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October 25, 2010 / Lukasz Cerazy

Harmonisation and Common Standards Are Necessary – Especially in the Case of Trade in Services

Services are very often intangible and invisible so when it comes to international trade, regulators apply indirect controls. This unfortunately restricts the free flow of trade in services and as long as the degree of harmonisations is as low as it is at present trade will not pick up. The good thing about trade is that it is beneficiary to all parties involved and it is a plus-sum-game. The trouble with regulating the flow of services between borders is tricky, as border-agents cannot observe any objects actually crossing the border. These transactions are made electronically or delivered in person so the tariff-type-barriers are more rare than what is observed in goods; however, regulators can control their various kinds of delivery. This inevitably amounts to a very large number of barrier categories, as each service has its own unique way of delivery and or association with a manufactured good. However, there are some distinctions that apply to trade in services: Establishment of the firm vs. the firms operations and discriminatory vs. non-discriminatory regulations.

 

Image: jscreationzs / FreeDigitalPhotos.net

In today’s globalised and integrated world it is very rarely the case that a domestic firm is preferred over a foreign one, given that they are both equally competitive. However, all discriminatory barriers present the case where the differences between e.g. health and safe regulations in various countries creates uneven conditions for firms, obviously favouring the domestic ones. Foreign firms have to go through a long process of complying with local regulation, practice and law. This therefore also presents the best appeal for a greater degree of international cooperation and harmonisation. This not only applies to barriers in trade, but also in the case of education, traffic and e.g. the type of plug used in electric appliances. There are of course network externalities to be gained from adopting the same system. The differences are mainly due to path dependence of various cultures and at the time of their application they did not create greater problems because the world was not as well connected as it is today. At present it make more and more sense to adopt common norms, which is also gradually happening, however, governments and international institutions play a crucial role because they can either speed up the process or stop it.

A common standard will only be adopted if the cost of changing two different systems into one harmonised one is less than the utility and social gain that comes from only operating one system. The degree of positive social externality is strongest between countries in close proximity, because they usually are the biggest trading partners. That is also why economic and trade unions like NAFTA, EU, Arab League and ASEAN comprise of neighbouring members and it is also why continental Europe has a different electric plug from the UK and a different one still from America. The establishment of the General agreement on Trade in Services in 1995 was therefore a crucial step in developing common norms, however, a lot more focus needs to be put on the role services can have on global efficiency and growth. The world is a service-economy, with various agglomerated centres of manufacturing, so the scope for harmonisation is substantial and its urgency continuously more pressing. With the important role the World Trade Organisation and GATS can play in bringing together parties and overcoming the unwillingness to change national laws it is crucial that trade negotiations are held and perhaps it is time to create a new agenda for a future round at the WTO.

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