AN OVERVIEW OF INTERNATIONAL TRADE IN SERVICES
The service sector is the most important sector for
most developing economies like Pakistan having a comparative advantage
in labour services. It is the largest contributor to gross domestic
product, production and employment. Since it is such an important
sector, developing economies need to identify their comparative
advantage in services and potential export markets. Developing
economies. They have an abundance of low and semi-skilled labour that is
a major input into tourism, construction and transport services.
Developing economies are projected to be better off by US$ 130 billion
from services trade liberalization. As developing economies remove their
restrictions, their service sectors develop, primarily funded by foreign
direct investment, and they become major exporters of services. The main
restrictions on service suppliers that are preventing developing
economies from realizing these benefits are limits on foreign direct
investment, stringent licensing requirements and restrictions on
In 2000, world exports of services were US$ 1,435
billion, or approximately 20% of total world exports (WTO, 2001). As
would be expected, the flow of exports and imports of services is the
greatest for Asia, North America and Western Europe (figure 3.1). These
three regions account for more than 88% of service exports, the European
Union (45%), North America (22%) and Asia (21%). Asia and the Rest of
the world are the largest net importers of services.
The production of services typically accounts for the
largest share of gross domestic product (GDP) and employment in
developed and developing economies. The service sector is about 40 to 60
per cent of GDP and employment for developing economies and 60 to 80 per
cent for developed economies. While the proportion of GDP attributable
to services is generally lower in developing than in developed
economies, the rate of growth of service sectors in developing economies
is faster than that in developed economies (OECD, 1999). The importance
of services to an economy is even greater than that reflected in direct
sectoral shares of GDP and employment because services are import ant
inputs for all aspects of processing and production. The growth of an
economy's service sector is strongly associated with product
specialization, income growth and economic modernization. Services
provide much of the necessary infrastructure for investment and economic
growth, ensuring that their efficient delivery is an important means of
improving an economy's overall productivity.
HOW ARE SERVICES TRADED?
The major distinction between international trade in
goods and international trade in services lies in the movement of the
factors of production, mainly, labour and capital. For trade in goods,
the factors of production are typically fixed in a specific location and
the product is transported to the foreign market.
For example, a motor vehicle manufacturing plant is
usually located in the domestic market and motor vehicles are
transported to the foreign market.
For trade in services, the factors of production move
such that services can be supplied in four ways:
The World Trade Organization General Agreement on
Trade in Services (GATS) describes the four ways or modes of supply for
trade in services i.e.
commercial presence and,
the movement of people.
MODE 1: CROSS-BORDER
In the same way as goods are traded, services can be
traded across borders. There is thus a clear geographical separation
between the buyer and the seller. For example, a Pakistani stock-broking
firm may buy or sell shares to an American counterpart over the
Internet. Pakistan is exporting financial services across the border to
US and US is importing financial services from the Pakistan.
MODE 2: CONSUMPTION ABROAD
Services can be traded by the consumer moving or
traveling to the foreign market. For example, a Pakistan fee-paying
student may travel to US to study at a US university. US is exporting
its education services to the Pakistan and the Pakistan is importing
education services from US.
MODE 3: COMMERCIAL PRESENCE
Services can be traded by the capital of the exporter
moving to the foreign market.For example, a United States
telecommunications company may establish a company in Pakistan. The sale
of telecommunications services in Pakistan is an export from the United
States to Pakistan and Pakistan is importing telecommunications services
from the United States. Most services are traded in this way.
MODE 4: PRESENCE OF NATURAL PERSONS (OR MOVEMENT OF PEOPLE)
Services can be traded by the producer or service
supplier moving to the foreign market. For example, an accountant who is
a Pakistani citizen may temporarily work for a Saudi company in Saudi
Arab. The Pakistani accountant is exporting professional services to
Saudi Arab and Saudi Arab is importing professional services from
WHAT IS TRADE LIBERALISATION?
Trade liberalisation generally refers to the
reduction of barriers to the movement of goods and services in
international trade. It applies only to measures restricting imports and
exports. Trade liberalisation can be done collectively with other
countries (such as multilaterally through the World Trade Organisation)
or by one country on its own (unilaterally). When trade liberalisation
is done collectively, the benefits multiply significantly.
WHY DO COUNTRIES UNDERTAKE TRADE LIBERALISATION?
Countries undertake trade liberalisation for several
reasons. The first is based on the theory of comparative advantage.
