Birla College of Arts, Science and Commerce, Kalyan

PROJECT

ON

“TRADE IN SERVICES”

in the subject

Economics of Global Trade and Finance

SUBMITTED TO

UNIVERSITY OF MUMBAI,

FOR SEMESTER –I

of

MASTER OF COMMERCE

BY

Miss. Dhanashree Sanjay Gandhe.

(Roll No-06. Seat No…… )

UNDER THE GUIDANCE OF

Dr Radhika Lobo

YEAR - 2014 – 15

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Birla College of Arts, Science and Commerce, Kalyan

DECLARATION BY THE STUDENT

I, Dhanashree Sanjay Gandhe student of M Com Part-I Roll Number 06 and

Seat Number--------hereby declare that the project for the Paper Economics of

Global Trade and Finance titled, “Trade in services” submitted by me for

Semester –I during the academic year 2012-13, is based on actual work carried out

by me under the guidance and supervision of Dr. Radhika Lobo. I further state

that this work is original and not submitted anywhere else for any examination.

Signature of Student

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EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on

“Trade in services” submitted by Dhanashree Sanjay Gandhe, Student of M Com

Part-I.

This project is original to the best of our knowledge and has been accepted for

Internal Assessment.

Internal Examiner External Examiner

Dr Radhika Lobo

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Internal Assessment: Project 40 Marks

Name of the Student Class RollNumber

Seat Number

First name : Dhanashree

Father’s Name: Sanjay

Surname : Gandhe

M COM

PART I

06

Subject: Economics of Global Trade & Finance

Topic for the Project: Trade in services.

Marks Awarded Signature

DocumentationInternal Examiner (Out of 10 Marks)DocumentationExternal Examiner (Out of 10 Marks) Presentation Internal Examiner (Out of 10 Marks)

Viva and Interaction External Examiner (Out of 10 Marks)

TOTAL MARKS (Out

of 40)

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SR.N0. PARTICULARS PAGE NO.

CHAPTER 1

1.1 Introduction 8

1.2 Review of Literature 9

1.3 Concept 11

1.4 Definition 12

1.5 Recent policy reforms 13

CHAPTER 2

2.1 Importance of service sector 16

2.2 Trade in services (% of GDP) in India 19

2.3 World trade in services 20

CHAPTER 3 – Case Study

3.1 Tourism Services Liberalization in the Caribbean-

European EPA negotiations

22

3.2 The Issue 23

3.3 The Solutions 24

3.4 The outcome 25

3.5 Reasons for success 26

CHAPTER 4

4.1 Summary 27

4.2 Conclusion 28

APPENDICES

Abbreviations 30

Bibliography 31

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Acknowledgement

I would like to thanks from bottom of my heart to those who were involved

directly or indirectly in this project work. A great teacher is not simple one who

imparts knowledge to his student, But one who awakens their interest in it.

This idiom without doubt fit with Prof. Radhika Lobo who has been my

teacher, guide. she guides me and gave knowledge in details & help me to make a

very effective project. So, I thank her for precious time that she spent for me for

my project work.

I am grateful to my parents & friends who encouraged & inspired me at

every stage of project work by providing immeasurable help, care & moral support

as well.

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CHAPTER-1

1.1 Introduction

1.2 Review of literature

1.3 Concept of Trade in services

1.4 Definition

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1.1 INTRODUCTION

The services sector is key to economic growth, competitiveness,

and poverty alleviation. Comprising more than two-thirds of the world economy,

services are now commonly traded across borders, helped by technological

progress and the increased mobility of persons. In recent years, a number of

developing countries have looked at trade in services as a means to both

respond to domestic supply shortages and to diversify and boost exports. Any

country can tap into the trade potential of services, but not every country can

become a services hub across sectors. The opening of the services sector

potentially comes not only with large benefits, but also fears and costs that should

not be overlooked. This book provides useful guidelines for the assessment of a

country's trade potential, and a roadmap for successful opening and export

promotion in select services sectors.

It looks at both the effects of increased imports and exports, and

provides concrete examples of developing country approaches that have either

succeeded or failed to maximize the benefits and minimize the risks of opening. It

focuses on sectors that have been rarely analyzed through the trade lens, and/or

have a fast growing trade potential for developing countries. These sectors are

accounting, construction, distribution, engineering, environmental, health,

information technology, and legal services.

It is designed for non-trade specialists to understand how trade can

help improve access to key services in developing countries, and for trade

specialists to understand the specific characteristics of each individual sector. It

will be a useful tool for governments to design successful trade opening or

promotion strategies, and for the private sector and consumers to advocate sound

domestic policy reforms accompanying an offensive trade agenda.

