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Whether and When to Liberalize Capital Account and Financial Services
Discussions about international capital movements raise extremely important and controversial questions. Why should countries open up their capital accounts especially considering that unrestricted international capital movement is a relatively new phenomenon? For example many OECD countries have not eliminated their foreign exchange restrictions only until the 1980's. If the answer is unequivocally affirmative does it matter how fast should countries do so? Should they wait until "all essential pieces" of the policy package are in place before they eliminate all restrictions? How are international capital movements related to domestic financial sectors? Is there a difference between opening to competition an industry such as car manufacturing as compared to the banking sector? Should the opening of the banking sector be governed by different rules? Rules about foreign exchange restrictions are already in place in the IMF Articles. Until recently the IMF Articles only called for the elimination of foreign exchange restrictions on the current account. The ongoing discussion and the controversy about globalization that calls for the capital account liberalization introduces therefore a relatively new element into the whole discussion. These questions have also implications for the World Trade Organization. It is well known that the Uruguay Round Agreements have already provided a coverage for a number of aspects that are directly related to foreign investment. Rules established elsewhere such as in the context of changes to the IMF Articles will obviously have an important bearing for the implementation of rules agreed in the Uruguay Round. This raises a variety of other questions in the mind of some observers. Who should decide about the rules on capital account liberalization? What rules? IMF? What is the role of the WTO? How does one link the two? All of the questions raised above are clearly extremely important and most of them are discussed in the following paper by John Williamson. Mr. Williamson's presentation is based on his lecture and discussion which was delivered on 17 June 1999 at the WTO. The actual text that follows is a transcript of that lecture.
Vertical Specialization and the Quality of Infrastructure
This paper explores the role of producer services and ICT on international outsourcing. The motivation for outsourcing is to focus on core business and improve efficiency and outsourcing companies usually outsource a number of functions and the efficiency gains depend on the ability for the suppliers to deliver the required quality at the right time. The timeliness of delivery and the fulfilment of quality standards depend critically on the availability of producer services. I therefore argue that international outsourcing can best be understood within an analysis framework of many suppliers that are interdependent and the O-ring theory of production is such a theory. The paper first presents and modifies this model and then explores its predictions in an empirical analysis of the determinants of international vertical specialization as defined by an index developed by Hummels et al. (2001). The index is calculated for a cross-section of 52 countries and 5 sectors and regressed on a number of variables affecting the timeliness of delivery. It is found that vertical specialization is sensitive to trade barriers and infrastructure quality and cost of infrastructural services. The relative importance of trade barriers and various indicators of infrastructure vary between sectors. Vertical specialization in the electronics sector appears to be most sensitive to trade barriers and the density of the telecommunication network. This is also the case for the motor vehicles sector but the size of the parameters is somewhat lower. The chemicals sector is most sensitive to the restriction on maritime services while for textiles and clothing the aggregated measure of infrastructure had the highest explanatory power. Only in the electronics sector did the wage level (GDP per capita was used as a proxy) matter for vertical specialization.
Agricultural Trade and Development
The system of global agricultural and food trade is undergoing rapid processes of change with important implications for economic development. In this paper we document and discuss these changes; including the rapid growth and structural change in agri-food trade the increased consolidation in food supply chains the proliferation of public and private food standards high and volatile food prices and increased vertical coordination in the chains. We investigate what the implications are of these changes for developing countries for their participation in international agricultural trade as well as for economic development income mobility and poverty reduction in rural areas.
Trade Policy Substitution
We investigate to what extent the probability that a Specific Trade Concern (STC) is raised in the WTO against a Member in a given sector is affected by past reductions in applied tariffs. Employing an identification strategy based on “new measures” we find evidence of a substitution of non-tariff measures for tariffs both in the sample of TBT and in the sample of SPS concerns. While in the SPS sample this result holds both among developed and developing economies in the TBT sample such “trade policy substitution” only occurs when the country maintaining the measure at issue is economically developed. These results are consistent with our theoretical model which predicts policy substitution between tariffs and standards in economies where meeting such standards is relatively less costly and in sectors where meeting such standards is relatively more important from the perspective of producers.