Removing barriers to trade allows economies to produce what they produce
best. Another reason is to improve the domestic economy by reducing
protection and using resources more efficiently. Both reasons have
beneficial economic effects that help achieve higher growth and enhance
standards of living.
TRADE IN SERVICES AS COMPARATIVE ADVANTAGE
The modern economy fundamentally depends on
specialization and trade between economies. The principle of comparative
advantage is the fundamental analytical explanation of the gains from
The theory of Comparative Advantage states that an
economy should specialize in the production and export of services in
which it has a relative advantage and import services in which it has a
relative disadvantage. International trade on this basis will mean that
services will be produced by the relatively least cost world producer
and the quantity of services consumed will be optimal. The determinants
of an economy's comparative advantage are the endowments of the factors
of production and technology. Factor endowment is the amount of
resources: land, labour or capital held by an economy that can be used
for production. Technology entails the productive use of resources and
telecommunications undoubtedly provided necessary means to unleash the
prowess of services industry for trade.
Comparative advantage should be distinguished from
absolute advantage3. Few countries have an absolute advantage in
producing something, that is, they are better at it than any other
country. However, every country has a comparative advantage in producing
something. It must be best at producing something relative to other
activities. Many factors determine comparative advantage in an economy.
They could include the existence of natural resources; costs of labour;
proximity to markets; levels of education; experience; knowledge, and
International trade allows countries to specialise in
production according to their comparative advantage; each country
exports goods in which it has a comparative advantage: and imports goods
in which others have a comparative advantage. This way both countries
will be better off.
IMPROVING THE DOMESTIC ECONOMY
Governments can sometimes get in the way of effective
trade liberalisation. They can tax imports with tariffs; restrict
quantities of imports, and pay subsidies to domestic producers.
Governments intervene in these ways for various reasons. For example, it
may be to make domestic producers economically strong, or to protect a
Government intervention can be costly. It can weaken
the capacity of the economy to maximize its comparative advantage by
distorting resources to activities the economy is not really better at
producing. This means important resources are taken away from those
goods the economy can produce better. Protection benefits only to narrow
interests in the economy and reduces economic welfare. Often the cost to
the economy is greater than the benefit — businesses are less
efficient and products more expensive; less money is available to spend
on other things (such as health and education), and money is not
invested where the best returns are possible. As a result, the cost of
living is higher.
An economy may have abundant factor endowments of
unskilled labour and a comparative advantage in labour-intensive
services construction and tourism services. On the other hand, an
economy may have a small quantity of highly skilled labour such that it
has a comparative advantage in legal services. Developing economies
clearly have a comparativeadvantage in labour services or services where
labour is a major input, such as tourism. Some developing economies also
have a comparative advantage in construction and transport services,
although this is more variable between economies.
New export opportunities are also emerging for
developing economies in communications and computer services and with
the aggressive agenda for IT (Information Technology) Pakistan endeavors
to gain comparative advantage in not only software exports, but also
seizes opportunities among all sectors of the economy where digitization
of products and services can take place for trade purposed over digital
Keeping the very context of trade-able services,
developing countries as a group have witnessed an even more rapid
(nearly four-fold) increase in their services exports, and a consequent
increase in their share in world service trade from 14 percent in
1985-89 to 18 percent in 1995-98 (figure 3.2).
THE ECONOMIC EFFECTS OF LOWERING TRADE BARRIERS
Trade liberalisation fosters a more efficient
allocation of resources in the economy4. This is because it allows
countries to focus in the activities they are best at (comparative
advantage) and also because it reduces protection that benefits only
narrow interests in the economy. The economic effects of trade
liberalisation are increased growth, wealth and standards of living. It
improves the national economy by reducing costs and fostering the
efficient use of resources5. Imports become cheaper allowing a greater
choice of goods and services. Exports expand, adding to national and
personal incomes. Investment occurs where comparative advantage is
greatest. This encourages competitive pricing and also stimulates
COLLECTIVE TRADE LIBERALISATION
The economics of trade liberalisation multiply when
countries act collectively to liberalise trade. Higher growth is
achieved in all economies. Demand for products increases, including
imports from other countries. Welfare and standards of living increase
as a result. The recent decade of high growth and increases in standards
of living worldwide was characterized by the removal of trade barriers
as a result of the Uruguay Round of trade negotiations and subsequent
unprecedented levels of trade. Growth and demand slows when protection
is increased. The period of the Great Depression in the 1930s was
characterised by rapid increases in protection.
