Empirical Analysis Of Barriers To International Services Transactions And The Consequences Of Liberalization

This module provides an overview of the methods that can be used to identify and quantify barriers to international trade in services. Trade in services is customarily classified into four "modes of supply": Mode 1 – services that are traded internationally across borders; Mode 2 – services that require the consumer to be in the location of the producer; Mode 3 – services that require commercial presence in the form of foreign direct investment; and Mode 4 – services that require the temporary cross-border movement of workers. Barriers to any of these forms of trade typically take the form of regulations that either restrict supply or make it more costly. In either case, the economic impact of such a barrier can in principle be quantified as a "tariff equivalent," defined as the percentage tax on foreign suppliers that would have the same effect on the domestic market for the service as is caused by the barrier.Barriers to trade in services are extremely diverse, making it difficult to classify them in any simple yet detailed way. Broadly, they may be separated on the one hand into those that restrict entry of firms versus those that affect firms' operations, and on the other hand into those that discriminate against foreign service providers versus those that do not. Within these broad categories, barriers have been classified much more finely in terms of characteristics that are appropriate to particular service industries.Measurement of service barriers can be either direct or indirect. Direct measurement involves documenting barriers that are known to exist, either by extracting information about them from government documents or by questioning those market participants who confront them. Ideally, both of these methods should be based on detailed knowledge of the industries involved, since services differ greatly among themselves in the kinds of regulations that apply to them and in the rationales and effects of these regulations.Indirect measurement attempts to infer the presence of barriers from their market effects, much as nontariff barriers on trade in goods are often inferred from price differences across borders. Unfortunately, most services do not cross a border in this way, and even those that do are often differentiated sufficiently that comparable prices do not exist inside and outside of economies. Thus indirect measurement has to be even more indirect, drawing heavily on theoretical models of activity in the absence of barriers.We illustrate these various approaches by citing in some detail a number of studies that have been carried out, some for broad categories of service trade and others for particular sectors. We also, in an appendix, summarize a much larger number of studies. Procedures differ somewhat across studies, but most employ one or more of the following steps:• Collect the details of regulations and other policies affecting service firms in the economies and/or sectors being examined. Ideally, this information should be collected by systematic surveys of governments and/or firms. However, it may also be possible to infer it less directly from documents prepared for other purposes.• For each type of regulation or policy, define degrees of restrictiveness and assign scores to each.• Construct an index of restrictiveness by: weighting the above scores based on subjective judgments; using a statistical methodology; or designing proxy measures.• Convert these indices of restrictiveness into a set of tariff equivalents by one or more of the following methods.• Assign judgmental tariff-equivalent values to each component of the index.• Use data on prices and their determinants in a regression model to estimate the effect on prices.• Use data on quantities produced or traded in a regression model to estimates the effect on quantities, and convert to tariff equivalents.• Use the above measures as inputs into a model of production and trade in order to ascertain the economic effects of the presence of changes in the services barriers involved.