The Growth Effects of Services Trade Liberalization in ASEAN

By Hapsari, Indira M.; MacLaren, Donald | Journal of Southeast Asian Economies, August 2012 | Go to article overview
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The Growth Effects of Services Trade Liberalization in ASEAN

Hapsari, Indira M., MacLaren, Donald, Journal of Southeast Asian Economies

I. Introduction

Services are playing an ever-increasing role in economic activity. In the international economy, trade in commercial services reached US$3.3 trillion in 2009 (WTO 2010a, Table 3) with both exports and imports having grown at an average annual rate of 9 per cent over the period 2000-09 (WTO 2010b, Table 1.3). Over the same period, the average annual rate of growth in trade in goods was 8 per cent for exports and 7 per cent for imports to reach a value of US$12.2 trillion in 2009 (WTO 2010a, Table 3). Some of this growth may be explained by trade liberalization in services. In the regional context, the ASEAN countries have agreed to liberalize trade in services through the ASEAN Framework Agreement on Services (AFAS) in addition to their commitments through the General Agreement on Trade in Services (GATS) in the World Trade Organization (WTO). For this group of countries, AFAS is designed to enhance cooperation amongst members through liberalizing the services sector in both scope and depth beyond commitments in the GATS (Article 1, Subsection (c), AFAS Agreement, 1995).

AFAS was signed into being at the Fifth ASEAN Summit held in Bangkok in December 1995. The first schedule of commitments was signed in 1997 and the seventh in 2009. The schedule of commitments is based on the GATS with its four modes of supply, namely, cross-border supply (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3) and movement of natural persons (Mode 4). Under each mode, there are commitments dealing with market access and national treatment. These vary considerably across the five countries, indicating varying degrees of restrictiveness (Table 1). Further discussion of the restrictions in each mode are provided below (section III).

Liberalization in the services sector is believed to benefit a country through creating efficiency and economic growth (Walmsley and Winters 2005). The removal of barriers to entry, such as the licensing of foreign service providers, may increase competition between domestic and foreign suppliers, thereby leading to economic benefits such as higher rates of economic growth. However, quantitative measures that permit estimation of the growth effects of services liberalization are difficult to obtain because, unlike the price wedge effects that can be obtained for several measures that impede market access for goods, there is no equivalent measure available for trade in services.

The objective in this paper is to derive a quantitative measure of the effects of services liberalization on rates of economic growth in a subset of the ASEAN countries, referred to as ASEAN-5. (1) It is recognized at the outset that the existence of GATS has a confounding effect on measuring the effects of AFAS and, therefore, the liberalization of services trade is treated as stemming from both Agreements without any attempt being made to distinguish between them. Such a lack of separation is justified because, to date, there has not been much evidence of commitments in AFAS going substantially beyond those in the GATS (see, for example, Gordon et al. (2003a)). Moreover, we are unaware of unilateral liberalization of services amongst the ASEAN-5 over the period under review. Therefore, to the extent that there has been any liberalization at all, it has occurred either through regional or multilateral negotiations.

The remainder of the paper is organized as follows. The existing evidence for the relationship between openness in services trade and economic growth and the difficulties inherent in measuring that openness are reviewed (section II). The implementation of AFAS amongst the subset of ASEAN countries and its evolution are described (section iii). An openness index for services amongst these countries is constructed and used in the regression equation that relates openness to the rate of economic growth (section IV). The results and discussion are presented (section V) and some conclusions are drawn (section VI).

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