EU services trade liberalization and economic regulation: Complements or substitutes?

Matteo Fiorini,Bernard Hoekman

doi:10.1007/s11558-018-9333-4

Matteo Fiorini, Bernard Hoekman

Open Access

https://doi.org/10.1007/s11558-018-9333-4

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Abstract

This paper investigates how national economic regulation shape the impacts of reducing external barriers to services trade for a sample of European countries. Notwithstanding far-reaching integration of services markets there is significant heterogeneity in domestic regulation and governance across European economies. We show this affects the potential downstream productivity effects of external services trade policy. In some cases, liberalization can substitute for weak regulation; in others there is a complementary relationship. Thus, the productivity effects associated with services market access liberalization depend on the quality of domestic economic regulation. EU-specific measures to promote internal trade in services – proxied by implementation of the Services Directive – are found not to have such moderating effects. An implication of our findings is that EU governments should do more to assess how specific dimensions of domestic regulatory regimes influence the size and distribution of the effects of services trade reforms.

Highlights

Major changes in the organization of international production, exemplified by the rise of global value chains and intra-firm trade (Baldwin 2016) have changed trade policy preferences of businesses (Eckhardt and Poletti 2016; Madeira 2016; Young 2017)
One result has been an expansion in the coverage and depth of trade agreements. Such agreements generally include disciplines on protection of intellectual property rights (IPRs), foreign investment policy, investor-state dispute settlement (ISDS) mechanisms, and provisions on protection of human rights, labor standards and the environment. These features of deep trade agreements have attracted substantial attention in the international relations literature – e.g., Lechner (2016), Van den Putte and Orbie (2015), Donno and Neureiter (2017); Young (2016) – in part reflecting public opposition to ISDS, concerns regarding the effects of strong protection of IPRs and electorate pressure that trade agreements conform to EU norms and values
Member states will continue to differ in their treatment of foreign firms as they retain discretion over some policy areas that have implications for foreign investment, differences in external services trade policy will be reduced as common approaches to the treatment of foreign investors are implemented by the European Commission

Summary

Introduction

Major changes in the organization of international production, exemplified by the rise of global value chains and intra-firm trade (Baldwin 2016) have changed trade policy preferences of businesses (Eckhardt and Poletti 2016; Madeira 2016; Young 2017). One result has been an expansion in the coverage and depth of trade agreements (see e.g. Dür et al 2014; Hofmann et al 2018) Such agreements generally include disciplines on protection of intellectual property rights (IPRs), foreign investment policy, investor-state dispute settlement (ISDS) mechanisms, and provisions on protection of human rights, labor standards and the environment. These features of deep trade agreements have attracted substantial attention in the international relations literature – e.g., Lechner (2016), Van den Putte and Orbie (2015), Donno and Neureiter (2017); Young (2016) – in part reflecting public opposition to ISDS, concerns regarding the effects of strong protection of IPRs and electorate pressure that trade agreements conform to (support) EU norms and values. As EU countries have a comparative advantage in a wide variety of services, European services firms are keen to improve their access to foreign markets and lobby for trade agreements to do so

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