Eleventh Annual East Asian Seminar on EconomicsNBER Reporter: Fall 2000
Eleventh Annual East Asian Seminar on Economics
The NBER's eleventh annual East Asian Seminar on Economics, "Trade in Services," took place in Seoul, South Korea, on June 22-4. Takatoshi Ito, NBER and the Ministry of Finance, Tokyo, and Anne O. Krueger, NBER and Stanford University, organized the program and chose the following papers for discussion:
Dee, Hanslow, and Phamduc analyze the liberalization of trade in services in order to assess the extent to which the traditional Stolper-Samuelson and Rybczynski results in the Heckscher-Ohlin framework are still relevant. In the process, they examine whether and how the benefits of such liberalization are passed on to other sectors in the economy. In that way, the authors open up the "black box" of trade in services in general equilibrium, and explore the implications for different sectors of the economy.
The General Agreement on Trade in Services (GATS) is credited with having created a more secure environment for such trade. But even though GATS put in place a useful framework for dealing with explicit protection, it has generated neither the negotiating momentum to reduce such protection nor the rules to ensure that protection takes a desirable form. Mattoo suggests possible improvements to the GATS in the specific commitments made by countries and the negotiating methodology. In general, the policy instrument should be targeted closely on the policy objective, minimizing by-product distortions.
Snape addresses the policy-objective link for services, with a stronger emphasis on the specification of objectives than has been apparent in some of the literature. He draws on reports of the Australian Productivity Commission on Broadcasting, Gambling, International Aviation, and Architects to illuminate these issues. The lessons are not surprising: that it is best to use policy structures that are attuned to objectives and to seek generic policies in this context. Policies attuned to particular trade, investment, social and cultural, and competition objectives should extend beyond specific industries and beyond specific forms of production, consumption, and trading. In that regard, international trade policies are not used appropriately to improve labor standards, or the environment. Countries' domestic policies should align objectives and policies consistently and efficiently.
Chen, Chou, Kuo, and Wang first employ Hoekman's method to estimate the barriers to the services trade in Taiwan. They then apply a multiregional and computable general equilibrium model to analyze the impacts of global trade liberalization in services as well as in commodities. They also consider the technology spillovers from developed countries to developing countries via imports of intermediate inputs, capital goods, and services. Finally, they investigate the effects resulting from the accession of Taiwan and Mainland China to the World Trade Organization (WTO).
In recent decades, there has been a considerable increase in Taiwan's foreign trade in services, and as the Taiwanese economy continues to expand -- along with Taiwan's accession into the WTO and full implementation of its liberalization policy -- this trend is expected to continue. Hsueh, Lin, and Wang use trade data from national income accounts, input/output tables, and the balance of payments to examine Taiwan's past trade in services, to analyze some of the determinants involved, and to discuss the potential for future trade in services.
Kim and Kim investigate the impact of services liberalization on productivity in Korea. Because Korea underwent active liberalization of the service sector in the 1990s, the authors ask whether the service sub-sectors that were liberalized, and the manufacturing subsectors that use liberalized services as inputs, experienced productivity gains during this period. Although it is premature to suggest that services liberalization has caused an increase in productivity in Korea, Kim and Kim do find evidence of enhanced competition, for example, in distribution services, which may eventually lead to an increase in productivity.
Lee and Lie analyze the evolution of telecommunications regulation and reform in the 1990s in Korea in terms of both its effects on users and industry structure and how the WTO and other pressures for reform affected it. It seems that telecommunications reform has progressed significantly in Korea: prior to the 1990s, the chief objective of policy was the provision of universal service; in the past decade, the objective has been to bring more competition and cost-effectiveness into the system.