Foreign Banking
The General Agreement on Trade in Services (known as the GATS) is an important new element in the international framework that affects the regulation of every WTO Member's financial sector. However except for a limited number of country-specific case studies no attempt has been made to compare WTO commitments to open the domestic banking sector to foreign banks with actual regulatory practice in a systematic and comprehensive manner on a cross-country basis. Nor has much attention been devoted to systematically and comprehensively assess the degree to which WTO Members discriminate against foreign bank. This paper draws upon a new and comprehensive dataset consisting of the commitments countries made at the WTO and the regulations actually imposed on foreign banks by those countries. The dataset covers 123 WTO Members for whom there was also information available on their current regulatory regime for banking (based on the responses to a World Bank survey as discussed in Barth Caprio and Levine (2006)). On the basis of that data the authors develop indices measuring the degree of openness to foreign banking based upon both commitments made and actual regulatory practice with a view to assessing the overall extent to which countries open their borders to foreign banks more than they are legally obliged to do based upon their WTO commitments. The dataset is also used to assess the overall extent to which countries discriminate against foreign banks by regulating them less favorably than domestic banks. Although our results are still quite preliminary they do show substantial divergences between commitments and practices. Indices of market openness and discrimination reveal wide differences among the 123 countries in the sample. The paper also identifies various factors that help explain the level of commitments that WTO Members have made.
WTO Accession and Growth: Tang and Wei Redux
On the occasion of the 25th anniversary of the WTO this paper re-estimates the impact of WTO accession on growth. Joining the multilateral trading system not only expands access to international markets but also requires commitment to domestic reforms. Tang and Wei (2009) showed that there is in fact a positive effect of WTO on growth also during the period of accession when these commitments are undertaken.
Is There Reciprocity in Preferential Trade Agreements on Services?
Are market access commitments on services in Preferential Trade Agreements (PTAs) reciprocal or simply unilateral? If reciprocal do concessions granted in services depend on concessions received from the trading partner in other services or in non-services areas as well? In this paper we investigate the presence of reciprocity in bilateral services agreements by sub-sector mode of supply and type of agreement (North-North South-North South-South). To do so we use a database of concessions given and received by 36 WTO Members in 40 services PTAs. Results reveal the presence of reciprocity at the product (sub-sector) level and across economic sectors (i.e. preferences in services trade in exchange for preferences received in goods trade). Reciprocity is stronger in agreements between developed countries. The findings provide insights into motivations for services PTAs but also the multilateral negotiations. Indeed the negotiation of services PTAs provides an incentive to withhold services offers in the Doha Round in order to extract more - reciprocal- concessions at a bilateral level. The existence of reciprocity on a sectoral basis may also hold lessons on optimal ways to improve the multilateral negotiating process.
Services Rules in Regional Trade Agreements
The study tries first to assess the extent of similarities and divergences among services rules in regional trade agreements as compared to the GATS. To do so it uses a typology identifying variations in 48 key provisions structured under seven themes commonly found in RTAs and using the GATS as a benchmark. The analysis identifies two main “families” of agreements GATSinspired and NAFTA-inspired) and a residual category. The paper briefly explores the historical development that led to these families as well as their geographical spread both on an agreement by agreement basis and a country by country basis. The paper then analyses by theme the variations found in the RTAs among services rules including their novelty as compared to the GATS. Given the lack of available information on the implementation of the agreements the paper tries to assess whenever possible the magnitude of the discrepancies and their practical impacts. While subject to some qualifications the results of the study are relatively straight forward: there is no "spaghetti bowl" in services rules but just two "families" and one residual category. The details reveal that the degree of divergence between those two families does not overall seem insurmountable. This assessment concords with other studies (e.g. Marchetti Roy) that have equated them in terms of national treatment and market access and have compared directly commitments undertaken under the three families of agreements. One may even note a certain tendency to a convergence towards the GATS model (e.g. the addition of market access clause in the second generation of NAFTA-like agreements or the use of GATS-type architecture by EU for agreements else than pre-adhesion ones). In terms of "novelty" the results prove somewhat disappointing except in certain areas like mode 4 and transparency. Other issues in which in view of the intensity of WTO DDA debates one would have expected a lot of bilateral creativity such as domestic regulation safeguards and recognition provisions show themselves to be surprisingly embryonic. Finally anecdotal evidence gathered for instance during the drafting by the WTO Secretariat of Trade Policies Reviews and factual presentations on RTAs suggest that in numerous instances provisions relating to future negotiations or even regular meetings are not implemented thereby casting doubt on the effective impact of RTA provisions (including diverging ones) on trade realities.
