Academic journal article Asian Development Review

Why Do Economies Enter into Preferential Agreements on Trade in Services? Assessing the Potential for Negotiated Regulatory Convergence in Asian Services Markets +

Academic journal article Asian Development Review

Why Do Economies Enter into Preferential Agreements on Trade in Services? Assessing the Potential for Negotiated Regulatory Convergence in Asian Services Markets +

Article excerpt

(ProQuest: ... denotes formulae omitted.)

I. Introduction

One of the striking features of trade diplomacy in recent years has been the seemingly unstoppable march of preferential trade liberalization and rule-making (Kawai and Wignajara 2010). Such a trend now extends to services, particularly in the Asia-Pacific region (Chanda 2011, PECC and ADBI 2011, Shepherd and Pasadilla 2012). Of the 81 preferential trade agreements (PTAs) that entered in force prior to January 2000, 73 (90%) featured provisions dealing exclusively with trade in goods. Between January 2000 and August 2015, 124 of the 194 PTAs that entered into force also included provisions on services trade. The above trend signals the heightened importance of services trade in general, the growing need among economies to place such trade on a firmer institutional and rule-making footing, and the attractiveness of doing so on an expedited basis via preferential negotiating platforms (Sauvéand Shingal 2011). Interestingly, more than one-third (28) of the 78 World Trade Organization (WTO)-notified services trade agreements (STAs) that were in effect between January 2008 and August 2015 involved at least one South or Southeast Asian trading partner.

Unlike trade in goods, where the removal of border barriers retains significant negotiating traction, domestic regulation is the sole currency of negotiations in services trade (Mattoo and Sauvé2010). The importance and potentially trade- and investment-inhibiting impact of domestic regulation on service sector performance has received significant attention in policy research circles (Kox and Nordås 2007, 2009). However, less well understood and investigated has been the question of whether certain economies are more likely candidates for negotiated regulatory convergence from a services trade perspective. Simply put, are economies that display greater ex ante regulatory convergence more likely candidates for deeper integration agreements in services markets? Is the demand for negotiated market openings a by-product of what has been dubbed the "servicification" of production?1 What is the role of geography in trade-facilitating regulatory convergence in services? Finally, can the presence of significant developmental or institutional capacity gaps impede integration and convergence in services markets?

This paper seeks answers to the above questions in an Asian setting.2 According to the WTO's Regional Trade Agreements Information System, 103 PTAs entered into force during January 2008-August 2015. A vast majority of these (exceeding 70% of WTO-notified agreements) included provisions that cover both goods and services trade. Twenty-eight of the 78 STAs notified over the same period involved at least one Asian trading partner, and 11 of these have been entered into with another partner from Asia. Clearly then, Asian economies have been at the forefront of the burgeoning trend toward services preferentialism, offering a potentially fertile setting for exploring this paper's core research questions.

Regulatory heterogeneity has been shown to exert a significantly negative impact on bilateral services trade via Mode 3 (commercial presence) (Kox and Nordå s 2009) and commercial presence is the most dominant mode of service delivery, accounting for 55%-60% of all services trade flows (Maurer and Magdeleine 2008). We would thus expect trading partners in a services accord to exhibit lower levels of regulatory heterogeneity compared to those that are not party to such an agreement. Interestingly, this was not found to be true for the Asian economies studied in this paper. The causal links actually run in the opposite direction.

Regulatory approximation or convergence thus appears as one of the main objectives of negotiated services agreements rather than its chief determinant: the greater the extent of regulatory heterogeneity between trading partners, the more likely are they to enter into a services agreement to promote trade- and investment-facilitating regulatory convergence. …

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