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Trade in Services: Combining International, Regional and National Endeavours

August 2012

Rosengren, A. 2012. Trade in services: Combining international, regional and national endeavours. GREAT Insights, Volume 1, Issue 6. August 2012. Maastricht: ECDPM.

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Global trade in services has grown exponentially in the last decades, covering a full range of areas such as health, education, transport, telecommunication, construction, financial services, retail distribution and culture (1). Due to its capacity to generate incomes, create employment and to provide positive linkages with other economic sectors, the importance of a strong service sector is today highly recognised as an essential part of any country’s economic development strategy. 

Yet, African, Caribbean and Pacific (ACP) states are lagging behind. Even though the ACP countries seem to have kept apace in terms of the average share of services trade to total trade (see Figure 1), the regional and national disparities are substantial.

Figure 1: Trade in services as a share of total trade in the ACP countries and the world

Great-vol1-6-Rosengren-fig1

Out of the total 77 ACP countries, 16 states represent nearly 80 % of the total ACP exports of services with South Africa alone accounting for almost 20 % (see Table 1), while the rest face severe services trade constrains (2). Given the above mentioned developmental opportunities and growth potentials that lie in this sector – services now cover over 70 per cent of all employment in high-income countries (3) – the strategies on how to better tap these potentials is frequently debated within the ACP countries.

Table 1: Top ACP States Services Exporters

 Great-vol1-6-Rosengren-table1

Services and domestic regulatory framework

Slow growth of trade in services is partly due to a lack of capacity and resources (institutional, human, technological, financial etc.), underdeveloped ICT and telecommunications networks, and geographical disadvantages such as being landlocked or a remote island. However, one of the more profound barriers to increased trade is the slow progress in the establishment of strong legal and institutional frameworks for trade in services. At the time when many regional and bilateral trade agreements were initiated, the political focus was mainly placed on trade in goods. Both in the context of the trade relationships between ACP and EU and within regional economic communities (RECs), discussions on trade in services only intensified around 2007. It is however not merely a question of timing and sequencing, negotiations on trade in services are far more complex and complicated compared to negotiations on trade in goods and therefore require much more time(4).

The level of complexity is due to primarily three factors. First of all, with trade in goods, decision makers can fairly easily get an overview of the most important sectors and assess the consequences of opening up those sectors. Since services cover much more inter-related and abstract economic activities, it is significantly harder to fully assess what the implications of liberalisation would be. Secondly, liberalisation of trade in services penetrates much deeper into the domestic economy. While liberalisation of trade in goods generally relates to adjustments of tariff lines, trade in services affects the entire economic system through the establishment of new service providers and service systems, technologies and networks, and regulatory frameworks. This creates a ratchet effect where it becomes increasingly more difficult to revert back to previous situations or to use any safeguards measures to hamper the effect of the liberalisation. Thirdly, liberalisation of services generally requires countries to modify their domestic regulations. In effect therefore, the reformed regulation will, in principle, encompass trade with all partners, and in the case of bilateral agreements, specific preferential access is mentioned in the schedules of commitments.

Providing legal security 

The European service industry has long been an advocate of international service liberalisation and binding agreements. It argues that binding international commitments send strong positive signals to potential investors, provide a sense of legal security, and reassure investors that there will not be policy reversals. Signing international agreement is presented as a way to speed up the establishment of implementing regular frameworks by bypassing time consuming national endeavours.

Following this arguments, it seems to be a doubtful for these industries that regional or national commitments taken within the RECs could provide investors with the same level of legal security, notably given the legacy of low levels of implementation in regional integration among ACP countries. If the aim is of setting in stone a stable policy environment, effective implementation is key to the credibility of commitments.

Also implicit in this logic is the idea that arguing for non-reciprocity, i.e. the longstanding demand of ACP countries that the EU should open its market to their service providers unilaterally, simply misses the point. The benefit of signing an agreement, according to industry proponents and much of the research around service trade liberalisation and development, is not so much the increased access to European markets, but rather the prospect of increased investments – and, should political will be sufficient- deeper regional integration.

Is there traction? 

The increasingly positive economic prospects in Africa (Africa is the second strongest growth region, after Asia, and the number of FDI projects have increased by 27 % between 2010-2011 with a compound growth rate close to 20 % since 2007) (5), and in particular the increasing interests from alternative trade partners – such as China, India and Brazil – has confirmed that Africa is likely to become the next frontier for investment and trade. The African Union agenda on boosting intra-African trade, as recently adopted by the AU Summit, could further contribute to fostering trade in services. Africa has therefore become an attractive place for investors and lobbyists who want to secure their shares of the market.

While the arguments put forward by service industry in Europe sound rational, it is doubtful whether they will be sufficient to attract ACP partners to sign bilateral deals with Europe. The question is whether there are strong enough incentives for the ACP countries to devote extensive efforts into a liberalisation and regulation process with the EU, while domestic reforms are yet to be completed and regional frameworks are yet to be set up. Europe has a much more open services sector and is in the process of signing comprehensive free trade agreements,(FTAs) which include deep commitments in services with some of its largest trading partners. In this regard, ACP countries can expect to have low margins of preferences in Europe, in exchange for commitments that would give Europe far more market access than any other trading partner with whom ACP countries do not have FTAs.

Great-vol1-6-Rosengren-fig2

A pragmatic agenda 

To ensure that the opening up of the service sector does in fact result in the expected developmental outcomes, it is vital that, prior to any negotiations with third countries, there exist an updated and comprehensive assessment of service sectors at the national level, including on the necessary reforms of domestic regulations to improve the efficiency of services provision. While this operation might take a considerable amount of time and effort, it is essential in avoiding the risk of liberalising markets without the proper insights and risk awareness. In addition, countries need to define their offensive and defensive interests vis-à-vis third countries in order to prioritise and sequence market openings. Once this is in place, a country will then be able to benefit from opening their markets to third countries. The next sensible thing then would presumably be to liberalise with the partner you trade most with and that could bring greatest benefits, whether this is at the regional level, with the EU or WTO, or with one of the emerging players.

Anna Rosengren is Policy Officer at the European Centre for Development Policy Management (ECDPM) 

Footnotes

  1. Liberalisation of cultural provisions is an area that ECDPM has been engaged in through e.g. the Discussion Paper No. 128 on Implementing cultural provisions of CARIFORUM-EU EPA
  2. Opening remarks by the Secretary General at the Workshop on Strategy for Development of Services Sectors in ACP States. 2-3 May, Brussels, http://www.acp.int/content/opening-remarks-secretary-general-workshop-strategy-development-services-sectors-acp-states-
  3. WTO (2010) Measuring Trade in Services, World Trade Organisation, Switzerland
  4. See for instance Kruger, P. 2012. “Services Negotiations Under the Tripartite FTA”. GREAT Insights, Volume 1, Issue 1. January-February 2012. Maastricht: ECDPM.
  5. Ernst & Young, 2012, Building Bridges, Ernst &Young’s Attractiveness Survey 2012 Africa

 This article was published in GREAT Insights Volume 1, Issue 6 (August 2012).

Economic Transformation and TradeACP Group of StatesTradeAfricaCaribbeanPacific

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