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1.2 Review of Literature

The dominant theme in the theoretical literature on services trade

is the extent to which trade in services differs from trade in goods, and how this

affects previous theoretical results for goods trade. Authors such as Hill (1977)

argue that a key characteristic of most services is the joint production requirement

that consumption and production must be simultaneous Deardors (1985) and

Melvin (1989) argue that this feature invalidates, or at least requires

reinterpretation of, the

law of comparative advantage for trade in services. Mirza and

Nicoletti (2004) point out that, as a result of joint production, inputs from the

exporting and the importing countries are usually required to trade a service.

Other authors stress the similarities between goods and services trade For example,

Hindley and Smith (1984) argue that none of the differences between services and

goods trade change the normative implications of existing theoretical approaches.

Similarly, Bhagwati, Panagariya and Srinivasan (2004) propose that the gains from

trade in producer services can be understood using the same theoretical

frameworks as those used for goods trade.

This review of the literature has two broad implications for the

present research. First, as already pointed out, all the existing theoretical

contributions work either with perfectly competitive frameworks or representative

models. This raises the question of whether this abstraction from heterogeneity is

defensible. If it is not, then what are the stylized facts that heterogeneous models

for services trade should be able to explain? Second, there is extensive discussion

9

in the literature of the similarities and differences in services and goods trade, but

conclusions are mixed. Empirically, the more recent gravity literature on services

trade shows there are some remarkable similarities between the two types of trade.

In view of these results, it seems natural to extend the comparison of goods and

services trade to the level and ask whether the existing heterogeneous models for

trade in goods are applicable also to services trade.

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1.3CONCEPT

Trade in Services refers to the sale and delivery of an intangible product,

called a service, between a producer and consumer. Trade in services takes place

between a producer and consumer that are, in legal terms, based in different

countries, or economies, this is called Trade in Services.

International trade in services is defined by the Four Modes of Supply of

the General Agreement on Trade in Services (GATS).

(Mode 1) Cross border trade, which is defined as delivery of a service from the

territory of one country into the territory of other country;

(Mode 2) Consumption abroad - this mode covers supply of a service of one

country to the service consumer of any other country;

(Mode 3) Commercial presence - which covers services provided by a service

supplier of one country in the territory of any other country, and

(Mode 4) Presence of natural persons - which covers services provided by a

service supplier of one country through the presence of natural persons in the

territory of any other country

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1.4 Definition of Trade in Services

Article I: 2 of the GATS defines the concept of “trade in services” as “the supply

of a service” within one of four defined “modes of supply” This definition of

“trade in services” through the four different modes of supply is fundamental to

understanding the scope and operation of the GATS. It is especially important

when in relation to specific commitments inscribed by Members in their GATS

Schedules relating to market access and national treatment.

Trade in services is the sum of service exports and imports divided by the value of

GDP, all in current U.S. dollars.

There are two broad categories of services viz.

1. Those that necessarily require the physical proximity of the provider and the

user.

2. Those that do not, though such physical proximity may be useful.

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1.5 RECENT POLICY REFORMS & ISSUES

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14

CHAPTER-2

2.1Importance of Service Sector

2.2 Trade in services (% of GDP) in India

2.3 World trade in services

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2.1Importance of Service Sector

The services sector is the world's largest employer, and produces 70

percent of global gross domestic product (GDP). In the United States, services

generate more than 75 percent of the national economic output and provide 80

percent of private sector jobs. Broadly defined, a service is a product of human

activity aimed to satisfy a human need, which does not constitute a tangible

commodity. There are many types of services, ranging from heart surgery to road

construction, electricity transmission to education, and childcare to water

purification. Services are important for employment and employment growth. This

is because many traditional services, including distribution, education and social

services, are labour intensive. In many services sectors it has also proved more

difficult to substitute capital for labour than in manufacturing. The expansion of

services and the emergence of new services have been driven by income-related

demand shifts, technological developments, falling costs of communications and

the increased presence of transnational corporations. In particular, the new

information and communication technologies and the incessant compulsion on

companies to cut costs have led to the growth of outsourcing of services. In recent

years this outsourcing is now being off-shored to low-cost countries such as India,

Philippines etc.

The TISA has the opportunity to address major and fundamental

barriers to trade in services affecting the United States and the globe. Some

barriers to services trade include limited movement of data across borders, unfair

competition from state-owned enterprises, lack of transparency and need for due

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process of law, and forced local ownership and discrimination in obtaining

business licenses and permits.

Services are coming to dominate the economic activities of countries

at virtually every stage of development, making services trade liberalization a

necessity for the integration of the world economy.

