Reducing Services Trade Costs in the G20 and beyond

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trade policy brief

Joint Initiative on Services Domestic Regulations: Reducing Services Trade Costs in the G20 and beyond

October 2021

S ignificant economic benefits: Adoption and implementation of the Joint Initiative on Services Domestic Regulations can generate services trade cost savings of over USD 140 billion annually across G20 countries. S MEs will be the first to gain: Exporting to new markets involves the navigation of procedural hurdles and compliance costs. SMEs would enjoy an additional 2-3% cost reduction advantage relative to large firms.

Services sectors are key to economic recovery Services represent over 60% of GDP in value-added terms across G20 countries, underscoring their importance in supporting economic recovery, growth and well-being (Figure 1). Moreover, new technologies and the digital transformation enable the easier flow of services across borders and open new market opportunities, especially for smaller firms.

Services are also essential inputs into the production process and along supply chains of goods exports. Services are therefore important drivers of employment, productivity and innovation for developing and developed countries alike, and as such are critical to strong, sustainable and inclusive economic recovery.

Figure 1. Services are major economic drivers across the G20 (Services value added as a percentage of GDP, 2020) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: World Development Indicators (2020). Data for the United States is for 2019; for Japan, 2018; and for Canada for 2017.

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Joint Initiative on Services Domestic Regulations: Reducing Services Trade Costs in the G20 and beyond

Streamlined services domestic regulations facilitate trade Divergent regulations, cumbersome authorisation processes, and lack of transparency can be powerful deterrents to trade and investment. A group of 65 WTO members are currently participating in the Joint Initiative (JSI) on Services Domestic Regulation with the shared objective of improving the existing trade rulebook that affect qualification requirements and procedures, technical standards, licensing requirements and procedures for services providers. Most G20 countries are participating in these discussions. On 27 September 2021, participants in the JSI concluded discussions on the text of the Reference Paper on Services Domestic Regulations.

Easing procedural hurdles, increasing transparency, and promoting regulatory predictability can facilitate trade, incentivise new investment and lower prices for consumers. Across the G20, for example, there is scope to improve domestic services regulations. If the current disciplines considered under the JSI were to be fully implemented in G20 countries, impediments to trade, as measured by the OECD Services Trade Restrictiveness Index, could be lowered by up to 24% (Figure 2). Most barriers could be eliminated in sectors such as telecommunications services (-24%), computer services (-19%), engineering services (-18%) and commercial banking services (-17%), which are key intermediate services contributing to all economic activities. Moreover, as most of these sectors are important pillars of the digital economy, streamlining domestic regulations would also benefit digital trade.

Figure 2. Reducing regulatory hurdles will lower barriers to services trade (Average percentage of decrease in STRI values resulting from removal of existing impediments)

0%

-5%

-10%

-15%

-20%

-25%

-30% Note: Calculations based on 17 G20 countries and 19 further EU members currently covered in the OECD STRI. Trade-weighted average of intra-EEA restrictiveness and MFN restrictiveness for EU members. Equal weighting of all G20 members with available data, where the EU average is the simple average of 19 further EU members. Source: OECD STRI, 2020.

Streamlining services domestic regulations can generate significant economic benefits. In the case of G20 countries, for example, fully implementing all JSI disciplines, could potentially reduce services trade costs by -6% in the medium term (after 3-5 years), on average across sectors and across G20 economies (Figure 3). The impact of such a reform program would be particularly large in highly regulated sectors where licensing, registration processes

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and recognition of qualifications are prominent. These sectors include commercial banking (-21%), telecommunications (-10%), and insurance (-9%). Trade in computer services would also be facilitated (-6%). Among professional services, benefits would be equally significant for engineering (-6%) and architecture services (-6%).

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Figure 3. Significant sector-specific trade costs reductions (By sector, percentage of export values) Trade cost effect

Average

0%

-5%

-10%

-15%

-20%

-25%

Note: Calculations based on 17 G20 countries and 19 further EU members currently covered in the OECD STRI. Trade-weighted average of intra-EEA restrictiveness and MFN restrictiveness for EU members. Equal weighting of all G20 members with available data, where the EU average is the simple average of 19 further EU members. Source: Calculations are based on the methodology in Benz and Jaax (2020).

