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Global game changer

02 May 2013

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Dr Philippa Dee is an economist at the ANU Crawford School of Public Policy, and a former Assistant Commissioner in the Trade branch of the Productivity Commission.

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Modern trade negotiations need to be about more than just simple import and export arguments, writes PHILIPPA DEE.

What should trade negotiators negotiate about? As trade agreements delve ever deeper into behind-the-border issues, the answer to this question is far less obvious than when Paul Krugman considered it in 1997. Back then, the agreements were about goods trade, tariffs could be looked up in a country’s Customs schedule, and the trade negotiating game was about trading tariff ‘concessions’ so as to balance export and import-competing interests.

Now trade agreements are about services, people, capital and intellectual property as well as goods, the policy instruments are regulatory, and the trade negotiating game needs to consider their public policy as well as protectionist rationales. Who gains and who loses, and by how much, is far less obvious. Is it still appropriate to operate as if trade negotiations were all about balancing exporting and import-competing interests?

After all, the ‘height’ of a regulatory barrier can’t be looked up in a Customs schedule — it needs to be estimated. The incidence doesn’t always fall on foreign suppliers —domestic providers may also be affected. The impact of a regulatory barrier doesn’t generate tariff revenue — although it may penalise many potential providers, and/or cushion the profit margins of incumbents. And whether the barrier can or should be dismantled depends on whether there are better ways to achieve its public policy objectives. In my new book, Priorities and Pathways in Services Reform: Part 1 — Quantitative Studies (World Scientific), I’ve introduced the empirical tools that can provide answers.

A good example of this is the banking sector, which needs adequate prudential regulation to guard against systemic instability - as the global financial crisis clearly showed. But how should we treat regulation that restricts the ability of banks to undertake non-bank business, such as insurance, real estate or securities trading? Is it primarily prudential, or should it be treated as a trade barrier, to be negotiated away? The findings suggest that the economic cost of such restrictions is minimal, while recent experience shows that their absence can exacerbate conflicts of interest. Thus the book suggests that these measures should be left off the negotiating table.

Another example is electricity and gas. Foreign competition is possible through foreign direct investment. But removing barriers to foreign entry is not enough — investors in electricity generation or gas exploration also need access to transmission facilities. Without the right ownership structures or regulatory incentives, the operators of transmission facilities have the potential to thwart foreign competition. Empirical analysis in the book confirms the importance of incentive mechanisms in transmission. But these are not usually included in trade negotiations.

A key political concern in liberalising foreign direct investment is that domestic providers will be crowded out by foreign multinationals. A careful look at the incidence and impact of regulatory barriers reveals that in many services sectors, the regulatory restrictions doing the most economic damage are those that also restrict potential domestic new entrants. The political trade-off is not between exporting and import-competing interests because at least some import-competing interests can gain from liberalisation — those potential domestic providers who, like foreign direct investors, are being held back by regulatory protection afforded incumbents. In these circumstances, the traditional trade negotiating game will not capture the largest benefits.

My book presents a state-of-the-art evaluation of the benefits and costs of behind-the-border services reform. It introduces new, second-generation methods for quantifying regulatory barriers and applies those to a wide range of services sectors — financial, infrastructure and social — in a broad spectrum of countries. It uses advances modelling techniques to project the sectoral, economy-wide and regional effects of services reforms, as well as highlighting their adjustment costs.

Across APEC economies, a comprehensive package of services reforms can generate real income gains of between 1.0 and 6.6 per cent of GDP — collectively more than three times as big as the gains from further liberalisation of goods trade. The net gains from behind-the-border reforms are indeed substantial, but a very different negotiating game is required to achieve them.

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