This paper investigates how national economic regulation shape the impacts of reducing external barriers to services trade for a sample of European countries. Notwithstanding far-reaching integration of services markets there is significant heterogeneity in domestic regulation and governance across European economies. We show this affects the potential downstream productivity effects of external services trade policy. In some cases, liberalization can substitute for weak regulation; in others there is a complementary relationship. Thus, the productivity effects associated with services market access liberalization depend on the quality of domestic economic regulation. EU-specific measures to promote internal trade in services – proxied by implementation of the Services Directive – are found not to have such moderating effects. An implication of our findings is that EU governments should do more to assess how specific dimensions of domestic regulatory regimes influence the size and distribution of the effects of services trade reforms.
This is a preview of subscription content, log in to check access.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
An exception is analysis of the possible implications of trade agreements for public services (education, health) and audio-visual services). See Pedreschi (2017) for discussion and references to the related literature. More generally, see Delimatisis (2017) for an overview of services-related provisions in EU trade agreements.
The WTO defines four ‘modes of supply’: Mode 1: cross-border exchange of services via ICT networks; Mode 2: the movement of a buyer or consumer of a services to the (exporting) country where the service is performed; Mode 3: sales of services through establishment of a commercial; presence (i.e., foreign direct investment); and Mode 4: temporary cross-border movement of natural persons (services suppliers). See Francois and Hoekman (2010).
Although Mode 1-type trade in services occurring through ICT networks is becoming increasingly important, available data suggest Mode 3 remains the dominant mode of supply for EU countries, accounting for some 70% of total extra-EU services trade in 2013 (Rueda-Cantuche et al. 2016).
Prior to Lisbon member states did not necessarily pursue identical external policies in these areas. As a result, EU countries differ substantially in their external (extra-EU) policy towards FDI, reflected, inter alia, in differences in the number of bilateral investment treaties with non-EU countries, the restrictiveness of FDI policy, and the treatment of foreign (non-EU) service providers. Meunier (2017) describes the process leading up to FDI becoming part of the common commercial policy in the Lisbon treaty.
Their cross-sectional empirical analysis finds no evidence that economy-wide governance indicators play a role in shaping the downstream effect of Mode 1 services trade policies.
Copeland and Mattoo (2008) discuss different market failure rationales for regulation of services.
We abstract from economy-wide policies addressing anticompetitive practices and state aid (subsidies). Other research has found a complementary relationship between market access and competition law enforcement. For example, using time series data for 42 countries, Kee and Hoekman (2007) investigate empirically the contribution of competition law relative to import competition (openness) and regulation affecting entry and exit of firms. They find that domestic and foreign competition is an important direct source of market discipline in concentrated markets that is complemented by competition policy, which indirectly reduces equilibrium mark-ups by promoting a larger number of domestic firms.
The logical subject here is regulation, so that the relationship is limited to one-way complementarity: good regulation enables and magnifies the effect of trade reforms. We are agnostic on the effect of regulatory reform in the absence of trade openness.
The construction of such a composite policy indicator is standard in the economic literature assessing the effects of sector-specific policies on the productivity performance of downstream sectors/firms (see, e.g., Amiti and Konings 2007).
More detailed data on Mode 3 policies have been compiled by the OECD. However, these services trade restrictiveness indicators are only available starting in 2014. See http://www.oecd.org/tad/services-trade/services-trade-restrictiveness-index.htm.
When the analysis is conducted without controlling for the capital-labor ratio, the sample expands to include seven additional EU Member States (Estonia, Greece, Hungary, Luxembourg, Portugal, Slovakia, and Slovenia) plus Switzerland. Using this larger sample of countries generates results that are very consistent with those for the smaller sample. Estimation exercises that do not control for the capital-labor ratio are available upon request.
Our imputation methodology follows Bourlès et al. (2013), who use many of the PMR indicators we focus on in this article. Their sample starts in 1984. Results from alternative methodologies are available upon request.
