Liberalization of services has featured prominently in regional trade agreements (RTAs) since the late 1980s and also in the draft General Agreement on Trade in Services (GATS) negotiated under the Uruguay Round. In Discussion Paper No. 749, Research Fellow Bernard Hoekman reviews available data on trade and investment flows for services. He finds that intra-industry trade among OECD countries is high; the relative importance of intra-bloc trade is smaller than for merchandise trade; and many OECD countries have a `revealed comparative advantage' in services, for which foreign direct investment accounts for over half the total. These results suggest that levels of support for regional and multilateral liberalization are similar, but outward-oriented service industries that rely on establishment to contest markets may prefer multilateralism. Import-competing firms that already face substantial foreign competition in an RTA may perceive the marginal costs of offering further access multilaterally or indeed of not reaching such an agreement to be low.

Hoekman finds little evidence of actions to close regional markets to third parties, but with the notable exception of the EC single market, RTAs go little beyond the GATS. The similarity of the sectors excluded from and given priority in liberalization in all agreements suggests that industries favouring liberalization view regional and multilateral agreements as complements rather than substitutes. Pressure from export-oriented service industries has been necessary but not sufficient for liberalization, whose opponents have tended to oppose both approaches. Some export-oriented service industries pushed for reciprocal liberalization to effect changes in their domestic regulatory structures and were quite successful in achieving their objectives, but users also played a major role in convincing regulators of the benefits of liberalization. The perception that increased competitiveness required a reduction in the average cost of service inputs or an increase in their quality accounted for substantial regulatory change and the increased willingness to allow market access in services.

Regional Versus Multilateral Liberalization of Trade in Services
Bernard M Hoekman

Discussion Paper No. 749, December 1992 (IT)