Services Domestic Regulation - Doing the Obvious

Services Trade has been growing continuously over the past three decades and was worth USD 13.3 trillion in 2017. Services value added accounts for almost half of all world trade (goods and services combined). 

Despite these impressive figures, the 2019 WTO World Trade Report finds that costs of trading services are about twice as high as trade costs for goods.

A significant portion of these costs are attributable to regulatory divergence, as well as opaque regulations and cumbersome procedures. Through the development of disciplines on services domestic regulation, a group of currently 63 WTO members has set out to address these cost factors.

The WTO Joint Initiative on Services Domestic Regulation is close to converging on a set of disciplines which build on and enhance obligations contained in the General Agreement on Trade in Services (GATS) relating to transparency of services regulations, and predictability of licensing and other authorization procedures. These disciplines also contain a number of facilitative principles, such as requiring independence and impartiality of administrative decisions, and efficiency seeking measures relating to acceptance of electronic applications and authenticated copies of documents, as well as consolidation of all relevant information in a single online portal. They cover a sub-set of "good regulatory practice" developed by several international organizations (including the OECD, the World Bank, or APEC) which focus on cross-cutting procedural and transparency related obstacles to the supply of services. The disciplines designed by the Initiative, however, do not address other non-services and non-trade specific best practices such as regulatory impact assessments and regulatory cooperation.

The recognition that good regulation has a positive effect on economic performance has been demonstrated in many studies and is today generally accepted as common sense. It is the rationale behind countless reform efforts that countries around the world have conducted autonomously throughout the past decades. 

New research by the WTO Secretariat (WTO Staff Working Paper, forthcoming) examines the extent to which the specific disciplines developed by the Joint Initiative are rooted in Regional Trade Agreements (RTAs). A survey of 74 agreements shows that such disciplines have been included increasingly in RTAs, and in particular in recently adopted and "new generation" agreements. This trend is reflected among economies at all levels of income and across all regions of the world, with only low-income economies taking part to a lesser extent. This observation is important insofar as it suggest that disciplines that seek to promote transparency and predictability are compatible with different regulatory approaches and levels of development. And what is more, also emerging ASEAN markets that are not currently participating in the Initiative have agreed to set of largely equivalent disciplines in the context of the RCEP Agreement. 

On the basis of the RTA and applied regime datasets, the research highlights other interesting findings. Economies that have adopted more domestic regulation obligations in their RTAs have, on average, larger domestic services sectors. And larger services sectors create more jobs and foster efficiency and competitiveness, as well as contribute to improvement in firms' competitiveness in the manufacturing sector. Greater inclusion of domestic regulation commitments in RTAs also tends to correspond to more active engagement in global value chains (GVCs), which offer opportunities for domestic firms to integrate into international production networks and benefit from knowledge and technological spill-over effects. The inclusion of domestic regulation obligations in RTAs is, on average, associated with a greater level of entrepreneurship – a key tool for promoting innovation and competitiveness of markets. This suggests that services domestic regulation can particularly benefit small business and women entrepreneurs, who are typically less well equipped to navigate opaque and costly requirements and procedures. The research suggests that these findings hold true for cross-border trade as well as trade through affiliates. The research also establishes positive correlations between implementation of domestic regulation disciplines at national level and various sectoral indicators: economies with a higher rate of domestic regulation disciplines tend to have greater financial depth, lower telecom prices and more extensive mobile network coverage, and higher quality of transport services.

While this research cannot establish causal relationship, these findings all point in the same direction: more transparent, clear and facilitative regulation of services markets is positively associated with economic development and competitiveness of services trade.

The domestic regulation disciplines developed by the Joint Initiative do not break innovative new ground. Yet, they address a demand that business across the world have articulated for many years  and seek to consolidate recognized international best practice under the roof of the WTO. This is a step a in the right direction, and a welcome signal at a time when one lesson from the COVID-19 crisis points to a need for more transparency, clarity, and predictability of trade procedures for both goods and services. It may seem like doing the obvious, but such a step has eluded WTO negotiators for a very long time.

Markus Jelitto is Counsellor at the Services Trade Division, WTO Secretariat, Geneva

The views expressed here are the author’s alone, and do not represent the views of the Institute for International Trade.

Photo by Charles Deluvio on Unsplash