Developing Countries and Preferential Services Trade

In order to escape their dedicated role as suppliers of raw materials for the global market, developing countries need to engage in value-add production of goods. All value-add production requires some amount of services in order to manage the various steps in the production of goods: Think about managing teams in two different factories working on two different processes in the production, the transportation of raw materials to the production site and therefrom to the nearest airport or port. Although just one aspect of many, better quality and cheaper access to services may therefore increase opportunities for developing countries and LDCs to engage in value-add production.

Theory suggests that liberalisation of services markets can lead to better quality of and access to services at a cheaper prize. Nevertheless, services industries in developing countries and LDCs tend to be well-protected against competition from international suppliers. Regional or bilateral liberalisation between developing countries and LDCs, however, may reduce competition between service suppliers to a beneficial level and therewith benefit the domestic economy overall. This is particularly true if liberalisation focuses on business and professional services, construction, educational services and on mode 4 (temporary movement of persons). In addition, transportation, communication, and financial services, along with mode 3 (commercial presence) are considered key sectors for economic growth in general and are therewith also suitable for regional or bilateral liberalisation.

In my book “Developing Countries and Preferential Services Trade”, I analyse 289 preferential trade agreements in services with regard to their compatibility with the aforementioned theory. It soon becomes clear that South-South services trade liberalisation remains a vastly untapped source of economic opportunities. Furthermore, it is shown that developing countries and LDCs that have started to liberalise services trade on a regional or bilateral level do not necessarily focus on the key sectors for economic growth and South-South liberalisation.

One of the reasons may be that WTO law (GATS Article V) generally requires WTO members to liberalise “substantially all the trade in all of the sectors” in their preferential trade agreements in order to be exempted from the Most-Favoured Nation rule. However, as I argue in the book, the “substantially all the trade in all of the sectors”-requirement may not apply to South-South preferential trade agreements because of flexibilities provided in GATS Article V:3 lit. a.

The fact that there are a handful of trade agreements between developing countries in line with economic theory and with flexibilities granted by GATS Article V:3 lit. a proves that this book is not just another academic thought experiment: after all, new insights into economic integration may be critical in today’s world of global trade policy.

More about this in my book, now available in paperback: “Developing Countries and Preferential Services Trade”, Cambridge University Press, 2016