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| CHAPTER VII
Controls on imports of services rarely serve the exclusive purpose of restricting trade and are usually feasible only to the extent that the government regulates or controls all transactions in a particular category, whether they relate to trade in services or not. Indeed, the basic rationale of the underlying control mechanisms usually has nothing to do with trying to control trade-in services per se. Controls on the sale and consumption of imported services are usually attached to domestic regulatory programs that are aimed at domestic objectives. Controls on the purchase of foreign exchange used to pay for imported services are usually a part of a broader currency control program designed to solve a balance of payments problem. Controls on people moving across the border are usually designed to control the flow of new immigrants who want to settle permanently. This means that trade policy objectives and other regulatory objectives are usually completely intertwined, and this inevitably leads to considerable confusion over the objectives of government policy measures that create barriers to trade in services. This chapter is devoted to a brief review of the key barriers to trade in services in the major services sectors, as seen by business.1 Its aim is to provide an indication of the type of policy measures that trade negotiators are asked to address, the extent to which the measures that bother the business management the most in various sectors are similar, and finally whether the issues seem important enough for a major negotiating effort. The information on barriers summarized in this chapter is drawn from three principal sources: 1. A survey of barriers to trade in services carried
out by the services committee of the U.S. Chamber of Commerce, in
cooperation with the Office of the U.S. Trade Representative (1979).
This has come to be known as the USTR Inventory of Barriers to Trade
in Services. The data collected from that survey, organized by industry
and type of barrier, provided the first comprehensive overview of
the barriers faced by businesses engaged in international trade in
services.
A barrier to trade in services is a government measure that creates an obstacle to the sale of services produced abroad. Normally there is also an implication that the government measure involved creates a burden on foreign producers that is not borne by domestic producers. Use of the word barrier in a trade policy context can also add an analytical judgment that the burden on foreign producers is unnecessary for the achievement of nonprotectionist, domestic regulatory objectives. Finally, when used in the context of public rhetoric, the word barrier conjures up value judgments; the government measure is implicitly condemned as unjustifiable, undesirable, or even illegitimate. A trade barrier could be an added cost that is imposed on services produced abroad, either through a discriminatory tax on imported services or through regulations that require foreign producers to spend money on people or things that they do not need. A head tax on tourists who wish to travel abroad is an added cost on imports of tourism services. A requirement that foreign insurance companies staff sales offices with experts in every area of insurance, even though they are not allowed to sell many kinds of insurance, represents a discriminatory burden on imported insurance services. A trade barrier could also take the form of a quantitative limit on the services that can be produced by a foreign company, and in some cases foreign companies might be prohibited from producing certain services altogether. Foreign banks operating in Canada, for example, have a ceiling on their permitted level of deposits and loans. Foreign companies until recently have been prohibited from selling life insurance policies, fire insurance on public buildings, or compulsory auto insurance in Korea. Sometimes governments have to draft different regulations for foreign and domestic producers in order to achieve a domestic regulatory objective. For example, a government may wish to protect buyers of insurance against poor management through periodic audits of the investment portfolios of companies selling insurance. Since governments find it difficult to audit the books of companies located abroad, they may require foreign companies to maintain deposits and investments in local financial institutions, where they are within the reach of local regulatory authorities. The question in such cases is whether the requirement imposed on foreign producers is reasonable from the point of view of the domestic regulatory objective and minimizes any added burden on foreign producers. In order to determine whether a trade barrier exists, it may therefore be necessary to determine not only whether a government treats foreign producers differently from domestic producers, but also whether any differences in treatment that might exist are justified as a means for achieving equivalent domestic regulatory objectives. In other situations, the imposition of the same regulation on both foreign and domestic producers can be highly discriminatory. Two very different