitiveness of the manufacturing industry is a major concern. These countries lost significant market shares during the last decades, and failed to halt the deindustrialization process which destroyed hundreds of thousands jobs. To resist the competitive pressure from emerging countries, decision makers in old industrialized nations have two types of proposals. On the one hand they suggest offensive action, by singing alternatively the praises of wage moderation and investment in research and development and quality improvement. On the other hand, the economic crisis has exacerbated defensive arguments and protectionist rhetoric is increasingly popular. 

The debate on competitiveness, and on the appropriateness of using trade protection measures, is entirely focused on manufacturing industries. The case of services sectors remains in the shadows. This might be problematic. Indeed, services sectors are undoubtedly an important source of employment in developed countries. Most Western European countries have a clear comparative advantage in the production of tradable services. They would certainly benefit from an offensive promotion of trade liberalization. 

Services represent the main part of the global economy. They account for 70% of the world added value and over half of total employment. However, the share of services in total trade is lagging despite having expanded greatly since the 1980s. Services account for only 21% of total international trade (World-Trade-Organization, 2010), partly due to the high level of regulatory protection existing in domestic markets for services. In turn, the high level of protectionism in services is partially due to the fact that they have been only recently included in the bilateral as well as multilateral trade agreements. Their inclusion in the Uruguay Round, led to the General Agreement on Trade in Services (GATS) in January 1995. As a result of the growing role of services in world trade, economists have started to pay more attention to this field.

This is not an easy task. The assessment of the gains from liberalization (through simulations based on Computable General Equilibrium modeling) must rely on accurate measure of the level of protection. And measuring the effective level of protection in services can be challenging, both theoretically and empirically.
One problem lies in the specific nature of services compared to goods. Proximity between producer and consumer and the intangible characteristics intrinsic to services produce different impediments to trade in services from those that apply to goods. These impediments include limitations such as quotas, licences, prohibition of some activities for foreigners, and government regulations intended to reduce market access for foreign firms and/or discriminate in favor of domestic firms. Liberalizing trade in services implies changes to national regulation. From a technical and a political economy perspective, reformulating regulations implies much more than simply cutting a tariff. Moreover, data on services trade and actual policies are scarce, mainly for non OECD countries, and transforming qualitative information into a quantitative measure of protection is difficult. Nevertheless, several attempts have been made to quantify barriers to trade in services.

A recent CEPII working paper by Fontagné et al. attempt to assess the effective level of trade impediments in services. The authors use a very comprehensive approach, going beyond official restrictions. They computed tariff equivalents and revealed protection by comparing real trade in services against a benchmark estimated using an empirical gravity equation. This idea is relatively simple. By estimating a standard trade model on real data, the econometrics can reveal the importance of “missing trade”, i.e. the difference between the observed value of bilateral trade and the value predicted by the model under free trade conditions.
Not surprisingly, the results reveal that trade barriers are very high in services, even though the countries with the lowest levels of protection are the developed economies. The most liberalized sector is Transportation with a 26% tariff protection on average. The most protected is Construction, with an average tariff of 75%. This paper suggests that there is room for intensive trade negotiations in services, including between OECD countries, and even within the EU. Considering their comparative advantages in services, the promotion of trade liberalization in these sectors may be one of the most promising competitiveness policy they can ever imagine. 
This text in a shorter version of the “Focus” of the CEPII Newsletter N°49, 1st quarter 2012.
Trade & Globalization  | Competitiveness & Growth  | Europe 
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