Liberalizing trade in services is important for economic growth both in the United States and abroad. As an economy develops, services tend to increase as a share of gross domestic product (GDP) and as a share of trade. Like many advanced industrialized economies, the United States has a global competitive advantage in services and can benefit from services liberalization abroad by gaining access to markets and increasing foreign market share. But the largest gains may be realized by developing countries, in which trade liberalization in services can bring transformative change to the broader economy, increasing productivity at the firm, industry, and economy-wide level.
Despite the immense potential benefits from services liberalization, services remain highly protected in most countries. One impediment to liberalization has been the difficulty in assessing the effects of services liberalization, both qualitatively and quantitatively. Recent efforts to pursue liberalization have spawned a number of studies on the economic effects of such reforms. In this article, we explore recent empirical evidence of services liberalization efforts and economic effects. We aim to translate key findings into useful stylized facts for computable general equilibrium (CGE) modeling efforts in this area.
Services, which include sectors such as telecommunications, express delivery, transportation and storage, and financial and business services, generate 68 percent of world GDP but account for just under 20 percent of world trade. Not all services are easily traded, and perhaps we should not expect the share of services of trade to match its share of GDP. Still, technological advances in information communication technology have allowed an increasing number of services to be delivered internationally. Over the past decade, international trade in services has grown 8 percent, outpacing world GDP growth of 5 percent.
Not only do services sectors represent the majority of GDP value-added in most economies today, they are crucial inputs throughout the economy. Information communication and telecommunications play a vital role in diffusing knowledge and digitizing products. Transport services drive the cost of shipping goods and facilitate the movement of workers. Business and professional services such as accounting, engineering, financial, and consulting and legal services can reduce transaction costs and foster business process innovations. Retail and wholesale distribution services link producers and consumers within and across countries.
Despite—or perhaps because of—their importance, services face restrictions on trade at least as high as those on goods trade. Indeed, a number of careful studies using different methodologies, such as Dee (2005), Bradford (2005), and Dihel and Shepard (2007), have shown up to an order of magnitude of difference between barriers to services trade and barriers to goods trade, and consequently much larger payoffs from services trade liberalization than from goods trade liberalization.
Policies that restrict services trade and competition are not the same across all service sectors. For example, a recent survey by the World Bank (Gootiiz and Mattoo 2009) of the extent of discriminatory policies restricting entry by foreign firms in 30 developing countries found significant heterogeneity across individual service sectors. Still, the consensus among economists is that the tariff equivalents of prevailing restrictions on services trade are a multiple of those that restrict merchandise trade.
This paper aims to survey the literature on how economies respond to an increase in services trade and to reform in the services sector that leads to increased competition from domestic and international competitors. We consider theoretical predications and empirical findings. Then we consider how CGE modeling efforts have captured services liberalization. Finally, we conclude by proposing a set of stylized facts that indicate the way forward for future modeling efforts.