For each specification observations vary across downstream manufacturing sectors (j), countries (i) and years (t). The dimension of variability that reflects to which and how many services a given moderator variable (GId) applies to does not affect sample size.
All the variables have the same country coverage, i.e., the estimation sample remains constant across all regression exercises.
More detailed quantification of the downstream effects of trade policy changes is beyond the scope of this paper. Our empirical methodology implies that quantification of the effects of changes in the policy variables alone can only be conducted at the manufacturing sector level. We adopt the simpler approach of looking at the effects of changes in the composite policy indicator (de facto treating it as a policy variable in itself) given our focus on analyzing the potentially heterogeneous role of different dimensions of regulatory governance in moderating the downstream effects of services trade policy as opposed to quantification of the magnitude of these effects. Analogous quantification approaches are used in the literature looking at the impact of import tariff reforms for downstream firms or industries—see for instance Amiti and Konings (2007).
Francois and Hoekman (2010) provide references to some of the literature.
For example, Baccini and Urpelainen (2014) investigate the hypothesis that governments use trade agreements to support reforms they cannot implement without external assistance. However, their empirical analysis focuses on recently democratized states (developing nations), consistent with the specific theory they develop, and does not specifically highlight services.
Interest groups have sought to include disciplines relating to social, political and human rights into trade agreements as well as provisions relating to environmental regulation. This reflects different considerations, including a desire to ‘level the playing field’, address nonpecuniary negative spillovers, export ‘good practice’ norms and internationally agreed standards, and to safeguard the ability of governments to regulate economic behaviour. In the case of the EU, see e.g., Lavenex (2014), Lechner (2016) and Young (2015) on the export of norms and values; Van Den Putte and Orbie (2015) on the substance and drivers of inclusion of labor and related rights into EU agreements, and Spilker et al. (2018), Postnikov and Bastiaens (2014) and Donno and Neureiter (2017) for empirical assessments of whether they have an impact.
Ahsan, R. N. (2013). Input tariffs, speed of contract enforcement, and the productivity of firms in India. Journal of International Economics, 90(1), 181–192.
Amiti, M., & Konings, J. (2007). Trade liberalization, intermediate inputs, and productivity: Evidence from Indonesia. American Economic Review, 97(5), 1611–1638.
Arnold, J. M., Javorcik, B., & Mattoo, A. (2011). Does services liberalization benefit manufacturing firms? Evidence from the Czech Republic. Journal of International Economics, 85(1), 136–146.
Arnold, J. M., Javorcik, B., Mattoo, A., & Lipscomb, M. (2016). Services reform and manufacturing performance. Evidence from India. Economic Journal, 126(590), 1–39.
Baccini, L., & Urpelainen, J. (2014). International institutions and domestic politics: Can preferential trading agreements help leaders promote economic reform? The Journal of Politics, 76(01), 195–214.
Baldwin, R. (2016). The great convergence: Information technology and the new globalization. Cambridge, MA: Harvard University Press.
Barone, G., & Cingano, F. (2011). Service regulation and growth: Evidence from OECD countries. Economic Journal, 121(555), 931–957.
Basedow, Robert, and Celine Kauffmann. 2016. “International trade and good regulatory practices: Assessing the trade impacts of regulation.” OECD regulatory policy working papers. Paris: OECD.
Beverelli, C., Fiorini, M., & Hoekman, B. (2017). Services trade policy and manufacturing productivity: The role of institutions. Journal of International Economics, 104, 166–182.
Bourlès, R., Cette, G., Lopez, J., Mairesse, J., & Nicoletti, G. (2013). Do product market regulations in upstream sectors curb productivity growth? Panel data evidence for OECD countries. Review of Economics and Statistics, 95(5), 1750–1768.
Busse, M., & Hefeker, C. (2007). Political risk, institutions and foreign direct investment. European Journal of Political Economy, 23(2), 397–415.
