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CHAPTER II
People have such a hard time believing that trade in services is important because they cannot see it and it is very difficult to measure. Trade in services has justifiably been called trade in invisibles. Because the act of selling services is more visible than the flow of services across the border, governments have been more inclined to control sales of services through the domestic regulatory process, rather than through explicit controls on cross-border flows of services, as is the case with goods. Barriers to trade in services are thus intermingled with domestic regulatory measures, and often difficult to distinguish from such measures. Barriers to trade in services therefore tend to be as invisible to the average person as trade in services itself, and this only compounds the skepticism that there is anything to talk about with respect to trade in services. The purpose of this chapter is to identify some of the key characteristics of trade in services and to develop a descriptive model of services that focuses on the means for storing and transporting services. Such a model helps to overcome the difficulty of visualizing trade in services. A
DESCRIPTIVE MODEL OF International trade in services purchased by consumers - tourism, education, live entertainment-usually requires international travel. These services are transferred from one country to another when either the consumer of imported services or the producer of exported services travels from one country to another. Services are exported and imported through information flows, including architectural drawings, advertising copy, computer software, credit card transactions, legal opinions, medical information, insurance, and sporting events. A third category of services consists of those exported through transfer of money from one nation to another. This is the case with banking and other financial services. Finally, some services become tradeable through an international shipment of goods. Repair services, for example, are exported and imported by transporting the object in need of repair from one country to another. We can summarize these observations in the following single statement: All international trade in services is linked to an international movement of people, information, money, or goods.1 In order to become tradeable, services either have to be applied to people, information, money, or goods that provide the means for transferring the services to another country, or have to be used to move people, information, money, or goods from one country to another. We might call the first category of international trade in services "trade in value-enhancing services" and the second category "trade in transfer services." The easiest way to conceptualize trade in services is to think of it in terms of an application of "value-enhancing services" to goods, people, money, or information in the exporting country and a transfer of the enhanced goods, people, money, or information to the importing country with the help of internationally traded support services. Another way to look at trade in services is as trade in economic benefits created by the application of services. Services can be stored for later consumption somewhere else only when they are incorporated in goods, money, people, or an information medium. A repaired machine incorporates repair services. A check from the stockbroker incorporates investment services. A student returning from a foreign university incorporates educational services, and a tourist returning home from a foreign vacation incorporates tourism services. A computer tape from an auditing firm incorporates accounting services, and a television signal bounced off an international communications satellite incorporates entertainment services. Internationally traded services have to be carried across the border in the form of goods, people, money, or information that have been made more valuable in economic terms through the application of services. A repaired machine that crosses the border carries with it imported repair services.2 A happy tourist crossing the border on the way home is importing tourism services, or a New York lawyer crossing the border to advise a French businessman on the intricacies of American law is exporting American legal services. 3 Ten thousand dollars crossing the border into Switzerland on the way to a secret bank account provides the means for importing Swiss banking services. A blueprint that crosses the border on the way to a foreign construction site or a computer tape that crosses the border on the way to a foreign computer center incorporates exports of professional services. Most elusive of all, electronic signals bounced off communications satellites or conducted through a buried copper cable could be transferring exports of insurance services, banking services, legal services, accounting services, engineering services, software services, advertising services, medical services, or any other service that can be communicated in the form of electronic information. All international
movements of goods, people, money, and information are in turn facilitated
by international trade in transportation, communications, and services.
International trade in goods is facilitated by international trade
in related services such as shipping, export financing, transport
insurance, and trade law, to name just a few. International travel
is supported by travel agents, airlines, hotels, restaurants, and
taxi drivers. The international flow of money is supported by a wide
range of banking, communications, and information services. Similarly,
the international flow of information is facilitated by trade in international
transport and communications services. International movements of goods, people, money, and information provide the means for transporting services from one country to another. The international movement of goods, people, information, and money in turn is facilitated by international trade in services such as transportation services, travel services, transport insurance services, communications services, and financial services.5 CONSEQUENCES OF THE INVISIBILITY OF TRADE IN SERVICES An observer who is at the right spot at the right time might see the goods, money, people, or an information medium crossing the border, but such an observer would find it extremely difficult to see the services that are being exported or imported. A person crossing the border could be visiting an aunt, giving a speech, coming to repair a machine, seeing the world, attending an official conference, marketing shoes, or providing consulting services. Without extensive probing, a border official has no way to know what services, if any, a person is exporting or importing. Similarly, a piece of information contained in an electronic signal could be accounting information, a personal message, an order for books, a state secret, information processed in a foreign computer, or the latest news wire story. Without an ability to decode the signal and to read its content, a government official charged with monitoring imports or exports of services would have no way of knowing whether services were being imported or exported. Money that crosses an international border could be a payment for smuggled goods, a deposit headed for a Panamanian bank account, or the inheritance of Aunt Nellie. As officials charged with administering foreign exchange controls well know, it is difficult to determine why money is being transferred without extensive probing into the affairs of all the people and institutions involved in the transaction. The difficulty in visually observing imports and exports of services has a number of important implications. Governments cannot measure the services actually crossing the border. Instead, data on international trade in services has to be collected in one of two ways: I / by asking domestic producers and consumers of services to report all exports and imports of services or 2) by maintaining a comprehensive foreign exchange control system that