The economics of services trade

CN trọng thương: ra đời khi châu Mỹ dc phát hiện ra, TK16

From your opinion, which argument of mercantilism (4) is correct or incorrect?
Explain.
1. Wealth as a Measure of National Power
Gold and Silver as Wealth: Incorrect by modern standards. Mercantilists saw wealth
primarily in terms of gold and silver, but modern economics understands that wealth
is more accurately measured by a country's overall productivity, the standard of
living, and the diversity of goods and services it can produce. Economic value today
is largely created through productive capacity, technological innovation, and human
capital, not just the accumulation of precious metals.
Finite Wealth (Zero-Sum View): Incorrect. The mercantilist view that wealth was a
zero-sum game is flawed. Modern economics recognizes that trade can be mutually
beneficial, creating wealth for all parties involved through comparative advantage,
innovation, and increased market efficiencies.
2. Positive Balance of Trade
Exports Over Imports: Partially Correct but simplistic. While having a positive
balance of trade can be beneficial, it's not inherently necessary for a healthy
economy. Modern economics shows that trade deficits are not necessarily harmful;
they can reflect an economy's strength and capacity to attract foreign investment.
Moreover, imports can benefit consumers by providing goods at lower prices and
encouraging competition and innovation.
3. Government Intervention
Protectionism: Incorrect in most cases. While some level of government regulation
can be necessary, especially in developing industries or during economic crises,
excessive protectionism often leads to inefficiencies, higher consumer prices, and
retaliatory measures from other countries. Free trade, supported by modern
economic theories, typically leads to more efficient allocation of resources, greater
innovation, and overall economic growth.
Colonialism: Ethically and Economically Incorrect. Colonization was justified
under mercantilism for economic gain, but it led to exploitation, human suffering,
and long-term economic distortions. The idea that colonies existed only for the
benefit of the mother country is deeply flawed, both ethically and economically.

Theory: absolute advantage

A country has absolute advantage in the production of a product when it is more
efficient than any other countries in producing it
Drb: country may not have absolute advantage

1. Why do countries trade?

a. Diferrent concepts of advantage
Absolute advantage
1 country manufactures goods at a lower cost than another
Swiss watches cost 100, chinese watches cost 20
Swiss tshirts cost 10, chinese tshirts cost 1
 China has absolute advantage in watch and tshirt production.
Comparative advantage
1 country manufactures goods at a lower cost in terms of foregone resources than
another
Switz production of 1 watch= non-production of 10 tshirts
China production of 1 watch= non-production of 20 tshirts
 Switz has comparative advatage in watch production
 China has comparative advatage in tshirt production
Competitive advantage
Firm level: 1 firm creates and/or maintains a strategic edge over others competing in
the same market.
Nation level: 1 nation has advantage over another nation in specific industries when
competing globally.
b. Productivity differences
Comparative advantage is driven by differences in labor productivity (=technology)
In the absence of trade, these differences can lead to differences in the prices of
input as well as output and these in turn create incentives to trade.
Opening to trade lead to:
- Equilisation of world relative price
- Specialisation by comparative advantage
- Seperation of production and consumption possibilities in each country
- Increased consumption poss for both countries.
Step 1: The production side
- Each country produces the same 2 goods
- Producing a certain amount of 1 product implies not producing a certain
amount of another product (opportunity cost)
- The trade-off btw producing 1 product rather than another provides a simple
representation of a country’s production tech.

Country 1: 7500 hours 500 com

Country 2: 6000 hours 2000 rice
Terms of trade (ty le trao doi): the hien = chi phi co hoi. Nc 1 doi computer sang
gao se nhieu hon gao ho tu san xuat, tuong tu vs country 2 (ty le trao doi giua 3 va
4)

c. Resources differences
Basic idea:
Comparative advantage is driven by differences in relative resources endowments
in the absence of trade, relative shortage or abundance of some resources (imputs)
can lead to differences in the price of inputs as well as poutput and these in turn
creates incentives to trade
Opening to trade lead to:
- Equalisation of world relative price
- Partial specialisation in each country according to its comparative advanatge
If each country specialises in a product that is relatively intensive in the
factor in which the country is relatively abundant.
- Separation of production and consumptions poss in each country
- Increased consumption poss for both countries.
In this model, trade has effects on factors: income (labor and capital)
- The relative price of the relatively abundant factor increases, while that of
the relatively scarce factor decreases.
- Explains why there are winners and losers from trade within a country
depends on the pattern of comparative advantage and industry links.
wage tang  Price rice/ price computer xu huong tang
w/R  L/K  P rice/ P computer
L/K us < L/K vn  vn doi dao tuong doi ve ldong
K/L us> K/L vn us doi dao tuong doi ve von

Chuyen mon hoa sp gan goc O hon, nhung ko chuyen mon hoa tuyet doi
Loi the tuong doi thuc chat la the manh ve nguon luc dau vao, trao đổi hh thực chất
là trao đổi nguon luc dau vao.