Ciuriak, D., Lapham, B., Collins-Williams, R. W. T., & Curtis, J. (2014). Firms in international trade: Trade policy implications of the New new trade theory. Global Policy, 6, 130–140. https://doi.org/10.1111/1758-5899.12183.
Copeland, B., & Mattoo, A. (2008). The basic economics of services trade. In A. Mattoo, R. Stern, & G. Zanini (Eds.), A handbook of international trade in services. Oxford: Oxford University Press.
De Loecker, J., Goldberg, P., Khandelwal, A., & Pavcnik, N. (2016). Prices, markups, and trade reform. Econometrica, 84(2), 445–510.
Delimatisis, P. (2017). The evolution of the EU external trade policy in services – CETA, TTIP, and TiSA after Brexit. Journal of International Economic Law, (3, 1), 583–625.
Donno, D., & Neureiter, M. (2017). Can human rights conditionality reduce repression? Examining the European Union’s economic agreements. The Review of International Organizations, June. https://doi.org/10.1007/s11558-017-9283-2.
Dort, T., Méon, P.-G., & Sekkat, K. (2014). Does investment spur growth everywhere? Not where institutions are weak. Kyklos, 67(4), 482–505.
Dreher, A., & Gassebner, M. (2013). Greasing the wheels? The impact of regulations and corruption on firm entry. Public Choice, 155(3), 413–432.
Dür, A., Baccini, L., & Elsig, M. (2014). The Design of International Trade Agreements: Introducing a new dataset. The Review of International Organizations, 9(3), 353–375.
Eckhardt, J., & Poletti, A. (2016). The politics of global value chains: Import-dependent firms and EU–Asia trade agreements. Journal of European Public Policy, 23(10), 1543–1562.
Egger, P., Francois, J., Manchin, M., & Nelson, D. (2015). Non-tariff barriers, integration and the transatlantic economy. Economic Policy, 30(83), 539–584.
Eschenbach, F., & Hoekman, B. (2006). Services policy reform and economic growth in transition economies, 1990-2004. Review of World Economics, 142(4), 746–764.
Fiorini, M., & Hoekman, B. (2018). Trade agreements, regulatory institutions and services liberalization. Global Policy (forthcoming).
Francois, J. F. (1990). Producer services, scale, and the division of labor. Oxford Economic Papers, 42(4), 715–729.
Francois, J., & Hoekman, B. (2010). Services trade and policy. Journal of Economic Literature, 48(3), 642–692.
Freund, C., & Bolaky, B. (2008). Trade, regulations, and income. Journal of Development Economics, 87(2), 309–321.
Goldberg, P. K., Khandelwal, A. K., Pavcnik, N., & Topalova, P. (2010). Imported intermediate inputs and domestic product growth: Evidence from India. Quarterly Journal of Economics, 125(4), 1727–1767.
Hoekman, B., & Mattoo, A. (2013). Liberalizing trade in services: Lessons from regional and WTO negotiations. International Negotiation, 18(1), 131–151.
Hofmann, C., Osnago, A., & Ruta, M. (2018). The content of preferential trade agreements. World Trade Review, 1–34. https://doi.org/10.1017/S1474745618000071.
Jafari, Y., & Tarr, D. (2017). Estimates of ad valorem equivalents of barriers against foreign suppliers of Services in Eleven Services Sectors and 103 countries. The World Economy, 40(3), 544–547.
Kalinova, Blanka, Angel Palerm, and Stephen Thomsen. 2010. “OECD’s FDI restrictiveness index.” OECD Working Papers on International Investment. OECD.
Kee, H. L., & Hoekman, B. (2007). Imports, entry and competition law as market discipline. European Economic Review, 51(4), 831–858.
Lavenex, S. (2014). The power of functionalist extension: How EU rules travel. Journal of European Public Policy, 21(6), 885–903.
