Impediments in Services Trade Marrakech 16-03-2005 The impact of policy heterogeneity on trade and...

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e

Marrakech 16-03-2005

The impact of policy heterogeneity on trade and direct investment in services

Arjan Lejour, Henk Kox

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Frankenstein visits Lisbon

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Why so little trade in services?

Technical reasons: ► most service products cannot be shipped in boxes ► physical proximity of service producer and consumer often

required

Alternative international supply form: setting up a local subsidiary (FDI)

Regulation-based trade barriers► Directly trade barriers (non tariff)► Non-tariff barriers caused by regulation of service markets

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Regulation-based trade barriers for services

Many different types► additional diplomas, certificates, licenses, requirements on input

use, marketing, local professional insurance, membership of professional association, juridical form, etc. (EC, 2002)

► common element: qualification costs

Different motives for regulations: ► ensure quality of the service or ► reliability of the service provider► protect incumbent firms► satisfy special domestic interest groups

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Nature of regulation-caused trade cost barrier

Qualification costs for service providers: mainly fixed costs

Form an entry barrier that also affects domestic service providers

Like all fixed costs, regulation-caused costs could be a source of scale economies...... if borders were open!

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Main barrier for service trade: not regulation as such but regulation heterogeneity

Each country regulates in a different way Foreign service regulation comes on top of

regulation in home market Causing fixed compliance costs, specific for that

export market Compliance costs are independent of firm size →

press hardest on SME

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Costs of regulation heterogeneity

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


The effects of regulation heterogeneity on trade and FDI

Prior work: OECD researchers developed relative measures of regulation intensity level per country (Nicoletti et al.)

They found negative impacts of regulation levels on bilateral trade and FDI in services

Problem with levels: two countries with same regulation level may have very different regulations in place

► causes additional costs for exporters

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Indicator for bilateral policy heterogeneity

For explaining bilateral trade and direct investment patterns we need a quantitative measure for bilateral policy heterogeneity

Use OECD International Regulation database► Database: 1600 regulation items ► Selection of 200 items in product market regulation

For each regulation item pair-wise comparison of countries► yields a matrix of bilateral indicators for policy heterogeneity

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Refinements

Heterogeneity indicator: ► an indicator for regulation-caused NTBs► increases in the level of policy heterogeneity between countries► specific for each country pair

Decomposable for separate regulation domains:► Barriers to competition ► Administrative burdens on startups ► State control ► Regulatory and administrative opacity ► Explicit barriers to trade / investment

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Bilateral commercial services exports (ln), 1999-2001, 480 obs

TLS/SUR Country of origin Of Destination

GDP org. 0.85***

GDP dest. 0.73***

Distance -0.97*** -0.97***

Language -0.50*** -0.50***

PMR org -0.48***

Entr. Barr dest -0.02

Het. Start ups 0.83*** 0.83***

Het. Competition -2.66*** -2.66***

Het. reg. & adm. -0.21 -0.21

Het. State 0.04 0.04

Het trade&inves -0.22 -0.22

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Results for trade regressions

"Traditional" gravity variables:► all were significant and had the expected signs

Heterogeneity in market regulation has a strong negative impact on bilateral trade in commercial services

► strongest effect: sub-indicator for 'barriers to competition'

Several methods (OLS, FE, TLS / SUR) used for testing robustness

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Bilateral direct investment, 1999, 252 obs

TLS/SUR Country of origin Of Destination

GDP org. 0.98***

GDP dest. 0.68***

Distance -1.18*** -1.18***

Language -0.07 -0.07

PMR org -0.92***

FDI restrictions -9.33***

Het. Start ups 0.84 0.84

Het. Competition -3.46*** -3.46***

Het. reg. & adm. -0.61 -0.61

Het. State -2.50*** -2.50***

Het trade&inves 1.57*** 1.57***

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Results for bilateral FDI

Non-policy variables: ► gravity variables all significant and expected sign ► Technology variable (service productivity in origin country):

significant positive effect

Heterogeneity in market regulation has significant negative impact:

► strongest for regulation domain "Barriers to competition“► and FDI restrictions

Some policy heterogeneity domains affect choice between exporting and FDI

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Policy context:

EC (2004): new proposals that should boost internal service market by 2010. Principal instruments:

► reduce regulation heterogeneity► Country of origin principle► abandon discriminating regulations► single point of contacts for foreign service firms

Use our regression results for quantifying possible effects of EU proposals

Close reading of proposals and establish their probable impact on heterogeneity

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Impact of proposed EU directive on heterogeneity indicators

Component of regulation Reduction due to EU directive

Regulatory and administrative opacity 66 - 77 %

Explicit barriers to trade and investment 73 - 78 %

Administrative burdens on start-ups 34 - 46 %

Barriers to competition 29 - 37 %

State control 3 - 6 %

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Simulated effect of new EU proposals on service trade and investment

Imp

ed

ime

nts

in S

erv

ice

s T

rad

e


Conclusions

Heterogeneity in regulation hampers trade and FDI in services► In particular barriers to competition

Analysis of effect non-tariff barriers was always elusive (NTBs difficult to quantify)

► our analysis from perspective of policy heterogeneity seems fruitful

► Follow-up: test its explanatory power for the OECD as a whole

Results may have implications for future GATS negotiations► More emphasis on mutual recognition

Impediments in Services Trade Marrakech 16-03-2005 The impact of policy heterogeneity on trade and...

Documents

Transcript of Impediments in Services Trade Marrakech 16-03-2005 The impact of policy heterogeneity on trade and...