Trade
Wvn < Wus  Wvn có xu hướng tăng theo us
Rvn(lãi suất) > Rus  R vn có xu hướng giảm về us
Demand Conditions
Home Demand Composition
Segment Structure of Demand
Sophisticated and Demanding Buyers
Anticipatory Buyer Needs
Demand Size and Pattern of Growth
1.Size of Home Demand
2. Number of independent buyers
3. Rate of Growth of Home Demand
4. Early Home Demand
5. Early Saturation
Internationalization of Domestic Demand
1. Mobile or Multinational Local Buyers
2. Influences on Foreign Needs: by visiting trainees, demonstration effects, cultural
dissemination via media and political alliances/ historical ties

Related and Supporting Industries

Competitive Advantages in Supplier Industries
- provide efficient and cost-effective access to inputs
- on-going coordination and the process of innovation and upgrading close to home
Competitive Advantage in Related Industries
1. Related industries involve industries which can share (computers and application
software) or those in which firms can coordinate activities in the value chain when
competing.
2. National success in an industry is likely if the nation has competitive adv. in a
number of related industries

Firm Strategy, Structure, and Rivalry

Strategy and Structure of Domestic Firms
Nations will succeed in industries where management practices and modes of
organization favored by the national environment are well suited to the industries'
sources of competitive advantage.
Goals
Nations will succeed in industries where goals and motivations are aligned with the
sources of competitive advantage
Domestic Rivalry
Having strong competition at home drives firms to pursue upgrading and
innovation, enter foreign markets to increase market of fill capacity, and even
creates stronger survivors for the global market.

The Role of Chance

- Chance events are related to acts of pure invention, technological discontinuities,
discontinued input costs, shifts in financial markets or exchange rates, surges of
regional or world demand, politics,
wars.
- allows for shifts in competitive positions: Can nullify(bãi bỏ) advantages of
previous leaders and open the way for new firms/nations to take a local or global
lead.
- have asymmetric impacts on different nations.
The Role of Government
- influencing the 4 determinants: Its positive or negative influence can have a
significant impact in the success of an industry or a firm in the nation.
- Government policy can be in turn influenced by the 4 determinants.

3. Global Value Chains and Trading in Tasks

▸ The concept of comparative advantage is not new; Ricardo first wrote about it in
1817.
▸ Do these basic ideas about the gains from trade still apply in a new trade
landscape, where Global Value Chains (GVCs) are becoming increasingly
important?
▸ To examine this question, we first look at what GVCs are and how they work,
then we consider how they fit with standard trade paradigms.
▸ GVCs are complex, interlinked networks of economic activity.
 Trade in goods.
 Trade in services.
 Investment.
 Movement of ideas.
 Movement of people.
▸ A typical GVC consists of a lead firm, and a potentially large number of suppliers
at various levels.
▸ Trade in intermediate inputs is intense, and goods can travel across borders
multiple times during the production process (more than half of world
manufactured imports are intermediate goods, and more than 70% of world
services imports are intermediate services)
▸ The lead firm is responsible for creating and maintaining the network, and
typically also supplies intellectual property (like designs) and marketing. Suppliers
take care of component sourcing and manufacture, as well as assembly

▸ The key concept behind GVCs is "trading in tasks".

