Transcript presentation

Impediments in Services Trade
Marrakech
16-03-2005
The impact of policy heterogeneity on
trade and direct investment in services
Arjan Lejour, Henk Kox
Impediments in Services Trade
Frankenstein visits Lisbon
Marrakech
16-03-2005
Why so little trade in services?
Impediments in Services Trade
 Technical reasons:
Marrakech
16-03-2005
► 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
Impediments in Services Trade
Regulation-based trade barriers for services
Marrakech
16-03-2005
 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
Impediments in Services Trade
Nature of regulation-caused trade cost barrier
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 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!
Impediments in Services Trade
Main barrier for service trade: not regulation as such but
regulation heterogeneity
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 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
Impediments in Services Trade
Costs of regulation heterogeneity
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Impediments in Services Trade
The effects of regulation heterogeneity on trade and FDI
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 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
Impediments in Services Trade
Indicator for bilateral policy heterogeneity
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 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
Impediments in Services Trade
Refinements
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 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
Impediments in Services Trade
Bilateral commercial services
exports (ln), 1999-2001, 480 obs
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TLS/SUR
Country of origin
GDP org.
0.85***
GDP dest.
Of Destination
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
Impediments in Services Trade
Results for trade regressions
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 "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
Impediments in Services Trade
Bilateral direct investment, 1999,
252 obs
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TLS/SUR
Country of origin
GDP org.
0.98***
GDP dest.
Of Destination
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***
Impediments in Services Trade
Results for bilateral FDI
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 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
Impediments in Services Trade
Policy context:
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 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
Impediments in Services Trade
Impact of proposed EU directive on heterogeneity indicators
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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%
Impediments in Services Trade
Simulated effect of new EU proposals on service trade and investment
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Impediments in Services Trade
Conclusions
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 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