Service domestic regulations: Advancing towards shared best practices

The ability of businesses to provide services to foreign clients can be constrained by regulatory and policy barriers. In the WTO context, domestic regulation covers measures that affect the authorisation of service suppliers, licensing requirements, and related procedures Important trade obstacles include lack of transparency, divergent regulations, and cumbersome authorisation processes Research suggests that the cost of trading services is twice as high as that of goods (WTO, 2019[6]) Such costs are often the result of regulatory divergence across countries, complex procedures, and added delays. The recorded trade barriers in the STRI represent average trade costs between 50% and 250% of export values ( (Benz and Jaax, 2020[5])

Did you know?

70 WTO Members are part of the Joint Initiative on Services Domestic Regulation, representing 92.5% of world services trade.

Source: WTO.

The Joint Initiative on Services Domestic Regulation concluded in December 2021 with the adoption of the Declaration on the Conclusion of Negotiations on Services Domestic Regulation. This marked a landmark achievement for advancing the facilitation of services supplies globally It aims to promote good regulatory practice in service sectors and builds on three core principles: (i) transparency, (ii) legal certainty and predictability, and (iii) regulatory quality and facilitation. These principles motivate a number of disciplines which are covered in Reference Paper on Services Domestic Regulations annexed to the Declaration. The disciplines include the publication of information and procedures for stakeholder engagement, transparency related to the application for licences, authorisations and recognition of qualifications, as well as regulatory quality and facilitation of services competent authorities. Moreover, for the first time in WTO history, a provision specifying non-discrimination between women and men was added (Box 2).

The OECD STRI collects information on the applied regulations affecting most disciplines included in the Joint Initiative and the Reference Paper, such as transparency in the rule-making process, administrative and procedural hurdles related to registering companies, as well as licensing and authorisation requirements across different sectors. The STRI also covers procedural regulations related to licenses such as: transparency related to the application criteria, whether applicants must be informed of the final decision related to their application; maximum time limits for decisions on applications; and restrictions related to the duration and renewal of licenses. Information is also collected on issues such as acceptance of applications for licenses in electronic format, transparency of fees applied by the licensing authority and authority’s independence from the government or private sectors.

Almost all countries covered in the STRI (45 out of 50) are participants in the Joint Initiative, making the STRI a unique instrument to assess the current status of applied regulations related to disciplines covered in the Reference Paper.

Licenses or authorisations to supply services are commonly regulated across countries in most sectors (Figure 6) Financial services are the most commonly regulated, followed by air transport, some professional services (e.g. accounting services), and broadcasting services.

Figure 6 Licencing or authorisation requirements are common for most services

Number of countries with licensing or authorisation requirements

Financial services

Air transport

Accounting services

Broadcasting

Legal services

Logistics storage (customs)

Rail freight transport

Road freight transport

Architecture services

Logistics cargo-handling

Courier services

Engineering services

Logistics customs brokerage

Maritime transport

Logistics freight forwarding

Logistics storage

Distribution services

Construction

Motion pictures

Sound recording

Computer services

Source: OECD STRI database (http://oe.cd/stri-db).

Closer examination of financial services – a sector that requires licencing in all countries ‒ is an example of the extent to which disciplines covered in the Reference Paper are applied domestically (Figure 7). 1 Overall, the evidence suggests a high degree of alignment across countries with best practices identified in the Reference Paper. For instance, licences are allocated according to publicly available criteria in almost all countries, and in close to 80% of the cases there are transparent policies related to applicable fees and maximum timeframes for regulators to decide on applications. Nonetheless, foreign companies face more stringent conditions than local companies in more than a quarter of the countries covered. The acceptance of applications in electronic format is still relatively low (close to 60% of the countries covered) despite growing trends towards more paperless processing and acknowledgement of equivalence between electronic and paper-based documents.

Safeguards are also generally in place to protect against unfair or discretionary conduct during licensing procedures, with appeal mechanism against decisions being available in almost all countries. However, uncertainty remains a source of concern in 15 countries (30% of the sample) where there is no explicit requirement for the financial regulator to explain the reasons for a denial of license and which may ultimately undermine an effective appeal However, relatively few countries impose restrictions related to the duration and renewal of licenses once these are approved.

Transparency mechanisms related to new regulations are also key to fostering better domestic regulations. Evidence in the financial services STRI highlights that in almost 70% of the countries covered there is no clear obligation to communicate regulations to the public within a reasonable timeframe before entry into force. Countries generally require a certain period of time to lapse between publication and entry into force, but this can be relatively short (e.g. one day). To counterbalance such short implementation periods, extensive consultation with all affected stakeholders during the drafting stage is essential. Indeed, STRI data shows there are opportunities for the public to express views about new legislation in 80% of the countries covered.