▸ Instead of specializing in production of a complete product like a watch or a t-
shirt, firms (and countries) can specialize in much narrower activities, like
production of a particular component, or assembly, or a service like research and
development, design, or marketing.
▸ Comparative advantage can still drive trade within GVCs, with similar economic
gains to the ones already seen.
▸ But how do we deal with the fact that GVC logic leads some countries to
specialize in high value added tasks (like design), while others specialize in low
value added tasks (like assembly)?
▸ Value added follows a "smile" pattern in many GVCs: high at the two
extremes of the production process, lowest in the middle.
The brave new world of services
• We are in a world of trade in tasks more than in products
- Global value chains in goods and now services
• Some 70% of global GDP = services
- This is where the mass of business interests and concerns lie - not in
agriculture or NAMA
• Services are key determinants of competitiveness
• They are also a key factor for efforts to reduce current account imbalances - a
major G-20 objective
• Barriers to services trade are much higher than for manufactures
• Services are already on the Doha/WTO table, but progress is needed to conclude
the Round and realize its promise
- General feeling that a "topping up" is needed
- Services offers a clear way of doing so, indeed a critical missing lubricant for
a completed DDA
Services and Growth
• Economic growth is driven by increases in the quantity and productivity of capital
(K) and labor (L) inputs
• Services are frequently direct inputs into economic activities, and thus
determinants of the productivity of the 'basic' factors of production - labor and
capital - that generate knowledge (innovation), goods and other services
- Financial sector development (intermediation across time)
Human capital = educational services, health and
other professional services
"Producer services" underpin specialization: more variety lowers (quality-adjusted)
costs
Services allow "splintering" of value chain and ATFP
through their intermediation role and coordination and communication across
time/space
Productivity of services
• Productivity growth in services drove much of the post-1995 expansion in US
productivity, especially in distribution and financial sectors
.
- IT and managerial innovations - outsourcing, express delivery, "big box"
retail store format - helped to transform and accelerate productivity
• Aggregate productivity differentials across the OECD area reflect differences in
services, not goods industries - especially TFP in business services
• India's TFP growth in services was 2.4% p.a. between 1980-2006, double what
was achieved in manufactures or agriculture
• Service sector TFP rate in China was 2%, below other sectors over the same
period
Defining characteristics of services
Intangible
Non-storable
Intermediates
Protected behind borders
Highly regulated
Diverse

Intangible
➢ What is the value of a service? This is arguably harder to assign and measure
than for “physical” goods.
➢ Data limitations at both the national and international levels are pervasive in the
services field.
➢ Weak data means that the predictive value of economic models of services
reforms is itself weaker.
➢ Can you negotiate what you cannot properly measure? Weak data induces
negotiating precaution, especially on the part of developing countries.
➢ Negotiating implications: lack of precise data inhibits the quest for workable
emergency safeguards provisions in services trade (need to document import surges
and establish causation/injury).

Non storable
➢ Unlike goods, the simultaneity of production and consumption distinguishes
many services transactions.
➢ Yet, we observe the increasing commoditization of many services that are
embedded in goods or stored and delivered electronically.
➢ There remains, nonetheless, a critical need for factor mobility, and its complex
political economy in home and host countries:
➢ Movement of capital remains controversial in many host countries,
especially developing countries; and
 ➢ Movement of labour (for work purposes) is resisted in most recipient
countries, especially (but not only) in developed countries.
➢ Definitional and negotiating implications: non-storability alerts us to the need to
adopt a modal approach to defining services trade, with two modes of supply
“Modes 3 and 4” focusing specifically on factor movements.

Intermediates
➢ Services are inputs into all that a nation produces, brings to market, trades or
invests in.
➢ This is arguably the most central insight by far, with farreaching implications for
policy design and engagement in trade negotiations.
➢ An inefficient service sector acts like a prohibitive tax on economy-wide
performance.
➢ Services trade policy should thus be designed like that affecting imports of
capital goods.
➢ Gains from trade come from both imports and exports, such that countries may
have an incentive to engage in negotiations to secure access to (or reduce the price
of) key inputs that may be lacking or that are inefficiently produced at home.

Protected behind borders

➢ Domestic regulation, not tariffs, is the main instrument of protection in services.
➢ Services negotiations are thus akin to dismantling non-tariff barriers: experience
teaches us that this is slow and ponderous.
➢ Absent a tariff/border tax, national treatment could not be a general obligation in
services trade (i.e. applied without exceptions as in the GATT).
➢ While a general obligation under GATS, even MFN is subject to exceptions in
services trade (unlike in GATT).
➢ Competition in services markets is very often quantitatively constrained: the
maintenance of quantitative restrictions is allowed under GATS whereas it is
outlawed under the GATT.
➢ The regulatory intensity of services trade heightens the importance of disciplines
on transparency.

