Services have increasingly dominated international trade negotiations, despite limited information about the extent of trade in services, barriers to it, and their impact. In Discussion Paper No. 666, Research Fellow Bernard Hoekman cites theoretical arguments for making all modes of contesting all services markets available to foreign providers. But then services transactions would be subject to a much more liberal regime than merchandise trade. And the theory also ignores the natural complementarity between many services and the production and trade of goods. Political economy considerations constrain the broad-based liberalization of goods and services trade. Moreover, the lack of information on costs and benefits of alternative partial liberalization strategies in services makes it difficult to choose the best strategy that is politically feasible, so liberalization may only move the economy from one sub-optimal position to another.

Hoekman maintains that the welfare effects of liberalization depend in practice on the preferences and influence of interest groups, but the political economy of liberalization is much more complex for services than for merchandise trade. Liberalizing services allows foreign providers to establish a commercial presence, which may affect some interest groups. For example, workers making goods in which the home country is at a comparative disadvantage will oppose liberalization that threatens their employment, but the net effect on employment of liberalizing services is ambiguous. Services are often highly regulated, and liberalization may affect regulators' ability to exert control; they may therefore require the establishment of foreign providers to enable them to regulate their activities effectively. Claims of `unfair' international competition due to regulatory differences and calls for harmonization are likely to be especially strong for services, although they may be driven by strategic rent-seeking, since harmonization imposes differential costs on foreign and domestic producers.

Hoekman concludes that the net effect on liberalization of these and more traditional political economy forces is ambiguous. He suggests further research into the costs and benefits of excluding certain sectors from liberalization and the effects of harmonizing countervailing trade policies. Methodological work is needed to overcome the major difficulties arising in generating the necessary data, without which policy-makers will be unable to adopt or defend more efficient policies.

Conceptual and Political Economy Issues in Liberalizing International Transactions in Services
Bernard Hoekman

Discussion Paper No. 666, June 1992 (IT)