Abstract
Abstract Despite the fact that many modern preferential trade agreements include commitments to foreign investors in imperfectly competitive services sectors, the literature has not established conditions under which these agreements are beneficial or harmful. The authors fill that void by developing a model with monopolistic competition and foreign direct investment in services with Dixit-Stiglitz endogenous productivity effects from additional varieties. They specify a numerical model, with probability distributions of all parameters. The model is executed 30,000 times, and results are reported as probability of an outcome, based on the sample distribution. In order to ground the results in reality, the authors apply the model to Kenya. They show that preferential commitments in services could be immizerising. Losses are more likely the greater the share of initial rent capture on the services barriers in the home country and the more technologically advanced are the excluded regions relative to the partner region.
Highlights
Since the early 1990s, regional trade agreements have surged; 283 have been notified to the WTO and were in force as of February 2010.1 Commitments to foreign investors in services are key aspects of modern FTA agreements negotiated with the European Union (EU) and the US, and in some other agreements
In these scenarios we assume that Kenyan ad valorem equivalents of the barriers against foreign investors in services are reduced by fifty percent with respect to the region with which Kenya has an agreement
We assume that Kenya already offers tariff free access to goods originating from its African trade partners, so in the scenario where we evaluate the agreement with the Africa region we include only liberalization of discriminatory barriers against foreign investors in services
Summary
Since the early 1990s, regional trade agreements have surged; 283 have been notified to the WTO and were in force as of February 2010.1 Commitments to foreign investors in services are key aspects of modern FTA agreements negotiated with the EU and the US, and in some other agreements. The literature, contains neither analytical nor numerical results on the general equilibrium welfare impacts of preferential commitments to foreign investors in the presence of imperfect competition in services sectors.. Given that commitments to foreign investors in services sectors (many of which are imperfectly competitive) are key aspects of modern FTA agreements, the objective of this paper is to determine if such agreements can be immizerising, and the conditions that make it more or less likely the agreements are beneficial. Mattoo and Fink acknowledge that if the home country is capturing rents from the barriers, these rents play the same role in preferential liberalization of services as tariffs in goods, leading to possible losses.. Despite the fact that key sectors in the negotiations are characterized by imperfect competition (like banking, insurance and telecommunications), there has not been any analytical work assessing the welfare impacts with imperfect competition. Mattoo and Fink acknowledge that if the home country is capturing rents from the barriers, these rents play the same role in preferential liberalization of services as tariffs in goods, leading to possible losses. And despite the fact that key sectors in the negotiations are characterized by imperfect competition (like banking, insurance and telecommunications), there has not been any analytical work assessing the welfare impacts with imperfect competition.
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