Highly regulated
➢ The ubiquity of market failure in the provision of services justifies the high level
of domestic regulation found in services markets.
➢ There are four main types of market failure in services trade:
➢ Monopolies and oligopolies (especially prevalent in network-based
industries);
➢ Information asymmetries (finance/prudential standards and professional
licensing regimes);
➢ Externalities (transportation and environmental services, cultural
diversity); and
➢ Universal services/public goods (health, education)

Diverse
➢ Complex political economy: industry is usually closer to sectoral regulators than
to trade ministries; regulatory agencies can be powerful political actors.
➢ Limits to reciprocal bargaining as a result of cross-country differences in
specialization patterns.
➢ Services negotiations entail the need to master many different regulatory
languages and bureaucratic cultures (challenge of inter-agency coordination).
➢ Building user coalitions may also be needed to overcome producer resistance to
market opening:
➢ Financial industry lobbied hard for telecommunications liberalisation in
Uruguay Round; and
➢ Manufacturers/distributors lobby for more liberal logistical/transportation
services.
➢ Acknowledging the need for sectoral specificity – dual architecture of GATS:
horizontal disciplines and annexes addressing sectoral specificities.
Key Determinants
Technological change
Changes in the organization of production
The growth of FDI
The supply of human capital
Changes in demand patterns
Ideology

Technological change
➢ Technological innovation, especially (but not only) in information and
communication technologies, was instrumental in:
➢ Contributing to dramatic cost reductions in information processing; and
➢ Increasing the tradability of services transactions.
➢ Technological developments have allowed a large and growing number of
developing countries:
➢ To insert themselves into the new international division of labour in
services;
➢ To exploit new sources of comparative advantage; and
➢ To leapfrog entire stages of infrastructural development, notably through
the spread and rapid adoption of mobile technologies (telephony and
internet).

Changes in the organisation of production

➢ The fragmentation of production and the intensification of competitive pressures
have altered the manufacturing process.
➢ Key service functions, e.g. design, accounting, after sales services, human
resource management, that used to be performed within manufacturing firms, are
today outsourced, including on a cross-border basis.
➢ This has led to a secular drop in the share of manufacturing in GDP and
employment and a commensurate rise in the share of services.
➢ The rising strategic importance of logistics in the management of supply chains
in just in time delivery patterns is illustrative of the key role of services in
manufacturing efficiency.
➢ Similar patterns of fragmentation and outsourcing are today at play in service
industries, e.g. professional services, finance, travel and tourism, are increasingly
relying on remotely supplied services.

The growth of foreign direct investment

➢ The growth FDI has far outstripped that of domestic output and international
trade in recent decades, making cross-border investment the most powerful vector
of globalisation.
➢ Two successive FDI waves have contributed to the internationalisation of the
service economy:
➢ Starting in the late 1950’s, the rise of the multinational firm encouraged
service suppliers to follow their manufacturing clients abroad (pull factors);
and
➢ More recently, service industries have been pursuing their
own(endogenous) internationalisation strategies in an environment
characterised by trade and investment liberalisation, privatisation and pro-
competitive regulatory reforms (push factors).
Modes of supply
What is excluded?
- Services supplied in the exercise of governmental authority
Neither on commercial basis
Nor in the competition w 1 or more suppliers
- Air traffic rights or directly related rights (the sector is difficult to regulate on
an MFN basis)
Governmental ser
- Ex:
Police, fire protection, infrastructural ser (roads), monetary
Basic obligations
MFN (Article II):
- Treatment no less favorable than that accorded to like services and service
suppliers of any other country.
- Like GATT, such a basic obligation applies regardless of commitments.
 - But a one-off opportunity to claim exemptions at the entry into force of the
WTO or upon accession to the WTO.
- Note: Unlike national treatment (NT), the other key non-discrimination pillar
of the WTO system, MFN is not an inherently liberalizing discipline. A
monopoly is MFN-consistent, preventing entry by any new supplier,
domestic or foreign.
- NT provide more advantage for the domestic firm, MFN provide treamant
that no less favorable for all the exporters.

Annex on MFN Exemptions

- Allows exemptions from MFN treatment.
- Exemptions are to be reviewed every 5 years:
> WTO Members are to examine whether the conditions that created the
need for the exemption still prevail.
- In principle, exemptions should not exceed 10 years:
In practice.....the exemptions seem deeply entrenched in sensitive sectors,
such as maritime transport (United States) or audiovisual services (France,
Canada), and therefore unlikely to be removed any time soon

Other MFN derogations

 Economic Integration (Article V)
 Elimination of barriers relating to NT between participants.
 Recognition (Article VII)
 Elimination of regulation-related restrictions (licenses, certificates, etc.)
 Other:
 Labour Market Integration Agreements (Vbis);
 Government procurement (XIII:1)
 General exceptions (XIV);
 National security exceptions (XIVbis);
 Prudential carve-out in financial services (2a FSA).
Mfn: Goods and ser: immediate and unconditionally
Nt: goods: imme and uncon
Ser: no

Transparency
-publication of all measurements of general application affecting the operation of
GATS
- establishment of national enquiry points
- where specific commitment are scheduled, WTO members must make annual
notification to the service council of new or changed measures significantly
affecting trade in service.

