Services in the Global Economy
Services encompass a heterogeneous group of economic activities often having little in common other than that their principal outputs are largely intangible products. It includes both intermediate (construction, distribution, etc.) as well as final demand services (tourism, health, education, and similar services). Services account for an increasing share of employment and GDP in both developed and developing countries. The growth of trade in services has outstripped manufacturing. Services trade now makes up a quarter of all cross-border trade. In 2003, developing countries exported services estimated at $US 504 billion and this is likely to grow with increasing globalization of their economies and the market access resulting from the widespread deregulation and privatization of state owned corporations
Trade in services is subject to protectionism in many countries. Such restrictive policies are largely intended to limit the access of foreign services and/or foreign- service providers to domestic markets. They range from outright prohibitions against foreign providers, reciprocal agreements, licensing and certification requirements, to discriminatory fees and limits to access to distribution and communications systems . In his study of market access barriers for services, Hoekman (1996) shows that the benchmark tariff equivalents ranged from about 200 percent for air and maritime transport, postal services, and life insurance to 20-50 percent for sectors in which market access was less restricted. Services in many developing countries have been largely costly and inefficient partly due to the absence of vigorous competition. This underscores the need for reforms and the potential for more inflows of capital and technology arising from increases in foreign and domestic investment.
To date, there is no clear and adequate definition of services. However, a broad consensus exists on the characteristics that distinguish trade in services from that of trade in goods. Services can be remotely accessed or electronically delivered as opposed to goods that enter through customs. They are also intangible, non-storable and characterized with more extensive regulations than trade in goods. Trade in services requires the movement of factors of production i.e. capital or labor thus necessitating commercial presence or the movement of people to the location of the service consumer. Unlike the cross-border mode for trade in goods, services can be provided at various locations: locations of the services provider, consumer or at neither of these locations .
Most of the international agreements address trade in goods. The Uruguay Round of multilateral trade negotiations culminated in the adoption of the first international agreement on trade in services in 1995. The General Agreement on Trade in Services (GATS) includes general obligations applicable to all WTO members and to services (most favored nation treatment), national schedules of access commitments .It lists about 160 sectors and sub-sectors in which market access and national treatment commitments can be made on a national basis. Among the broad service sectors, tourism has drawn the highest number of commitments followed by financial and telecommunications services. The percentage of members that have made specific commitments for trade liberalization varies by country group: 75-80 percent for developed and transition economies and 37 percent for developing nations in 2004.
The high number of commitments in tourism services from developing countries is probably attributable to their comparative advantage in this area. A number of bilateral and regional trade agreements have been negotiated over the last two decades to provide for liberalization of trade in services. The recent US free trade agreement with Central American countries (CAFTA-DR), for example, provides for substantial commitments to liberalization in cross-border trade in services. It establishes a framework for the elimination of restrictions in most service sectors and regulatory transparency. Unlike the GATS, it has a negative list approach in which all services not expressly excluded are included and thus available for trade. The recent EU “Services Directive” is intended to achieve a genuine internal market in services by removing legal and administrative barriers to trade in services between member states, i.e. freedom of establishment and free movement of services. Such bilateral and regional agreements build upon the existing commitments of the countries under the GATS. The value of trade in services is underestimated because the statistics does not cover trade in services embodied in goods as well as production and sales of foreign affiliates (Hoekman, et al.. 2002).
The GATS which came into force in 1995 is the first international agreement covering multilateral trade in services. It has two parts: the framework agreement consisting of general rules and principles that apply to all measures affecting trade in services and the specific commitments that apply to the services sectors listed in each member’s schedule. The GATS covers all internationally traded services except those provided to the public in the exercise of governmental authority (such as central banking, social security) which are neither supplied on a commercial basis nor in competition with other suppliers of services .
Scope and Coverage
The GATS defines four ways in which a service can be traded (modes of supply): a) cross-border supply (mode l) entails the export of services to another country in a way similar to trade in goods. This does not require the physical movement of supplier or consumer; b) consumption abroad (mode 2) such as tourism or education where the consumer moves to the supplying country; c) commercial presence (mode3) where a company sets up a branch or subsidiary to provide services in another country (banking, insurance); and d) presence of natural persons (mode 4) where foreign nationals are admitted to another country to provide services. In cases where a foreign -service provider hires foreign managers or specialists, one could experience mode 3 and mode 4 together.
The general obligations and disciplines (Part II of GATS) set out the basic principles that apply to all WTO members and services. These principles include application of the most favored nation standard (MFN), transparency, domestic regulations, and restrictions to safeguard the balance of payments and general/security exceptions.
US Export of Services
- In the United States, the service sector accounts for nearly 80 percent of the private sector GDP and for 90 million jobs.
- US service exports exceeded imports by $80 billion, offsetting 10 percent of the deficit in merchandise trade
Service Exports with High Growth Potential
- Architectural, construction and engineering services
- Financial services (Banking , insurance and other financial services)
- Commercial, professional and technical services
- Education and training services
- Environmental services
- Telecommunications and information services
- Transportation services
- Travel and tourism services