Regionalism in Services CARSTEN FINK “Regional Trade Agreements & the WTO” WTO Secretariat, Geneva, November 14, 2003

Examples of RTAs in services Early agreements: EU NAFTA Newer agreements: MERCOSUR ANDEAN Pact ASEAN US bilateral FTAs (Chile, Jordan, Singapore, Vietnam) More agreements are being negotiated Post-Cancun proliferation of RTAs?

Why negotiate? Foster deeper liberalization at home and abroad through reciprocity-based market access negotiations Enhance credibility of current trade regime commitment to future reforms Regulatory cooperation

Will there be trade preferences? Time Protection GATS MERCOSUL FTAA T3T3 T2T2 T1T1 PMPM PFPF PGPG

Are preferences in services feasible? Measures affecting services trade are typically not tariff-like instruments, but: Limitations on entry of firms Foreign equity limitations Quotas on outputs and foreign service workers Requirements regarding the legal form of establishment Regulatory measures Can there be exclusionary rules of origin?

Example of preferences in services Bilateral air service agreements: preferential allocation of output quotas Preferential relaxation of foreign equity limitations (e.g., NAFTA) Preferential access to certain regions within a country (e.g., Hong Kong-China FTA) Preferential recognition of foreign qualifications (e.g., EU mutual recognition)

Welfare effects of trade preferences Lesson from goods trade: Trade creation: consumers gain from lower prices Trade diversion: loss of fiscal revenue, possibly loss of quota rents Preferential liberalization in services is more likely to lead to welfare gains: No (static) cost of trade diversion, as measures do not generate benefits for the importing country “ Go with the Living Ism ” ?

But gains are larger from MFN liberalization Non-preferential liberalization offers access to the most competitive service providers MFN liberalization avoids complexity for negotiators, administrators and businesses Other gains from trade (economies of scale, more intense competition, knowledge spillovers) are likely to bigger if liberalization is non-discriminatory

And trade diversion can be costly in a different way Due to the importance of location-specific sunk costs in services: second-best providers may benefit from first mover advantages sequence of liberalization matters, benefits from eventual MFN liberalization may be smaller

Why then negotiate regionally? Political imperative More efficient bargaining Negotiations may be less complex Less scope for free riding on MFN principle Certain forms of regulatory cooperation are more feasible and desirable within a smaller group of countries (regulatory harmonization, mutual recognition). Innovation in rule-making

Rules of origin (denial of benefits) From an economic perspective a liberal rule of origin is to be preferred, but then regional liberalization approaches MFN liberalization Possible approaches: Local incorporation Local incorporation and substantial business operation Domestic ownership and control

Example 1: Mexico’s NAFTA commitment in financial services 0 5,000 10,000 15,000 20,000 25, US Spain Holland Canada Includes investments of U.S. based European banks FDI in millions of US$

Example 2: Rules of origin adopted in Hong Kong-China FTA Detailed Annex on “ Definition of Service Supplier and Related Requirements. ” Criteria for Hong Kong service suppliers include: Incorporation and possession of valid operating license Substantive business operations for 3 years of more (5 years for certain services) Must have paid profit tax in Hong Kong More than 50 percent of employed staff must be local residents

What have RTAs achieved so far? Few commitments beyond status quo Where regional commitments go beyond GATS, few actual preferences exist Some innovation in rule-making Some success in promoting regulatory cooperation. Will future agreements achieve more?