Lechner, L. (2016). The domestic battle over the design of non-Trade issues in preferential trade agreements. Review of International Political Economy, 23(5), 840–871.
Lodefalk, M. (2017). Servicification of firms and trade policy implications. World Trade Review, 16(1), 59–83.
Madeira, M. A. (2016). New trade, new politics: Intra-industry trade and domestic political coalitions. Review of International Political Economy, 23(4), 677–711.
Mansfield, E., & Milner, H. (2012). Votes, vetoes, and the political economy of international trade agreements. Cambridge: Cambridge University Press.
Meunier, S. (2017). Integration by stealth: How the European Union gained competence over foreign direct investment. Journal of Common Market Studies, 55(3), 593–610.
National Board of Trade. (2016). The Servicification of EU manufacturing: Building competitiveness in the internal market. Stockholm: Kommerskolligium.
Osgood, I. (2018). Globalizing the supply chain: Firm and industrial support for US trade agreements. International Organization, 72(2), 455–484.
Pedreschi, L. (2017). Balancing efficacy with policy space: The treatment of public services in EU trade agreements. Journal of International Economic Law, (3, 1), 627–647.
Postnikov, E., & Bastiaens, I. (2014). Does dialogue work? The effectiveness of labor standards in EU preferential trade agreements. Journal of European Public Policy, 21(6), 923–940.
Rajan, R., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88(3), 559–586.
Rodriguez, F., & Rodrik, D. (2001). Trade policy and economic growth: A Skeptic’s guide to the cross-National Evidence. In B. S. Bernanke & K. Rogoff (Eds.), NBER macroeconomics annual. Cambridge: MIT Press.
Roy, M. (2016). Charting the evolving landscape of services trade: Recent patterns of protection and liberalization. In M. Roy & P. Sauvé (Eds.), Research handbook on trade in services. Cheltenham: Edward Elgar.
Rueda-Cantuche, José, Riina Kerner, Lucian Cernat, and Veijo Ritola. 2016. “Trade in services by GATS modes of supply: Statistical concepts and first EU estimates.” Chief economist note issue 3. European Commission.
Sampson, G., & Snape, R. (1985). Identifying the issues in trade in services. The World Economy, 8(2), 171–182.
Spilker, G., Bernauer, T., Kim, I. S., Milner, H., Osgood, I., & Tingley, D. (2018). Trade at the margin: Estimating the economic implications of preferential trade agreements. The Review of International Organizations, 13(2), 189–242.
Van Den Putte, L., & Orbie, J. (2015). EU bilateral trade agreements and the surprising rise of labour provisions. International Journal of Comparative Labour Law and Industrieal Relations, 31(3), 263–283.
Young, A. (2015). Liberalizing trade, not exporting rules: The limits to regulatory co-ordination in the EU’s ‘new generation’ preferential trade agreements. Journal of European Public Policy, 22(9), 1253–1275.
Young, A. (2016). Not your parents’ trade politics: The transatlantic trade and investment partnership negotiations. Review of International Political Economy, 23(3), 345–378.
Young, A. (2017). The New politics of trade Lessons from TTIP. Newcastle: Agenda Publishing.
This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 770680. The initial work on this paper started as part of the European Commission’s DG ECFIN fellowship initiative 2016-17. We are grateful to three referees and the editor for very constructive suggestions that improved the paper, to Josefa Monteagudo for comments and sharing data on transposition of the EU Services Directive, and to participants in the May 2017 conference on Structural Reforms and European Integration in London and workshops at the AERC, EUI, and the European Commission for helpful feedback and ideas.
Electronic supplementary material
About this article
Cite this article
Fiorini, M., Hoekman, B. EU services trade liberalization and economic regulation: Complements or substitutes?. Rev Int Organ 15, 247–270 (2020). https://doi.org/10.1007/s11558-018-9333-4
- Services trade policy
- Economic governance
- Foreign direct investment