Substantial trade cost savings for exporters

SMEs are the first to gain

Lower services trade costs would facilitate entry into new markets for existing exporters. It would also allow domestic firms to reach out to international customers. For existing exporters, easing border bottlenecks would correspond to substantial cost savings. In the case of G20 countries, the total relief resulting from the cutback of regulatory cost for services exporters and importers could amount to annual savings of around USD 143 billion in five broad services sectors, including transport, insurance, financial services, telecommunications and other business services (Figure 4). Savings would materialise in the medium-term and would be highest for other business services with USD 42 billion across all G20 economies. This is mostly driven by the high volume of services trade in the sector. Substantial trade cost savings could also be realised in financial services with USD 33 billion, even though there is significantly less cross border trade in this sector. Benefits could also be realised for transport services (USD 28 billion), communications services (USD 25 billion), and insurance services (USD 15 billion).

Exporting to new markets and maintaining international trade relationships often involves a large number of regulatory procedures. These requirements represent significant costs to all businesses, related to the navigation of complex regulatory regimes across economies, dealing with time-consuming procedural hurdles and documenting compliance in new markets. However, they can be particularly costly for small- and medium sized enterprises (SMEs). SMEs often do not have the capacity for large and rapid expansion and upscaling. Instead, they often export lower services values, while issues such as licensing, authorization and compliance can represent a fixed cost. For this reason, smaller firms are particularly affected by a lack of regulatory transparency.

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In fact, inefficient and non-transparent services regulations may make market entry for smaller players prohibitively costly. Otherwise profitable business opportunities will need to be abandoned. Consumers may not be able to access services provided by foreign SMEs. And even successful SME exporters face particular challenges due to their size disadvantage. The costs of inefficient regulation fall more heavily on SMEs than larger multinational firms with more resources.

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Joint Initiative on Services Domestic Regulations: Reducing Services Trade Costs in the G20 and beyond

Figure 4. Annual trade cost savings in five broad services sectors (By broad services sector, USD billion) Trade cost savings (right axis) 60

1000

50

800

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600

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400

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Transport

Insurance

Financial services

Communication

Other business services

trade cost savings in USD billion

trade value in USD billion

Trade value (left axis) 1200

0

Note: Calculations based on 17 G20 countries and 19 further EU members currently covered in the OECD STRI. Trade-weighted average of intra-EEA restrictiveness and MFN restrictiveness for EU members. Equal weighting of all G20 members with available data, where the EU average is the simple average of 19 further EU members. Trade data from the OECD-WTO Balanced Trade in Services dataset (BaTIS) Source: Calculations are based on the methodology in Benz and Jaax (2020).

Thus, as barriers to services trade are eased and regulatory co-operation makes tangible progress, SMEs are the first to gain (Rouzet, Benz and Spinelli, 2017). Existing evidence suggests that trade cost reductions for SMEs could be between two and three percentage points higher than those for large companies. On average, this implies that SMEs could benefit from trade cost reductions of up to 8%. The advantage to SMEs would be even larger in sectors experiencing more profound reductions of services trade costs. Improving services domestic regulation and reducing the costs of market entry would help improve the inclusiveness of services trade, allowing more SMEs to take up global opportunities.

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Further reading • Benz, S. and A. Jaax (2020), “The costs of regulatory barriers to trade in services: New estimates of ad valorem tariff equivalents”, OECD Trade Policy Papers, No. 238, OECD Publishing, Paris, https://dx.doi.org/10.1787/bae97f98-en • Rouzet, D., S. Benz and F. Spinelli (2017), “Trading firms and trading costs in services: Firm-level analysis”, OECD Trade Policy Papers, No. 210, OECD Publishing, Paris, https://dx.doi.org/10.1787/b1c1a0e9-en

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