In the high-income industrialized economies, the value added by services generally

exceeds 60 per cent of total output. In many developing economies, even allowing

for the fact that governments are major service providers (education, healthcare,

sanitation, etc.), the commercial market for services is huge and growing and the

trend is clear: as national economies develop and incomes rise, the commercial

service sector accounts for an ever-larger share of GDP. It is widely recognised

that liberalisation of trade in Services has manifold benefits. Some of them can be

listed as the following:

Free trade in services enables countries to better enjoy the benefits of globalization

and improves economic efficiency just as free trade in goods does. It contributes to

job creation, higher incomes, more consumer choice, downward pressure on

inflation, and a better quality of life.

More, better and lower cost services are important because

services are the "enablers" that permit economies to function and prosper. Some

form essential infrastructure - transport, communications, finance, information.

Capital markets, for example, cannot function efficiently without abundant, high-

quality information that can be quickly and frequently communicated. Other

services are critical to the success of manufacturing and agriculture.

Liberalization of trade in services is an important means to encourage the

continued rapid expansion of foreign direct investment, to integrate national

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economies more effectively and to reduce income and other disparities among

countries. Because services production and consumption normally are proximate

and simultaneous, services trade usually entails a significant transfer of technology

and know-how from country to country.

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2.2 Trade in services (% of GDP) in India

Trade in services (% of GDP) in India was last measured at 14.07 in 2011,

according to the World Bank. Trade in services is the sum of service exports and

imports divided by the value of GDP, all in current U.S. dollars. This page has the

latest values, historical data, forecasts, charts, statistics, an economic calendar and

news for Trade in services (% of GDP) in India.

Trade in services (% of GDP) in India was 13.99 as of 2011. Its highest value over

the past 6 years was 15.83 in 2008, while its lowest value was 11.91 in 2005.

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2.3 World trade in services

.

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CHAPTER-3

CASE STUDY

3.1Tourism Services Liberalization in the Caribbean-European EPA negotiations

3.2 The Issue

3.3 The Solutions

3.4 The outcome

3.5 Reasons for success.

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3.1Tourism

Tourism is the third largest industry and source of foreign exchange in the country

after oil and manufacturing. Revenues from international consumers accounted for

US$8.2 billion in 2000 — roughly half of Mexico’s current account. The tourism

sector has also been one of the most progressive supporters of sustainable

development. In 2001, the Ministry of Tourism (SECTUR) in collaboration with

the Ministry of the Environment and Natural Resources (SEMARNAT) completed

the sustainable development strategy for this sector. The strategy proposes, among

other instruments, a sustainable tourism certification programme based on the

findings from a survey, which showed that 69 percent of respondents were willing

to pay a price premium for sustainable tourism services.

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Case study

Tourism Services Liberalization in the Caribbean-European EPA negotiations

 

  

International Trade Forum - Issue 4/2009

In Barbados, collaboration between the public and private sectors successfully

secured better tourism trade conditions than that afforded by the World Trade

Organization's General Agreement on Trade in Services.

The Economic Partnership Agreement (EPA) between the CARIFORUM Group of

African Caribbean Pacific countries and the European Union (EU) represented

enhanced and new market access opportunities for CARIFORUM investors and

service providers in the tourism industry in the EU market. The outcomes of this

process demonstrate that the private sector in developing countries, including small

and vulnerable economies, can reap significant rewards from the adoption of a

proactive approach to and early engagement in trade negotiations.

THE ISSUE

From the perspective of the Barbadian and broader Caribbean tourism industries, the global tourism industry is characterized by consolidated distribution channels controlled by a limited number of large international players, many of which are based in the EU. In spite of this situation, a key objective for the CARIFORUM tourism services was to secure better market access conditions and trade facilitation mainly to enable small service suppliers in the region to export for the first time and/or increase exports to the EU.

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THE SOLUTION

At the centre of the process was the Caribbean Regional Negotiation Machinery

(CRNM), which partnered with the Caribbean Tourism Organisation and the

Caribbean Hotel and Tourism Association to drive regional national collaboration

at the industry level. The Ministers of Tourism of the Caribbean Community

(CARICOM) and the CARICOM Council of Trade and Economic Development

supported these partners. The partnership created a new entity - the Barbados

Private Sector Trade Team (PSTT) - which was mandated to research, document

and promote private sector interests likely to be affected as a result of international

trade negotiations. The PSTT played an important business advocacy role in the

EPA process including lobbying, engaging in both formal and informal

consultations with the Ministry of Foreign Trade, and coordinating the public and

private sectors at national, regional and international levels.

In conjunction with the Barbados Hotel and Tourism Association and other key

private and public stakeholders, the PSTT facilitated focus groups to identify the

tourism sector's offensive and defensive positions. PSTT prepared a report that

highlighted areas in which Barbadian service providers expressed interest in

gaining enhanced access to the European market and requested the removal of

specific barriers to tourism services exports.

