How Can Aid for Trade Facilitate Trade in Services?

10 July 2017

Aid for trade has made important interventions in services sectors, but going forward, there needs to be more emphasis on regulatory reform and building productive capacity, rather than just infrastructure spending.


The services economy is already large in developing countries, typically at least 50 percent of GDP, even in low income countries, and much more in higher income countries. As such, it makes sense to ensure that aid-for-trade (AfT) resources give appropriate attention to services trade, and in particular help to facilitate it.

What does trade facilitation for services mean? One interpretation, by analogy with APEC’s approach to trade facilitation in goods, is to aim to reduce trade costs by a particular percentage over a particular time, but with countries left free to choose their own approaches. The advantage of this approach is that if it succeeds, it can result in a substantial freeing up of services markets. It also takes full notice of the lack of progress on traditional services negotiations in the WTO, where request-offer seems to have broken down as an effective way of trading “concessions”. Focusing on reducing trade costs as the core of a trade facilitation concept for services sits well with the G20’s commitment to reduce trade costs, which is not limited to goods but is broad enough to include services as well. The analogy with goods breaks down somewhat in terms of the WTO’s Trade Facilitation Agreement—although India has proposed a similar agreement for services, it is difficult to see what it could cover that is not the subject of request-offer negotiations, other than perhaps additional rules on administrative transparency.

Although data are scarce for services trade, the OECD-WTO TiVA dataset includes a full set of bilateral trade data, based on observations and model-based estimates. We can use that dataset to construct estimates of trade costs, which the recent literature shows can be inferred from cross-country patterns of trade and production, without the need to build them up measure by measure.

Based on new calculations using the TiVA dataset, Figure 1 reports the percentage change in trade costs between 1995 and 2011 for developing countries in the dataset. A negative number indicates that trade costs have fallen, while a positive one indicates they have increased. The figure clearly shows that a wide range of countries have been very successful in reducing services trade costs over recent years, although data on many developing countries, particularly low income and African countries, is not available. Small countries have done well, but so too have emerging markets like China and India. Although trade costs (in levels) are typically higher in services than in goods, there is evidence that they are coming down rapidly in at least some parts of the world. Interestingly, these developments have taken place in the absence of multilateral liberalisation. Although there has been some preferential liberalisation in services, research shows that it is often de facto MFN, in the sense that it applies equally to all trading partners.[1] The primary purpose of regional agreements has been to assist individual governments in solving the political economy problem of how to be able to implement serious reforms. The key dynamic is therefore unilateral reforms—perhaps anchored by an external engagement, like China’s WTO accession, but fundamentally based on a domestic political decision.
 

Figure 1: Percentage change in services trade costs, 1995-2011,  selected developing countries.

 

Source: Shepherd (Forthcoming).[2]

 

Against this background, what role has AfT been playing? Has it been supporting the process of facilitating trade in services? In fact, a significant proportion of total AfT flows has at least some connection with services, although the categories that are commonly tracked, and which are mandated by the WTO General Council, reflect the effort to analyse AfT using existing data sources that do not always correspond to the categories suggested by economic analysis. In terms of sector-specific flows, services-related AfT is heavily skewed towards social services, like health and education. These flows are very important from a development perspective, and should be encouraged. But it is not clear that they truly facilitate trade in services: they are more about building potential to deal with domestic health and educational needs. This is not to take away from the importance of these flows, just to question their potential to support trade integration.

In terms of the core AfT categories of trade policy and regulations, economic infrastructure, and productive capacity building, services play a role in all three. However, there are arguably some misallocations in terms of the sectors likely to promote growth and development in the developing world. For instance, productive capacity building is heavily skewed towards agriculture. Of course, agriculture is important as a source of income and employment, but there is an argument for developing other sectors, including services, to act as magnets for workers freed up as agricultural productivity improves. Expenditures on trade policy and regulations are relatively small, which is not surprising as they are not as resource intensive as infrastructure projects, but in services there is a strong case for prioritising interventions here. Regulatory reform is relatively low cost but high impact. It is also strongly trade facilitating.

Aid directed towards economic infrastructure and services is heavily skewed towards infrastructure projects. Building power plants, roads, and other infrastructure is of course important for services, but does not itself help to support trade integration in services sectors. There needs to be regulatory reform accompanying infrastructure investment if it is to have its full payoff. Supporting regulatory reform in a wide range of services sectors is not nearly as resource intensive as building and maintaining infrastructure, but it is usually difficult from a political economy point of view.

What can AfT do to support the process of regulating key services sectors? The most important intervention is supporting domestic policy mechanisms and institutions that help develop effective and efficient services regulations. Effectiveness means that regulation achieves important social goals, while efficiency means that it does so at the lowest economic cost. Such an approach is fully consistent with the goal of facilitating trade in services, as it can help reduce trade costs even further. Experience has shown that negotiating regulatory objectives and mechanisms is hard, even among relatively similar countries, let alone among the WTO’s diverse membership. By contrast, agreement on the objective of reducing trade costs in services, and on effective and efficient regulation as the mechanism, has the potential to allow countries to move forward productively even while negotiations in Geneva are stalled.

In services sectors, it is important to strike the right balance in AfT between infrastructure interventions, measures to support good policymaking, and building productive capacity. The touchstone is competitiveness: the outcome should be firms that can compete in world markets, with a strong basis of infrastructure and regulation behind them. Judged on that basis, there is still considerable work to do, as instances of developing country success in services markets, while important, are still more the exception than the rule.

Moving forward on AfT in services requires a better understanding of the services economy in the developing world, and in particular the important role it plays in boosting competitiveness for other sectors of the economy. All types of goods and services use other services as inputs into production, whether it be transport and distribution services, finance, or business services. Based on the available data, which largely cover the developed world, we know that a significant proportion, perhaps one-third or more, of the value of gross exports in manufacturing is in fact made up of embodied services value added. The trade facilitation agenda in goods is therefore largely also about services, focusing on areas like transport and distribution, as well as logistics. Donors and beneficiary countries need to work together to better understand the services sector, and in particular the regulatory measures that are holding back domestic and foreign service suppliers. Regulating efficiently and effectively can boost the trade integration of developing countries, at the same time as ensuring that important domestic policy objectives, like consumer and environmental protection, are met.
 

Author: Ben Shepherd. Principal, Developing Trade Consultants


[1] Miroudot, Sébastien, and Ben Shepherd. “The Paradox of ‘Preferences’: Regional Trade Agreements and Trade Costs in Services.” The World Economy 37, no. 12 (2014).

[2] Shepherd, Ben. “Trade Costs in Services: Database Update.” Working Paper, Developing Trade Consultants, Forthcoming.

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