examples can help illustrate the point. Foreign exchange regulations that prevent both domestic and foreign architects from converting local currency receipts into foreign exchange are likely to be highly discriminatory against foreign architects, and could exclude foreign architects entirely. A regulation that freezes the total number of domestic or foreign companies allowed to sell securities could be highly discriminatory, particularly if foreign companies were largely excluded in the past. Government measures that limit the ability of foreign companies to carry out certain activities in the local market can also create trade barriers. Foreign producers of services, depending on the requirements of the specific industry, may need local sales representatives or agents, freight handlers, insurance adjusters, repairmen, or professionals familiar with the local environment. They may also need access to local communications systems, air and hotel reservation systems, and local transportation systems. Foreign suppliers of services also have to be able to carry out activities required by government regulations. For example, foreign insurance companies may need to invest a portion of their premiums locally, or they may need to establish themselves locally to satisfy regulatory requirements. Government measures that restrict any of these local activities by foreign producers of services can limit trade opportunities, and it is useful to analyze them as potential trade barriers. In order to determine whether they arc in fact trade barriers, one has to examine whether the restricted activity is essential for meaningful trade in a particular services industry. Barriers to trade in services need to be distinguished from barriers to the establishment and. operation of foreign-owned firms producing services. Regulations limiting the local production and sale of services by companies owned by foreigners are usually considered not trade barriers, but investment barriers. Nevertheless, restrictions on foreign investment in services can have a restrictive effect on cross-border trade in services, since trade and investment are often closely linked. Barriers to foreign investment in services thus frequently also constitute barriers to trade in services. Government measures that inhibit the movement of money, information, people, or goods create barriers to trade in services by limiting the means for transferring services internationally. Controls on the transfer of money thus can create impediments to international trade in banking, insurance, and brokerage services, which depends on the international flow of money. Barriers to the international flow of information create barriers to international trade in data processing and information services that depend on an international flow of information. Travel restrictions create barriers to trade in tourism, education, and professional services that depend on the international movement of people. Restrictions on the movement of goods create barriers to trade in services that add value to material things-repair of equipment or printing of books. Money, of course, is not only a means for transferring financial services, but also a means of payment. Restrictions on the transfer of money thus create a barrier to all trade in services by limiting the extent to which sales proceeds can be transferred home. After all, how much opportunity is there for real trade if one cannot get paid for it? Similarly, information flows are not only a means for transferring information services but also a means for providing information about trade opportunities in services. Impediments to the transfer of information can reduce the information available to banks about foreign exchange or securities markets, information available to travel agents and airlines about foreign bookings, and information available to credit card companies about stolen cards. Barriers to international information flows also can make it more difficult for construction companies to coordinate the timely procurement and transportation of cement, bulldozers, building permits, architectural drawings, construction workers, and supervising engineers. Barriers to movement of people create a barrier to trade in any service that requires frequent face-to-face contacts between an exporter and a foreign client, or between a manager in the, home office and a local sales manager in the importing country. Business contracts still depend on personal trust and confidence, which can only be achieved through face-to-face contacts. Barriers to the movement of goods create barriers to trade in any service that requires the international transfer of a physical information medium. Accountants often need to carry audit tapes, engineers often need to carry technical drawings, computer services companies often need to carry software tapes, and musicians have to carry their instruments. International trade in services also frequently depends on access to compatible equipment in the importing country-a customized crane to unload a special kind of ship, or telecom equipment designed to handle information transmitted in a unique code or requiring transformation into a unique medium in the importing country.