Figure 7. Domestic regulations in financial services across countries Distribution of answers in the STRI database, 2022

Restrictions related to the duration and renewal of licences

Criteria to obtain a licence are more stringent for foreign companies

Obligation to communicate regulations to the public before entry into force

Applications in electronic format are accepted

Applicants must be informed of the reasons for denial of Licences

Licensing and authorization fees are transparent

Maximum time allowed to the regulator for decisions on applications

There is an adequate public comment procedure

The supervisor has full authority over licensing

Licences are allocated according to publicly available criteria

Decisions by the regulatory body can be appealed

Source: OECD STRI database (http://oe.cd/stri-db).

Streamlined regulations in service sectors could reduce the time and cost required for complying with administrative barriers and regulatory red tape. These cost savings can also incentivise new trade and investment. These savings can also be passed on through lower prices to users of these services, including consumers and businesses. Leveraging promising avenues for lowering business costs is key in the short term as global economic uncertainty continues and higher costs related to inflationary pressures are passed through to the prices of goods and services.

While the exact distribution of cost savings is difficult to assess, it is possible to quantify the magnitude of potential savings based on the current volume of services trade. Joint OECD-WTO research has demonstrated that through the full implementation of the disciplines on services domestic regulations, economies can lower trade costs and reap substantial trade benefits; annual trade cost savings could be in the range of USD 150 billion, with a substantial one-third of these benefits in financial services and the rest in business services, communications and transport services (Figure 8).

Figure 8. Annual trade cost savings in five broad services sectors

Note: Simple average of 48 SDR JI participants for which OECD STRI data are available Values of some sectors are based on a smaller number of countries. Trade-weighted average of intra-EEA restrictiveness and MFN restrictiveness for EU members. Trade data from the OECD-WTO Balanced Trade in Services dataset (BaTIS)

Source: OECD calculations based on Benz and Jaax (2020 [5]) and report in WTO (2021[6]).

Box 2. The Reference Paper provision on non-discrimination between women and men services providers

An historic provision

For the first time in the WTO’s history, the Reference Paper on Services Domestic Regulation includes a provision on non-discrimination between women and men. The exact wording of this provision is:1

“If a Member adopts or maintains measures relating to the authorization for the supply of a service, the Member shall ensure that:

(a) such measures are based on objective and transparent criteria;

(b) the procedures are impartial, and that the procedures are adequate for applicants to demonstrate whether they meet the requirements, if such requirements exist;

(c) the procedures do not in themselves unjustifiably prevent the fulfilment of requirements; and

(d) such measures do not discriminate between men and women.”

Footnote 18 that is associated with point (d) indicates that differential treatment that aims at accelerating de facto equality between women and men is not considered discriminatory.2

Why this is important

Services make up about two-thirds of world GDP, but only 30% of direct trade as measured in value added terms. The STRI and related analyses have shown that barriers to trade in services are greater and more prevalent than those in goods trade. Moreover, women tend to work in services sectors more than do men and are less likely than men to engage in trade.1 Therefore, ensuring that women do not face additional barriers to trade in services based on their gender can support closing gender gaps.

Existing discriminatory measures

In order to increase transparency regarding existing discriminatory measures against women services providers, and in the context of the 2022 update of the STRI and related data gathering, the OECD collected information on potentially discriminatory measures in the 50 countries and 22 sectors covered in the STRI inventory. No measures were scored as restrictions in the STRI databases. Some of the measures identified seem to be in place in order to protect women from the potentially harmful effects of jobs that require substantial physical strength or stamina (e.g. in underground mining or construction). However, many jobs that previously required more physical strength may have evolved due to technological advances. Other examples of such measures include prohibiting women from undertaking night work in an industrial setting or prohibiting certain women from working in an establishment serving alcohol.

Additional measures for consideration

The above measures refer to different criteria for women and for men service providers. However, discrimination in services providers can also be indirect, i.e. where application processes for certifications or licenses or approval processes favour one gender by design. This de facto discrimination is more covert, but could result in lower approval rates for women applicants. Such indirect discriminatory measures may be even more far-reaching than the direct measures outlined above. Such measures may go beyond the scope of the JSI, but are relevant in a context where countries aim to close gender gaps and reduce barriers to women’s participation in labour markets and trade.

1.WTO Reference Paper on Services Domestic Regulation, Section II – Disciplines on Services Domestic Regulation, para. 22, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/INF/SDR/2.pdf&Open=True

2. “18. Differential treatment that is reasonable and objective, and aims to achieve a legitimate purpose, and adoption by Members of temporary special measures aimed at accelerating de facto equality between men and women, shall not be considered discrimination for the purposes of this provision” (WTO Reference Paper on Services Domestic Regulation, Section II – Disciplines on Services Domestic Regulation, footnote 18, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/INF/SDR/2.pdf&Open=True).

3. Korinek, J., E. Moïsé and J. Tange (2021), "Trade and gender: A Framework of analysis", OECD Trade Policy Papers, No. 246, OECD Publishing, Paris, https://doi.org/10.1787/6db59d80-en

Sources: WTO, Reference Paper on Services Domestic Regulation, INF/SDR/2, 26 November 2021, https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/INF/SDR/2.pdf&Open=True; OECD STRI database (http://oe.cd/stri-db); World Bank, Women, Business and the Law, https://wbl.worldbank.org/en/wbl-data