The complexity of services trade agreements

Compared with other regions in the world, Latin America and the Caribbean is less integrated into services GVCs, especially for intraregional trade.

The content of the region’s preferential trade agreements (PTAs) helps explain the scarcity of services trade, especially regional trade, in the region’s GVCs. Latin America and the Caribbean’s intraregional trade costs are higher than trade costs with North America. Its PTAs with external partners tend to be more ambitious in content than those with regional partners. This configuration contributes to services trade patterns in Latin America and the Caribbean, aligning with evidence that deeper services PTAs increase trade by 15–65 percent and lead to more service value added being sourced from PTA partners.

Latin American and Caribbean countries can use deep trade agreements to increasingly liberalize service sector policies, such as posing a horizontal standstill on discriminatory measures and quantitative restrictions. They should also consider liberalizing a broader range of modes of services trade—particularly foreign investment and movement of people, which are associated with higher value added in services exports. PTAs can foster trade by including provisions to improve the transparency of measures that restrict trade in services and by strengthening data collection on services trade and policy.

As services become more tradable, policy makers need to know what facilitates services trade, especially since the incorporation of the General Agreement on Trade in Services (GATS) into the World Trade Organization (WTO) framework in 1995. Unlike goods trade, where the obstacle of tariffs is obvious, identifying, quantifying, and cataloging restrictions in services trade usually requires delving deeply into countries’ regulatory frameworks. Similarly, however, removing or rationalizing restrictions to services trade often requires technically complex regulatory reform.

Because PTAs increasingly deal with such regulatory issues, it is natural to ask what their role might be in facilitating regional services trade. Linked to that general issue is a specific question about the increasing importance of digital trade, especially in light of the COVID-19 pandemic. Modern PTAs, especially those with extraregional partners, tend to include provisions on digital trade that are specific applications of more general principles for the coverage of services and the regulatory reforms needed to lift restrictions.

GVCs in trade and production worldwide raise a related issue. Although GVCs are traditionally associated with goods sectors, such as electronics and apparel, a wealth of evidence now suggests that they are also active in services sectors. Examples include call centers that provide customer support for back-office functions for finance from distant locations—services in which India and the Philippines have excelled. Because this type of trade is grounded in intermediate services moving across borders, transactions take place between firms rather than between firms and consumers. Services moving

across borders are also important in manufacturing and agriculture, where networked production requires service inputs from sectors such as finance, professional services, and transportation and logistics. Trade policy can do much to facilitate or restrict the growth of both services GVCs and the use of services in goods GVCs, particularly in manufacturing.

Under GATS, services can be traded internationally through four supply “modes”:

• Mode 1 is pure cross-border supply, where, for example, a law firm in Buenos

Aires advises a client in Lima. Mode 1 therefore includes digital trade. • Mode 2 involves movement of the consumer, where the client travels from Lima to Buenos Aires to receive legal advice from the law firm. • Mode 3 is sales by foreign affiliates through “commercial presence,” where the law firm establishes a local office in Lima and uses it to provide advice to the client there. • Mode 4 is temporary movement by the service provider, where the Buenos

Aires law firm sends a lawyer for a short period to Lima to advise the client there, after which the lawyer returns to Buenos Aires.

From a policy perspective, assessing the facilitative role of PTAs in services is not as simple as looking at a PTA’s services chapter and the annexed lists of specific commitments. The evidence suggests that countries undertake very little liberalization in services PTAs. Adlung and Miroudot (2012), reviewing the general evidence on PTA provisions relative to GATS, found that backsliding was prevalent. And Shepherd et al. (2019), in a provision-by-provision analysis of the schedules of commitments in the European Union (EU)–Canada Comprehensive Economic and Trade Agreement (CETA), showed that there was little effective liberalization at a detailed sectoral level by either party relative to most-favored-nation (MFN) policies.

Other aspects of PTAs might also affect service providers. In many sectors where mode 3 is a way of contesting in foreign markets, PTA provisions on investment are key. Similarly, given the increased importance of mode 1 services trade during the COVID-19 pandemic—when in-person interactions have been substantially more difficult—PTA provisions on technology and data protection are important. And rules and institutions, on which services rely more heavily than other kinds of trade, are also vital (Beverelli, Fiorini, and Hoekman 2017). Even when a PTA contains little practical liberalization in its schedules of commitments, the regulatory framework it creates can nonetheless facilitate trade.

Whether PTAs promote services trade—specifically services trade within GVC frameworks—is largely an open question. It cannot be answered categorically. Instead, each agreement’s provisions in a range of areas determine the net result. So, the key question that motivates this chapter is whether the evidence supports the view that PTAs in Latin America and the Caribbean are indeed facilitating services trade for GVCs in the region.