REGULATORY HETEROGENEITY AND TRADE IN SERVICES. Workshop on Trade and International Regulatory Cooperation, Hildegunn Kyvik Nordås, TAD/TSD

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1 REGULATORY HETEROGENEITY AND TRADE IN SERVICES Workshop on Trade and International Regulatory Cooperation, Hildegunn Kyvik Nordås, TAD/TSD

2 Overview Services exporters and importers Regulation level and heterogeneity Regulation and trade Areas for future work

3 Services traders Services exporting and importing firms are large, often multinational, have high productivity, and are found in all sectors of the economy; Firms from the services sector account for most of services trade, but high-technology manufacturing and mining/oil companies have higher services trade intensity than services sector firms; Most services traders export only one type of service to a few countries. Services trade accounts for about 20% of total gross trade, about 45% in value added terms and more than 60% of FDI stocks

4 Services trade by sector, Norway % 90% 80% 70% 60% 50% 40% 30% 20% Other sectors Other business services Technical business services Information and communication Transport Distribution Construction Manufacturing Mining/oil 10% 0% M X Source: Statistics Norway

5 Average cost of service product Why services traders are big avg. costs in case of mutual recognition avg. costs per export market in case of regulation heterogeneity home market export market 1 export market 2 export market 3 market size (home market plus exports)

6 Regulatory heterogeneity and trade performance Trade and FDI are complementary (restrictions on one affect the other in the same direction) Onerous regulation has a negative impact on both imports and exports of services and on inward and outward FDI in services; Regulatory heterogeneity has a similar effect in addition to the level effect; Regulatory heterogeneity shifts mode of supply from commercial presence to crossborder trade where possible.

7 Why countries regulate differently EU professional services Legal origin - history Population size (10% larger population, 1% more regulated professions) Contract enforcement (Frazer ind.) The stronger contract enforcement, the fewer regulated professions Average number of regulated professions Other German British French Scandinavian Socialist

8 AUT BEL BGR CHE CYP CZE DEU DNK ESP EST FIN FRA GBR GRC HUN IRL ISL ITA LTU LUX LVA MLT NLD NOR POL PRT ROU SVK SVN SWE 0 10,000 20,000 30,000 40,000 Number of qualification recognitions professional services , EEA Source: European Commission

9 Recognition drives trade and vice versa A 10% increase in number of professional qualification recognitions is associated with 12% more trade in legal, accounting and technical services; A 10% increase in trade in the same professional services is associated with 5% higher number of qualification recognitions.

10 Policy implications The more complex is regulation, the more possibilities to differ; Regulatory harmonisation requires an agreed best practice minimum common denominator? Mutual recognition also requires agreed standards how does this work for countries that do not regulate e.g. a profession?

11 Future work Update and create new regulatory heterogeneity indices (STRI, other OECD indicators); Analyse regulatory spillovers along value chains - both levels and heterogeneity of regulation; Study regulatory complementarities and bottlenecks sequencing of reforms

12 The presentation is built on: Hildegunn Kyvik Nordås and Henk Kox (2009) Quantifying regulatory barriers to services trade OECD Trade Policy Working Paper no Hildegunn Kyvik Nordås and Henk Kox (2007), Services trade and domestic regulation, OECD Trade Policy Working Paper no Hildegunn Kyvik Nordås (2013), Why do countries regulate differently and how does it affect trade? Capital Finance International (CFI.co), October,