Service Trade Liberalization as a Handmaiden of Competitiveness in Manufacturing: An Industrialized or Developing Country Issue?
This paper discusses the issue whether developing countries forego chances in world manufactured markets by protecting intermediate services against market entry of new suppliers. By scanning the empirical literature on effective rates of protection (ERP), the evidence is supportive. Yet, it seems more the indirect effect via expanding the service sector in total through liberalization and deregulation than the direct effect of lowering ERP in intermediate service industries for downstream manufacturing industries which is relevant. Developed countries on the other hand enjoy a much lower level of protection in important intermediate services like banking and telecom and thus these industries can be instrumental to help downstream manufacturing industries in adjustment and restructuring. It is argued that especially in the EU competition in intermediate services will further rise due to various EU-policy rooted factors. As a result, protection rates of services in individual EU countries will converge. This paper presents a theoretical model of the labor market in which these effects can be analyzed. We then calibrate the model with respect to the German labor market to shed light on the relative strengths of these effects and thereby assess the degree to which low-wage subsidies encourage or discourage employment
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