Hwang, Shin, and Yoo analyze Korea's liberalization of its financial services trade, contrasting the lukewarm approach to liberalization that characterized the early 1990s with the much more enthusiastic approach that occurred after the Asian crisis. Foreign banks play a disciplinary role through monitoring and credit assessment of the borrowers, a function that had not been performed by domestic banks and that would have greatly improved the economy's efficiency. The authors find little evidence of such a disciplinary role by the foreign banks before the crisis when there was government-provided implicit insurance. It is too early to provide a full assessment of the effects of post-crisis liberalization, but the basic functions embodied in financial services are likely to improve after the crisis, because post-crisis policy reform is expected to reduce the implicit insurance drastically.
Fukao and Ito estimate the sales and employment of Japanese affiliates of foreign firms (JAFFs) and foreign affiliates of Japanese firms (FAJFs) in the service sector at the three-digit industry level for 1995. They find that imbalances between activities of JAFFs and FAJFs are smaller than those reported in the Ministry of Finance statistics on foreign direct investment (FDI). In terms of employment, the JAFFs/FAJFs ratio is 0.23. Fukao and Ito then compare Japan's purchases of services from foreigners with U.S. purchases from foreigners. For the service sector as a whole, Japan's ratio of imports to total domestic output is 2.1 percent, which is almost identical to the corresponding U.S. ratio of 2 percent. But Japan's ratio of purchases from affiliates to total domestic output is 1.3 percent, less than one-third the corresponding U.S. ratio of 4.1 percent. Japan's market for services seems to be more closed for establishment transactions than for cross-border transactions. Also, compared to the United States, Japan's purchases from foreigners are concentrated in a limited number of industries. Using cross-industry data, Fukao and Ito find that Japanese inward FDI penetration is related closely to the market structure of industries: it is relatively high in industries that have a higher entry rate, a higher sales concentration, and a lower presence of "keiretsu."
Accounting services are an area with particularly strong domestic regulatory arrangements. Business accounting systems are based on country-specific legal frameworks and often are not open to foreign firms or individuals. That works as an unintentional barrier to foreign penetration. At the same time, globalization of economic activities seems to call for the convergence of accounting systems. The International Accounting Standards committee has been constructing international accounting standards; in Japan, drastic institutional changes are taking place in accounting in response to these pressures. Kimura reviews the transition of the Japanese accounting system and considers how market forces are affecting the relationship between domestic institutions and international policy discipline.
Urata and Kiyota examine service trade in East Asia from two different perspectives: service trade in the form of cross-border supply and consumption abroad, and service trade that is embodied in goods trade. They confirm that service trade in East Asia has been increasing in recent decades. They also find that, unlike goods trade, service trade in many East Asian economies was in deficit. However, many East Asian economies engaged heavily in service trade in transportation, travel, and other services.The authors confirm that the Heckscher-Ohlin model can explain the patterns of trade in certain services -- including computer and information services -- but not more generally. Further, they show that a large amount of services are "traded" via goods trade. Indeed, for many countries the overall balance in service trade turns out to be a surplus, because the trade surplus in embodied service trade is greater than the trade deficit in disembodied service trade.
Wong and Zhang report the results of a survey of Hong Kong firms with regard to their experience in providing services to other Asian countries. Hong Kong is an important trade services hub in the Asia-Pacific region. Further services liberalization in other countries will provide increased opportunities for Hong Kong service exports, but also may allow service providers in other countries to compete increasingly with Hong Kong. It is not clear whether these changes ultimately will weaken or strengthen Hong Kong's competitive position vis-à-vis the service providers based in other Asian countries.
Wang and Wu investigate and identify the factors that determine the relative competitiveness of international tourism among a group of seven East Asian economies. Using data on U.S. and Japanese visitors, they find that: 1) international tourists are not sensitive to relative price variations if the purposes of their visit are business or visiting relatives, and/or if they come to the destinations on packaged group tours; 2) foreign visitors are not sensitive to variations in exchange rates if most of the tourism expenditures in these destinations are priced in terms of their home currencies; and 3) qualitative supply-side factors indeed may influence market share. Nevertheless, these effects depend on place of origin and destination.
These papers and their discussions will be published by the University of Chicago Press in an NBER Conference Volume. In advance of publication, most of these papers will be available on the NBER's Web site.