Trade liberalisation benefits all countries,
including large and powerful ones. Small countries generally lose from
imposing trade barriers because they cannot influence prices on world
markets. They have much to gain from collective or unilateral
liberalisation. For the world as a whole, the imposition of restrictions
by one or more countries is inefficient and reduces welfare. All
countries, including large ones that may be able to influence world
prices, end up with lower welfare under protection than if they applied
free trade policies.
Developing countries have gained significantly from
trade liberalisation under the Uruguay Round. They have more to gain
from further trade liberalisation. The WTO estimates that cutting
barriers to trade in agriculture, manufacturing and services by a third
would boost the world economy by US$613 billion, and that doing way with
all trade barriers would result in an extra US$1.9 trillion, the
equivalent of adding two more "Chinas" to the world economy.
Most of these benefits would accrue to developing countries.
MARKET ACCESS FOR TRADE IN SERVICES IN WTO
Market Access is the spirit of WTO negotiations which
requires WTO member states to provide non-discriminatory access to
domestic markets creating an equitable environment for imported and
domestically produced goods and services. WTO rules of National
Treatment (not to discriminate between imports and domestic production)
and Most Favored Nation (MFN) Treatment (to apply border measures
without discrimination among WTO member countries), Tariffication (to
protect domestic industry only through tariffs with prohibition of
quantitative restrictions) and Tariff Binding (to eliminate protection
to domestic production by reducing tariffs and other barriers to trade).
Market access in services is inherently more complex
than market access for trade in goods. For trade in goods, market access
is about reducing mainly border measures such as tariffs that are
imposed on goods as they enter a market. For trade in services, market
access is about reducing government policy interventions which are less
visible and may be applied after a service supplier has entered the
market. These measures take the form of government regulations that are
usually aimed at domestic policy objectives rather than trade policy
objectives. There is usually little consideration of the effects of such
measures on trade and market access for Foreign Service suppliers.
MEASURING TRADE RESTRICTIVENESS IN SERVICES
Restrictions on trade in goods usually take the form
of a tariff, while restrictions on trade in services usually take the
form of government regulation and a certain level of regulation is
usually justified for meeting regulatory objectives.
Restrictions can be classified in two ways. The first
is by whether a restriction applies to:
ability of service suppliers to establish physical outlets in an economy
and supply services through those outlets as of Commercial Presence.
The operations of a service supplier,
after it has entered the market. Restrictions on establishment often
include licensing requirements for service suppliers or firms,
restrictions on direct investment in existing firms and restrictions on
the permanent movement of people. Restrictions on ongoing operations
often include restrictions on firms conducting their core business, the
pricing of services and the temporary movement of people as of
Cross-Border Supply or Movement of Natural Persons.
The second way a restriction can be classified is by
whether it is:
Restricting domestic and Foreign
Service suppliers equally as of Market Access.
Restricting only Foreign Service
suppliers as of National Treatment.
The above bifurcation
call be more clearly elaborated in the following example:
Table 3.4: Classifying Trade Restrictions on Telecommunication
(Commercial Presence Mode of Supply)
(Cross-border consumption abroad, Movement of
Natural Persons mode of Supply)
No. of operator licenses is restricted(as the case of Mobile
Operators in Pakistan i.e. three)
Telecom Operator is restricted in the manner it operates.
(Say Rural Area only, or GSM only)
No. of foreign operator licenses is restricted.
Foreign Telecom Operator is restricted in the manner it
TRADE RESTRICTEDNESS INDEX (TRI)
The restriction categories are then weighted together
according to a judgment about their relative economic cost subject to
reasonably available information. For example, restrictions on telecom
operator licenses are weighted more heavily than restrictions on the
temporary movement of people. The weights are generally chosen so that
the total restrictiveness index score ranges from 0 to 1.
TRI = FI + DI (Total Restrictiveness)
FI — DI = (Total Discrimination against foreigners)
Where FI is Foreign Index,
And DI is Domestic Index.
A foreign index is calculated in order to measure all
restrictions that hinder foreign firms from entering and operating in an
economy. It covers both discriminatory and non-discriminatory
restrictions. A domestic index represents restrictions that are applied
index represents restrictions that are applied to domestic firms and it
covers non-discriminatory restrictions. The difference between the
foreign and domestic index scores is a measure of discrimination against
In calculating an overall economy score, it is not
determined which restrictions might be justified for enhancing the
efficiency of a service sector and which might not. In general, trade
restrictions, by reducing competition in a services market, will reduce
the efficiency of that market. However, sometimes regulation which
limits competition is necessary to deal with market failure and to meet
particular social objectives. It is extremely difficult to make an
assessment about the merits of regulation for economies with different
regulatory objectives and structures.