Since the movement of services across a border is largely invisible, it is generally useless to put up barriers to trade in services at the border. Barriers to international trade in services have to be erected at a point in the transaction where the government can exercise some control over the transaction. A government can limit, or at least it can try to limit, (a) the purchase of foreign exchange needed to pay for imported services; (b) the movement of all people, information, goods, and money across the border; (c) the sale of services inside the country by a foreign business; (d) the employment of foreign service workers in the importing country; or (e) the consumption of services required to meet regulatory requirements. A government, as a general rule, cannot control international trade in services purchased abroad unless it is prepared to maintain a comprehensive foreign exchange control system, it establishes comprehensive controls on the consumption of services, or it establishes a comprehensive system for controlling the movement of all information, people, money, and goods. The government would also have to develop and maintain a comprehensive system for collecting and compiling information about (a) foreign exchange transactions; (b) the information, people, money, and goods crossing the border; and (c) the consumption of services (e.g.. the information drivers have to supply to the government about their liability insurance). Barriers to services purchased abroad, therefore, should be a problem only in countries that maintain such comprehensive control systems. This tends to be the case with respect to a large number of the developing countries and the communist countries, but not with respect to most of the developed countries with market economies. Only a few developed countries in some specific cases try to control the purchases of services abroad by their citizens. Japan, Portugal, and Switzerland, for example, prohibit their citizens from buying insurance abroad. Even comprehensive foreign exchange control systems and even comprehensive border controls on international flows of information, people, money, and goods are likely to be insufficient and ineffective as long as they are not totalitarian. One should, therefore, expect that most barriers to trade take the form of regulatory measures limiting the right of foreign companies to sell services in the local market or handicapping their sales effort. Since most governments tend to regulate the sale of services domestically, in any case, domestic regulation provides a convenient mechanism for controlling trade in services. Controls on sales in the importing country can cover most potential trade in services since the close interaction required between the buyer and the seller of services makes it difficult to buy such services at a distance. Government controls on purchases of services at home are likely to be less effective with respect to the purchase of high-value services, since both the cost and the time required to travel to the exporting countries could be relatively small compared with the economic advantage of buying abroad. This is frequently the case with respect to the purchase of high-value business services by multinational corporations. Since large businesses have that option, one should expect governments to recognize the futility of protection in such areas, and one should expect to see a gradual breakdown of domestic controls on business services supplied to large multinationals. This has clearly been happening in the banking area. Even though less than fully comprehensive controls
on the movement of people, information, money, and goods are not able
to prevent trade in services, they can create inconvenience and can
add to the cost of trade in services. One should therefore expect
that any government measures that hamper or add to the cost of moving
information, people, money, or goods would be high on any list of
barriers put together by the business community. The results of the three surveys on barriers to trade in services are fairly consistent with what one might expect on the basis of the analysis above (see Office of the U.S. Trade Representative, 1979; Price Waterhouse, 1983, 1985; and Peat, Marwick, Mitchell, 1986). On the basis of the responses provided by exporters of services, we can say that most barriers to trade in services are created by regulations that control who is allowed to sell what to whom under what terms and conditions. Restrictions on who can sell what are most frequently cited in the surveys as a significant barrier to trade in services. Discriminatory terms and conditions imposed on foreign suppliers of services are the third most frequently cited barrier to trade in services. Predictably, controls on the international movement of money, information, and people are also frequently cited. Foreign exchange controls are the second most frequently cited barrier to trade in services, and problems associated with transborder data flows are the fourth most frequently cited barrier. The most prohibitive barriers are created by regulations that completely prohibit or strictly limit the number of authorized foreign suppliers. These truly prohibitive regulations are found in most countries (even in the United States). In many countries domestic regulators of some service sectors determine who can sell what to whom on a fairly detailed basis. The working assumption in these countries is that enterprises are only allowed to sell service products for which they have obtained a license, and the product can be defined in fairly narrow terms. Both the USTR and the Price Waterhouse surveys show that most barriers to trade in services take the form of regulations that limit the right of foreign firms to establish themselves in the local market, and limit what foreign-owned firms are allowed to sell. All industries listed restrictions on establishment and restrictions on products and markets as the most important barriers to trade. In four industries - banking, insurance, advertising, and construction-the concentration of barriers in this first category is particularly high. In addition to restrictions on what they are allowed to sell, foreign companies frequently face discriminatory taxes, discriminatory fees for services they must buy from the government, and discriminatory access to government facilities. The range of discriminatory practices reported by businesses is quite remarkable. It includes discriminatory delays in required government inspections, approvals, licenses, and clearances. Some businesses have reported discriminatory