GATS 2000: New Directions in Services Trade Liberalization

By Pierre Sauvé; Robert M. Stern | Go to book overview

COMMENT BY Malcolm Bosworth

The insightful analysis by Simon Evenett and Bernard Hoekman in chapter 6 concludes persuasively that government procurement disciplines may not be necessary in the realm of services. They show that the domestic and foreign welfare effects of discriminatory procurement regimes will be negligible and transitory where domestic markets are contestable by new suppliers. Procurement favoritism for local suppliers will not raise domestic prices or reduce welfare significantly in competitive and contestable markets. Even where government demand constitutes a large share of domestic output, such adverse economic effects will be short-lived and relatively benign provided market entry is open.

Many procured services, however, will either be nontradable "cross- border" services, or their preferred mode of supply will be commercial presence because of natural advantages in being located in the home market. For these services, procurement favoritism will only matter if such policies can differentiate between national entities and foreign affiliates. As the authors rightly point out, what really matters to economic efficiency and domestic welfare in these cases is the restrictions on foreign direct investment (FDI). Where government demand is relatively large, they contend, discriminatory procurement practices would be akin to nationalization or expropriation policies. Foreign firms would be encouraged to sell out to local firms. Evenett and Hoekman see a procurement ban on foreign affiliates acting as a de facto FDI barrier. Since restrictive FDI policies are likely to reduce economic efficiency and domestic welfare, governments should resist powerful political economy forces at work on behalf of procurement favoritism.

Some clear and practical policy implications emerge from their discussion of discipline issues. Since the economic damage done by discriminatory procurement policies depends upon the contestability of markets, the policy response should be to encourage open and competitive markets. Therefore Evenett and Hoekman call for the removal of market access barriers, especially on commercial presence, hoping the forthcoming services negotiations will concentrate on improving market access and national treatment commitments under GATS, rather than on developing government procurement disciplines.

In their opinion, general procurement disciplines would be best

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