NCPA - National Center for Policy Analysis


March 4, 2009

Although they are part of a large and growing segment of world trade, services are often overlooked in trade negotiations.  Yet countries with more open services markets benefit from higher growth rates and living standards, says Sallie James, a researcher with the Cato Institute.

While the extent of gains depends on the initial level of regulation and subsequent opening, the World Bank found that countries with fully open service sectors grow at a rate of up to 1.5 percentage points faster each year than other countries.  Compounded over a couple of decades, that would make a huge impact on living standards, says James.

It is clear, then, that remaining impediments to growth of services trade are a limit on economic growth, explains James:

  • A completely free global trade in services would increase global gross domestic product (GDP) by $1.661 trillion (or about $250 per person) -- more than 31 times the estimated $53 billion in gains that would come from complete liberalization of agricultural trade and more than twice the gains from free manufacturing trade ($700 billion).
  • The United States would capture $466 billion of the gains from free services trade, equivalent to about $4,500 per U.S. household.

So, how to capture those gains?  In many senses, services trade liberalization and the benefits that flow from it will come automatically if government doesn't get in the way of new businesses and technology.  But there are still some areas where governments can take positive steps to eliminate harmful regulations; thus, encouraging other governments to open their markets to services imports, says James:

  • Eliminate foreign equity restrictions that limit the investment opportunities for foreign firms and the inflow of foreign capital.
  • Eliminate market entry requirements and regulations that are not "national treatment" compliant.
  • Exact requirements on the form that investments should take when establishing a business.
  • Clear up the implementation regulations and licensing approval processes that generate a lack of commercial certainty.

Source: Sallie James, "A Service to the Economy: Removing Barriers to 'Invisible Trade'," Center for Trade Policy Studies (Cato Institute), February 4, 2009.

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