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THE OUTCOMES

Creation of meaningful, innovative, market-opening rules for the sector

Establishment of a common understanding on issues facing the sector -

particularly in the area of standards and anti-competitive practices

Creation of mechanisms to make it easier for EU investors to choose the

Caribbean

Strengthening of the capacity of CARIFORUM operators to increase tourism

exports and the industry's competitiveness.

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REASONS FOR SUCCESS

Determination of the private sector to engage actively in the negotiation

process

Effective use of business support organizations to formulate and convey

positions to the Government and the regional negotiation authorities

Commitment manifested by both the Barbadian Government and the

country's tourism stakeholders to creating and maintaining a constructive

and cooperative working relationship throughout the negotiating cycle

Ability of negotiators to successfully pursue the interests of private

operators.

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Summary

An increase in share of services in the GDP and total

employment leads to economic development. The growing importance

of services is reflected in the international trade also. The services in

international trade is subject to a lot of restrictions. Protective measures

include visa requirement, investment regulations, restriction on

repatriation, marketing regulation, restrictions on the employment of

foreigners, compulsion to use local facilities etc. International Marketing

Chapter-16 Trade In Services

27

CONCLUSION

The main characteristics of trade in services are, first, that traded services often are

demanded as a byproduct of trade in goods; second, that trade in services often

goes hand in hand with international movement of factors; and third, that services

may be provided internationally by transnational firms, some of whose factors of

production make their contributions from a distance

In this project the four modes of trade in services elaborately discussed. Though,

the GATS tried to give a holistic definition of trade in services, the definition not

foolproof. Due to constant technological advances, it is sufficient for purposes of

the GATS to define only what is meant by "trade in services." Second, the

definition of trade in services should be as precise as necessary to capture all

modes for the service trade. Specificity allows the GATS to apply to all modes of

trade in services and it also ensures that commitments made by members toward

liberalization of their service sectors will encompass all modes for service trade,

unless, of course, a given mode is otherwise exempted in the member's schedule.

The GATS has failed to provide a definition of what "services" should mean for

purposes of the agreement and has shed no light on the requirements that a

transaction under which services are traded must meet in order to be governed by

the GATS. Failure to address these definitional matters is certain to raise issues

concerning the scope of applicability of the GATS.

Cross-border trade in goods involves or necessitates the supply of certain services.

The clearest example is the case of transportation services associated with the

transfer of goods from the country of export to the territory of import. The

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importance of services would far outweigh that of goods if we assume, for

example, that operation and management services include the supply of engineers,

technicians, and other professional staff in the areas of operation and maintenance,

finance, marketing etc. for an extended period. But what impact may this have on

the applicability of the GATS. The GATS does not address this situation. It speaks

of trade in services through certain supply modes but not about transactions and

contracts for trade in services. Thus, the issue arises of whether such a

characterization is permissible under the GATS. Stated differently, whether a

member can require application of the GATS not only when trade in services

occurs but also when the underlying transaction can be characterized as one for

service trade.

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Abbreviations

ASEAN Association of South East Asian Nations

AUSTRADE Australian Trade Commission

BIE Bureau of Industry Economics

EC European Community

EU European Union

FATS Foreign Affiliate Trade in Services

FDI Foreign Direct Investment

GATT General Agreement on Tariffs and Trade

GATS General Agreement on Trade in Services

GDP Gross domestic product

I-O Input-Output tables

IMF International Monetary Fund

OECD Organisation for Economic Cooperation and Development

R&D Research and development

UN United Nations

UNCTAD United Nations Conference on Trade and Development

WTO World Trade Organization

TISA Trade in Services Aggremeent

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BIBLIOGRAPHY

Bhagwati J. N., 1984, ‘Splintering and Disembodiment of Services and Developing

Nations’, The World Economy, 7(2), pp. 133-144

Baumol W. J., 1967, ‘Macroeconomics of Unbalanced Growth: The Anatomy of

Urban Crisis’, American Economic Review, 57(3), pp. 415-426; and Victor R

Fuchs, 1968,

The Service Economy, National Bureau of Economic Research, New York, NY

Bureau of Industry Economics, 1994,

Economist Intelligence Unit, 2010, Aiming higher: How manufacturers are adding

value to their business, The Economist Newspaper

Organisation for Economic Co-operation and Development, 2001, Open Services

Markets Matter, Policy Brief, OECD Observer, Paris

Tucker K. and M. Sundberg, 1998, International Trade in Services,

Manual on Statistics of International Trade in Services,

Economic of global trade and finance- Johnson, Mascarenhas

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