Special and Differential Treatment in the WTO
Special and differential treatment (S&D) for developing countries continues to be a defining feature of the multilateral trading system. This paper seeks to address key aspects of what has become an increasingly entangled and multi-faceted discussion. The paper begins by reviewing the historical context in which the relationship of developing countries with the multilateral trading system evolved. The paper distinguishes several elements in the case typically made for S&D. It argues that concerns about graduation — the definition of which countries qualify for special treatment —have complicated progress on this issue suggesting that a focus on measures rather than on country status would obviate this difficulty while at the same time increasing the analytical underpinning of the case for special and differential treatment. The paper explores various forms of S&D and develops arguments for particular approaches to the design and management of access to S&D. An illustration is provided of how a more analytical approach would work by defining eligibility automatically in relation to measures rather than countries.
Financial Services Trade, Capital Flows, and Financial Stability
This study argues that trade policies regarding financial services are an important—but often neglected—determinant of capital flows and financial sector stability. Financial services trade liberalisation which promotes the use of a broad spectrum of financial instruments and allows the presence of foreign financial institutions whilst not unduly restricting their business practices results in less distorted and less volatile capital flows and promotes financial sector stability. The study finds significant evidence in favour of this claim through an empirical analysis of GATS commitments in 27 emerging markets. For example countries which experienced financial crisis during 1991-97 show a combined indicator of financial services trade restrictiveness three times as high (= less favourable for financial stability) as countries without a crisis. The study' s findings have two important policy implications. Firstly liberalising international trade in financial services can be a market-based means to improve the "quality" of capital flows and to strengthen financial systems. This would complement other policies including financial regulation. Secondly even in countries where the financial system is weak and where immediate full-fledged financial sector liberalisation is not advisable certain types of financial services trade could be liberalised as such trade strengthens the financial system without provoking destabilising capital flows.
Managing Capital Flows in Transition Economies with a Case-Study of Central and Eastern Europe
Management of capital inflows has unexpectedly become a major challenge in transition economies. These countries were expected to have an insatiable demand for foreign capital and an excess demand for capital inflows was therefore predicted by most observers. Foreign investors are also known to be very selective in their choice of markets and these countries were a big unknown. Moreover macroeconomic policy in these countries has been dominated by the objective of disinflation. We explain in this paper the reasons why some transition countries have been an attractive market for foreign investors and how important has foreign capital been for these countries. But the bulk of the paper provides an assessment of government policies to manage foreign capital inflows. We evaluate the policies against the background of different government objectives and in terms of the actual policy instruments used by the monetary authorities the timing and sequencing and the costs of these interventions. We argue that the initial responses to capital surges were poor; the authorities were reluctant to adjust their original policies and learn from the experiences elsewhere. Eventually their policy responses were changed but until the costs of inertia became too high. The authorities have effectively used sterilization policies more flexible exchange rate policies combined with tight monetary and fiscal policies. They also understood that an effective management of capital flows must start from well functioning markets and have been prepared to adopt structural policies whenever market imperfections could be identified.
21st Century Regionalism
This paper weaves several sets of facts into an argument that: 1) today’s trade is radically more complex involving a “trade-investment-service nexus” 2) this 21st century trade demanded deeper disciplines which were supplied by “21st century regionalism” while the WTO was otherwise occupied and 3) 21st century regionalism has quite different implications for the world trading system than the traditional thinking suggests. The paper also argues that the traditional thinking (building-stumbling-block and Vinerian economics) is not up to the job of analysing 21st century regionalism. An alternative framework is not provided but elements a new approach should encompass are discussed.
