International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

There exists a serious argument against free trade in some service industries. To the extent that the service industry in question is the subject of domestic regulation of the foreign supplier, there exists a possibility that a subsidiary of a foreign multinational could escape any domestic regulatory network with greater ease and effectiveness than could a domestically based system. Such a capability could cause legitimate concern on the part of the regulators about the effect of a foreign subsidiary or branch on the effectiveness of the regulatory system. The crucial question is whether the regulation is warranted by industry characteristics or it is merely a simple domestic source of inefficiency. Hindley explicitly recognized the need for fiduciary regulation of the insurance industry and was willing to countenance special measure to control the ability of foreign firms to escape the regulatory network. 12 However, Hindley also argued strongly for the ability of foreign firms to establish themselves so that they might introduce their own product and process technologies. The argument is for some conditions to be imposed on foreign firms when they enter a local market, but for so-called national treatment once they have established themselves. "National treatment" implies equal, nondiscriminatory treatment of all firms located in the country, irrespective of the nationality of ownership. Any discrimination involved manifests itself purely in the conditions attached to the establishment of the subsidiary rather than to the subsidiary's ongoing operations. In some industries, certain lines of endeavor are restricted to domestic firms, so that foreign firms are penalized by the loss of any scope economies that might otherwise be available. Such a restriction is likely to prove very important in the commercial banking industry.


CONCLUSION

This chapter has argued that a substantial number of services require an "own" foreign presence if they are to successfully and effectively provide services to residents of foreign markets. It is, therefore, possible to restrict international trade in services by erecting barriers to foreign direct investiment in service industries. Negotiators in the Uruguay Round may face tremendous difficulties in establishing this fact as a basis for increased freedom for international trade in services. Because of the foreign presence, large amounts of international trade in services will be intra-firm trade, as a parent firm will provide services to its foreign subsidiary as inputs into the provision of a service by that subsidiary to a foreign resident. This relationship will vary among firms and among industries but is likely to hold to some degree for nearly all intermediate, professional services.


NOTES
1.
Herbert G. Grubel, "Direct and Embodied Trade in Services," Fraser Institute Service Project Discussion Paper 86-1 ( Vancouver, B.C.; mimeo).

-22-

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