allows the government to keep track of all foreign exchange earned or spent by its citizens. Collecting information from individual producers or consumers of services is difficult because the government first has to identify the producers of services who might have sold services to foreigners and the consumers of services who might have purchased services from foreigners. The government then has to persuade all firms and individuals that buy services from foreigners or sell services to foreigners to maintain detailed records of the transactions. Governments that maintain foreign exchange control systems could theoretically use data collected on sales and purchases of foreign exchange for developing detailed data on trade in services, but few developed countries still impose comprehensive foreign exchange controls and developing countries often lack the technology for compiling the data they collect. Most countries therefore have only the foggiest notion about the magnitude, composition, and direction of trade in services and the lack of data reinforces the mystery surrounding international trade in services. All existing data on international trade in services are extremely poor. 6 Most governments have managed to capture data on only the most obvious forms of trade in services such as international shipping, air transport, insurance, banking, and tourism, and even most of those data provide little detail on specialized services within these broad categories or the countries with whom such trade took place. Data on international -trade in professional services, data processing, and information services are virtually nonexistent. Efforts are now under way in the United States and in many other countries to collect more data, 7 but it has become obvious that governments will never be able to collect data of the same detail and quality as the existing data on trade in goods. Not only are services much more difficult to define with great precision, but there is tremendous public resistance to the detailed reporting that would be necessary. It is likely, therefore, that many of our most important insights into trade in services will come not from aggregate data collected by governments but from case studies carried out by individual economists. The difficulty of visually observing exports and imports of services also makes it difficult to control the international flow of services. In order to assert control over services that cross the border in the form of goods, people, money, or information, a government can adopt one of two strategies: it can extract more information about the people, money, goods, and information crossing the border and use that information to control the flow of services, or it can control all goods, people, money, and information crossing the border. This creates a major dilemma for democratic governments. How deeply should they pry into the affairs of their citizens and to what extent should they control the free flow of information, people, and money just in order to control the flow of services? To a significant degree, control over the movement of services and maintenance of democratic freedoms are incompatible. Virtually every government has had to wrestle with this basic problem, and no government has been able to avoid major controversy when it has tried either to establish more detailed monitoring of people, information, and money crossing the border or to assert greater control over such movements. When professionals crossing the border between the United States and Canada are thoroughly grilled by customs inspectors or immigration officials as to the purpose of their trip, they complain vociferously. The French government at one point made a proposal to inspect all information transmitted or carried across its border, and thereby triggered a major outcry in the international business community. And, of course, there is not a democratic government with a foreign exchange control system that has not managed to generate controversy by trying to increase the effectiveness of such controls through more extensive reporting. Most democratic governments of advanced countries respect the rights of the individual and recognize the need to limit the amount of information that individuals should be required to report to the government. Democratic governments are therefore usually unable to develop detailed information about the data, money, and people crossing the border, and without such information they are usually in a poor position to control the flow of services. This means that such governments find it far more difficult to limit imports of services purchased abroad than to limit domestic sales of imported services. Most barriers to trade in services are therefore embedded in domestic regulations that control the sale of services.A government can try to control purchases of services by its citizens in foreign countries by establishing restrictions on such purchases, but it can enforce such restrictions only through a comprehensive foreign exchange control system or a comprehensive system for regulating the consumption of particular services. For example, the government can refuse to allocate foreign exchange to the purchase of foreign architectural services or it can insist that only architectural plans signed by a domestically registered architect be used to construct buildings. A government can also refuse to allocate foreign exchange for the purchase of insurance abroad, or it can insist that only insurance sold by an approved insurance company can satisfy the requirement for compulsory auto insurance, or that only a will signed by a local lawyer is recognized by the courts.Where a transaction occurs, therefore, turns out to be crucial for trade in services. If the sale takes place in the home country of the producer, the laws and regulation of the exporting country will apply to the sale, and the government of the importing country may not have any effective means for controlling the resulting imports. If the sale takes place in the home country of the customer, the laws and regulations of the importing country will fully apply to the sale. This difference in the degree of control that the importing country government can exercise over imports purchased abroad versus imports purchased at home has had a major impact on the structure of the world market in services, the evolution of national policies regarding trade in services, and efforts to develop rules for trade in services. For some time, the Eurodollar market has been the fastest growing financial market in the world because both people with money and people who wanted money could escape the controls of their own governments. This basic fact of life has persuaded an increasing number of governments to establish offshore markets to attract more of the banking business. It has also persuaded a number of governments that it was futile and counterproductive to protect their own banking system by keeping out foreign banks. Sweden provides one example of this trend. Sweden has traditionally kept foreign banks out and has kept Swedish banks from going abroad. The result was that more and more Swedish companies did their banking in London, where money was cheaper and available in larger quantities. In face of the growing loss of customers, Swedish banks as well as the government came to recognize that it would be better to allow foreign banks to compete in Sweden, rather than to see the continued erosion of the volume of banking done in Sweden.
Since nobody can readily identify the services embodied in goods, money, people, or information crossing the border, it is difficult both to measure and to control the flow of services across national borders without considerable government intrusion into the affairs of its citizens. Governments find it much easier to control sales or purchases of imported services within their own territories. This explains why most barriers to trade in services are embedded in domestic regulations that control the production, sale, and consumption of services.
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