The EU Model and Turkey
The customs union between the European Union (EU) and Turkey which entered into force in January 1996 extended and deepened the Association Agreement signed in 1964 and which foreshadows full EU membership for Turkey. In a number of areas the new relationship goes beyond the minimum requirements for a customs union: Turkey is also having to implement a number of measures which are part of the acquis communautaire similar to those applicable within the EU. This paper addresses the question whether this adoption of the EU model is beneficial to Turkey and third countries. The importance of this issue is the spreads of this model through the extension of the EU itself and the building of an increasing web of partnerships between the EU and other countries in Central and Eastern Europe as well as Mediterranean countries. Moreover other regions are looking at the EU model as a way in which to deepen their own preferential trading arrangements.
Clustering Value-Added Trade
The paper builds a typology of value-added traders according to their economic and trade policy characteristics. In the process it defines clusters of countries according to the multidimensional criteria defined by value-added economic and trade policy indicators. A second approach focuses on the relationships existing between the variables themselves using multicriteria and graph analysis. Natural resources endowments on the one hand and services orientation on the other one are among the most determinant variables for defining Trade in Value Added (TiVA) clusters. The level of economic development remains a crucial determinant of the TiVA profile as is the size of the economy even if not as important as initially expected. Proactive GVC up-grading strategies such as investments in ICT and R&D tend to foster a higher foreign content in exports compensating the lower domestic margin by higher volumes. Inwardoriented protectionist policies are not particularly successful in exporting higher share of domestic content except in services exports; but in this case export volumes remain marginal.
Poison in the Wine?
Commitments in regional trade agreements (RTAs) that fall short of the same countries' obligations under the General Agreement on Trade in Services (GATS) are a relatively frequent phenomenon. However they have gone widely unnoticed in the literature to date and drawn very little attention in relevant WTO fora either. Nevertheless 'minus commitments' are potentially poisonous and for various reasons would deserve close attention. Given the broad definitional scope of the GATS extending inter alia to commercial presence such commitments may impinge upon the rights of third-country investors in the RTA economies. Their existence casts doubts on the legal status of the respective agreements under the GATS and can have severe implications for the trading system overall. If not complemented by comprehensive Most-favoured-Nation clauses the RTAs concerned are disconnected from the WTO and virtually impossible to multilateralize. Based on a review of some 80000 commitments in 66 agreements this study seeks to develop a reasonably comprehensive picture of the frequency of 'minus commitments' and their dosage in terms of sectors measures and modes of supply. It also discusses potential remedies from a WTO perspective.
Product Standards and Margins of Trade: Firm Level Evidence
This paper analyses the trade effects of restrictive product standards on the margins of trade for a large panel of French firms. To focus on restrictive product standards only we use a new database compiling the list of measures that have been raised as concerns in dedicated committees of the WTO. We restrict our analysis to the subset of Sanitary and Phyto-Sanitary (SPS) regulatory measures and analyse the effects of product standards on three variables: (i) probability to export and to exit the export market (firm-product extensive margins) (ii) value exported (firm-product intensive margin) and (iii) export prices. In particular we study whether firms size market shares and export orientation modify the effect of SPS measures. We find that SPS measures discourage exports. We also find a negative effect of SPS imposition on the intensive margins of trade. This paper analyses the trade effects of restrictive product standards on the margins of trade for a large panel of French firms. To focus on restrictive product standards only we use a new database compiling the list of measures that have been raised as concerns in dedicated committees of the WTO. We restrict our analysis to the subset of Sanitary and Phyto-Sanitary (SPS) regulatory measures and analyse the effects of product standards on three variables: (i) probability to export and to exit the export market (firm-product extensive margins) (ii) value exported (firm-product intensive margin) and (iii) export prices. In particular we study whether firms size market shares and export orientation modify the effect of SPS measures. We find that SPS measures discourage exports. We also find a negative effect of SPS imposition on the intensive margins of trade. Finally the negative effects of SPS measures on the extensive and intensive margins of trade are attenuated for big firms.