Economic integration agreements: conditions

- Substantial sectoral coverage (volume of trade, number of sectors, and
modes of supply).
- No a priori exclusion of modes of supply.
- Absence or elimination of discrimination "in the sense" of Article XVII
(national treatment).
- No discrimination of foreign-owned resident companies (preservation of
acquired rights).
- An EIA should facilitate trade among parties and not raise overall barriers
vis-à-vis other Members.
- If GATS specific commitments are affected, renegotiation is to done
according to Article XXI (Modification of commitments).
Economic Integration Agreements (Article V): Flexibilities
 Substantial sectoral coverage and elimination of all discrimination can be
achieved over "a reasonable time frame".
 Conditions are relaxed if developing countries are parties to the agreement.
 Consideration may be given to the relationship with a wider process of
economic integration.
 However: No discrimination of established suppliers (juridical persons) of
third countries- a liberal rule of origin for Mode 3 trade (substantial business
 operations test) is mandated, except for agreements among developing
countries, e.g. ASEAN, Mercosur, Andean Pact, et

Domestic regulation (Article VI)

- WTO has no direct role either in promoting the creation of domestic
regulations nor in specifying their content. The GATS preamble explicitly
recognizes the right of Members to regulate in order to meet legitimate
national policy objectives.
- GATS objective is to ensure that regulations do not create unnecessary
barriers to trade.
- Overly burdensome domestic regulation may effectively restrict market
access. Some examples:
A taxi driver must be 25 years old;
A license necessary for each region/state within one country;
A requirement of fluency in the host country language for providers of
cleaning services.
Where specific commitments are scheduled:
- Regulations must be applied in a reasonable, impartial and objective manner.
- Members must not apply licensing and qualification requirements and
technical standards that nullify or impair specific commitments in a manner
which:
Does not meet certain criteria; and
Could not reasonably have been expected at the time the specific
commitments were made.
- What are these criteria?
 Regulation must be based on objective and transparent criteria (e.g.
competence);
 Regulations must be no more burdensome than necessary to ensure
the quality of the service;
 In the case of licensing procedures, they should not in themselves be a
restriction on the supply of the service.
 - Ongoing negotiating mandate (Article VI.4) on the development of a
necessity test for services.
Cơ chế chặn ENT: có license hd trong lĩnh vực dịch vụ, new comers phải có license
mới dc enter

Recognition (Article VII)

- Recognition of foreign education, experience, requirements met, or licenses
and certifications granted, to fulfil standards and criteria for authorisation,
licensing or certification of service suppliers.
- Through negotiations or autonomously.
- Openness of agreements for new Members.
- No discrimination among countries.
- Obligation to notify the Council for Trade in Services.
- Use of multilaterally agreed criteria - work with other international
organisations.
- "Open" form of preferential treatment, as opposed to "closed" treatment
under Article V.

Competition-related issues (Articles VIII and IX)

- Monopolies and exclusive service providers are allowed, but:
 They should not abuse their dominant positions;
 They should not undermine specific commitments outside the scope of
their exclusive rights.
- It is recognised that some (anti-competitive) business practices can hamper
trade:
 Members are to consult upon request with a view to eliminating such
measures (positive comity approach)
 Note: these disciplines were crafted at a time when international
discussions on the trade impacts of competition law and policy were only
just beginning, hence their relative weakness.
General Exceptions
Article XIV - same chapeau and model as GATT Article XX:
➤ Necessary to protect public morals or maintain public order (argument
invoked in the recent dispute on online gambling (US-Antigua));
➤ Necessary to protect human, animal or plant life and health;
➤ Necessary to secure compliance with laws not consistent with the
agreement including, e.g. fraud, privacy and safety.
How to prepare a schedule?
Choose sector/sub-sector to list bottom up
Determine all the restrictions that must be listed, if any, forr each mode of supply
top down
Hence the notion of a hybrid approach to scheduling

GK: T6 (20/9)
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