Furthermore, multilateral trading agreements, such as
the GATS, aim to reduce restrictions while recognizing the freedom of
trading agreement members to regulate to meet national policy
objectives. Governments generally set their own regulation objectives of
achieving efficiency, transparency, stability and adequate disclosure.
BENEFITS OF LIBERALIZATION FOR
The most gains from trade reform come from the
economic efficiencies created when an economy opens itself to the
pressures and opportunities of international competition. There is
substantial empirical evidence to show that significant benefits accrue
to those economies undergoing trade liberalization, whether it is in the
traditional area of goods or the important growth area of services.
Sachs and Warner (1995) found a close association between trade openness
and economic growth in developing economies. From 1970 to 1989, open
developing economies grew at an average annual rate of 4.5 per cent,
while closed economies grew at a rate of 0.7 per cent. Dollar and Kraay
(2001) found a strong positive effect of trade on growth. Srinivasan and
Bhagwati (2001) found that, after accounting for numerous
economy-specific factors, trade does seem to create, even sustain,
As mentioned above, liberalizing trade in services is
about reforming regulation that restricts trade, so as to improve
national welfare. While it is necessary for Governments to maintain
regulation to meet social and economic objectives, certain regulation
may intentionally or unintentionally restrict trade in services. Such
restrictions are likely to reduce economic efficiency and hence national
welfare by limiting the extent to which economies specialize in
providing services according to their comparative advantage.
Liberalization increases competition, lowers prices
and improves the quality of services. Competition, especially
international competition, is the best guarantee that domestic service
suppliers are and will remain efficient. Competition forces service
suppliers to reduce waste, improve management and become more efficient.
Costly rent seeking activities, for the purpose of gaining or
maintaining preferential access to a services market, are also less
feasible in a liberalized environment. These pressures reduce the
operational costs of providing services. Competition then forces service
suppliers to pass on cost savings to consumers in the form of lower
prices. The excess profits of service suppliers are reduced and the
number of service suppliers is increased.
These benefits of liberalizing independently are not
confined to the service sector. Some service sectors like,
telecommunications, financial and transport not only provide final
consumer services, but also are essential inputs for the production of
other goods and services. This congruence between the service sector and
other sectors produces substantial benefits beyond the service sector
that directly feed into improving an economy's trade and economic
MARKET ACCESS IN TELECOMMUNICATIONS
Three trends are making globally linked electronic
networks a key feature of the world economy: the declining cost of
computing power, the increasing growth of communications capacity
("bandwidth"), and the continuing expansion of Internet-based
data networks. The growth and development of the modern networked
economy relies upon continued investment and build-out of the basic
telecommunications infrastructure. In evaluating the value of
liberalization, and its effect on attracting investment, it must be
taken into account that the changing nature of telecommunications
networks: increasingly, firms investing in networks seek to provide a
broad range of integrated services, often involving voice, data, and
video, through a variety of narrowband or broadband technologies using
wireless (fixed, mobile, terrestrial, and satellite) and wire-line
platforms. Evolving networks can use all these services and technologies
in a seamless, technology neutral manner.
One of the central roles the WTO can provide is
encouraging an environment conducive to investment in and use of such
networks. Two important ways in which WTO members can help foster
investment in the development of advanced networks is by removing
barriers to investment and competition. One way to promote a more
favorable investment climate is reducing monopoly power in the
telecommunications sector, typically characterized by government
ownership of the operator. In the past, governments ensured investment
in networks by building telecommunications infrastructure from
government resources, and recovering capital needs through high prices
in an environment of restricted competition. Therefore, while
privatization is an important first step toward a liberalized market, it
must be combined with viable competition for full benefits of increased
growth and innovation to be realized.
Therefore, market access in telecommunication becomes
the kernel of economic activity, directly affecting the performance and
scope of trade potential of a specific country or company.
PROFILE OF AUTHOR
MR. YOUSAF HAROON is
working as Assistant Professor (Management) at the National Post
Graduate Institute of Telecommunications and Informatics, PTCL
Islamabad, coordinator and trainer for professional management courses
for top and middle management of PTCL all over Pakistan. He specializes
in WTO, GATS, Telecommunications Services, Business Strategy and Policy.
This article is an extract from the thesis written as
the partial requirement for completing PGD WTO and IPR from
International Islamic University Islamabad.
He can be reached at [firstname.lastname@example.org] or