Exporting under Trade Policy Uncertainty
Policy uncertainty can delay investment and reduce the response to policy change. I provide theoretical and novel quantitative evidence for these effects by focusing on trade policy a ubiquitous but often overlooked source of uncertainty when a firm's cost of export market entry is sunk. While an explicit purpose of the World Trade Organization (WTO) is to secure long term market access little theoretical and empirical work analyzes the value of WTO institutions for reducing uncertainty for prospective exporters. Within a dynamic model of heterogeneous firms I show that trade policy uncertainty will delay the entry of exporters into new markets and make them less responsive to applied tariff reductions. Policy instruments that reduce or eliminate uncertainty such as binding trade policy commitments at the WTO can increase entry even when applied protection is unchanged. I test the model using a disaggregated and detailed dataset of product level Australian imports in 2004 and 2006. I use the variation in tariffs and binding commitments across countries products and time to construct model-consistent measures of uncertainty. The estimates indicate that lower WTO commitments increase entry. Reducing trade policy uncertainty is at least as effective quantitatively as unilateral applied tariff reductions for Australia. These results illuminate and quantify an important new channel for trade creation in the world trade system.
Services Liberalization from a WTO/GATS Perspective: In Search of Volunteers
There has been virtually no liberalization under the General Agreement on Trade in Services (GATS) to date. Most existing commitments are confined to guaranteeing the levels of access that existed in the mid-1990s when the Agreement entered into force in a limited number of sectors. The only significant exceptions are the accession schedules of recent WTO Members and the negotiating results in two sectors (financial services and in particular basic telecommunications) that were achieved after the Uruguay Round. The offers tabled so far in the ongoing Round would not add a lot of substance either. Apparently negotiators are 'caught between a rock and a hard place'. For one thing the traditional mercantilist paradigm relying on reciprocal exchanges of concessions seems to be provide less momentum than in the goods area. For another there are additional - technical economic and political - frictions that tend to render services negotiations more complicated timeconsuming and resource-intensive. The novelty of the Agreement adds an additional element of legal uncertainty from a negotiator's perspective. This paper discusses various options that might help to overcome the ensuing reticence to engage. Few appear within reach at present however. The bare minimum that would need to be achieved is to revive work on scheduling and classification issues with a view to putting both existing commitments and new offers on a safer footing and to improve compliance with long-existing information/notification obligations.
The Economics of Permissible WTO Retaliation
WTO arbitrators rely on economics to establish the permissible retaliation limits authorized by the Dispute Settlement Understanding (DSU) which arguably serves to enforce the overall agreement. We examine how theoretical and quantitative economic analysis has and can be used in this stage of the DSU process. First we identify characterize and categorize the major classes of disputes – e.g. those affecting import protection versus export promotion – and use the Bagwell and Staiger interpretation of the WTO principle of reciprocity to provide a theoretical framework that arbitrators can use to identify the maximum level of retaliatory countermeasures. Second we allocate each of the ten DSU arbitrations that have taken place thus far into one of these categories and compare the arbitrators’ actual approach with the theory. Third we use this framework to identify three crucial elements to the arbitrators' decisionmaking process for each case: i) the formula that they decide to adopt for identifying appropriate countermeasures ii) their political-legal-economic decision on a WTOconsistent counterfactual to use to implement the formula and iii) the quantitative methods they use to necessarily construct the (unobserved) WTO-consistent counterfactual. We examine not only the arbitrations that have taken place thus far but our approach also illustrates a template for many additional types of arbitrations likely to take place under the DSU. Finally in the disputes in which this reciprocity approach has not been used we identify procedural difficulties that arbitrators confront thus highlighting the constraints that hinder their use of economic analysis in practice.
Simulating World Trade in the Decades Ahead
The geography and composition of international trade are changing fast. We link a macroeconomic growth model and sectoral CGE framework in order to project the world economy forward to the year 2035 and assess to what extent current trends in trade are expected to continue. Constructing fully traceable scenarios based on assumptions grounded in the literature we are also able to isolate the relative impact of key economic drivers. We find that the stakes for developing countries are particularly high: The emergence of new players in the world economy intensification of South-South trade and diversification into skill-intensive activities may continue only in a dynamic economic and open trade environment. Current trends towards increased regionalization may be reversed with multilateral trade relationships gaining in importance. Hypothetical mega-regionals could slow down but not frustrate the prevalence of multilateralism. Continuing technological progress is likely to have the biggest impact on future economic developments around the globe. Population dynamics are influential as well: For some countries up-skilling will be crucial for others labour shortages may be addressed through migration. Several developing countries would benefit from increased capital mobility; others will only diversify into dynamic sectors when trade costs are further reduced.