access to data collected by the government, discriminatory placement of sales offices, and discriminatory treatment in the provision of public utility services. All in all, both the USTR and the Price Waterhouse surveys show that these kinds of barriers are widespread. The USTR inventory shows that barriers within this category are of particular concern to the computer processing industry, the motion picture industry, the air transport industry, the shipping industry, and the insurance industry. Overall, discriminatory treatment by the government is the third most frequently cited barrier to trade in services. In some cases, businesses have identified as barriers government policy measures that are not discriminatory per se but have the effect of placing a far greater burden on foreign suppliers than on domestic suppliers. It is not always obvious, however, whether the choice of measures was designed to restrict or place an added burden on foreign suppliers, or, more important, the extent to which the officials responsible for designing the regulations could adopt a less trade-distorting approach without altering regulatory policy goals. Foreign exchange restrictions and limitations on the transfer of funds from the importing country to the home country are the second most frequently cited category of barriers to trade in services. As expected, most foreign exchange restrictions reported by respondents to the USTR survey are found in developing countries. In some cases, the foreign exchange controls place a ceiling on the amount of local currency proceeds that can be converted into convertible currencies and in other cases the controls impose specific limits on the repatriation of profits, royalties, management fees, or capital. Needless to say, all of these controls are subject to a considerable degree of discretion by local officials. In the USTR survey, the tourism industry, the construction industry, the motion picture industry, the computer services industry, and the car rental industry reported strong concern about foreign exchange restrictions. Interestingly enough while the banking industry indicated in both the USTR survey and the Price Waterhouse surveys that foreign exchange restrictions were a problem, the degree of concern expressed was not as high as that expressed by other industries. Another major problem reported by exporters in many service industries is unfair competition from government-owned enterprises. The practices covered under unfair competition include the following list of preferences extended to government corporations: subsidies provided by taxpayers, avoidance of taxes, preferential enforcement of regulations, and greater latitude in permitted practices. As in the case of foreign exchange restrictions, most of the examples of these kinds of practices involve developing countries. In the first Price Waterhouse survey, a quarter of all respondents indicated a concern about these practices, compared to 71 percent who expressed a concern about the right of establishment (including limitations on what the firms could sell), 49 percent who expressed a concern about foreign exchange restrictions, and about 35 percent who complained about discriminatory treatment. The USTR survey provided a less clear focus on this issue, but descriptions of problems provided by individual respondents nevertheless indicated that this was an area of major concern. The fourth most important area of concern is related to the transfer of information, or what are often called transborder data flows. Since transfer of information has become an increasingly viable and convenient way of transferring services from one place to another, policies affecting the cost and conditions for transferring information have become a critical issue for trade in services. Increasingly regulations that increase communication costs or limit flexible use of communication facilities are seen as barriers to trade in services. Thirty-eight percent of all companies responding to the first Price Waterhouse survey and 23 percent of all companies responding to the second survey reported difficulties concerning the international transfer of information. The initial USTR survey did not focus on this issue because international data flows had not yet emerged as a key concern, but all later information collected by USTR clearly established the widespread concern about impediments to the efficient and economical transmission of information. Some of the problems with respect to transborder data flows arise from regulations dealing with privacy and the concern of fiduciary authorities for a full audit trail. Most of the difficulties, however, relate to restrictions on the exploitation of new telecommunications technology at a market-oriented price. Many telecom authorities have been slow to respond to advances in technology, and they have been loath to allow private companies to introduce the new technology because that would lead to an erosion of the traditional post, telephone, and telegraph (PTT) monopoly. The last major category of barriers concerns regulations dealing with work permits and immigration rules. Interestingly enough, the issue is not primarily a visa issue, though many companies report visa problems, but a work permit issue. Companies report almost as many problems in employing local nationals as in employing foreign nationals. A favorite technique to control the size of a foreign enterprise seems to be to control the number of people it can hire. With respect to foreign nationals, the problem does not seem to be so much a problem of the number of foreign service workers that can be transferred (except in construction), as the ability of a foreign enterprise to bring a critical expert into the country on a timely basis. REFLECTIONS ON THE NATURE OF BARRIERS Some barriers to trade in services are quite explicit, in the sense that the discrimination against foreign suppliers is written into a country's laws or published regulations. The reason that they remain not very visible is that they are frequently buried in hundreds of pages of domestic regulations. They are also not very visible to the general public because the average person who travels abroad is not faced with a discriminatory tax while crossing the border. (The tax levied on citizens traveling abroad by many countries is an exception. In many cases the discriminatory treatment is not written into the published laws and regulations but is a matter of official practice. In some cases the discriminatory practice is the result of an explicit government policy, but more often than not "it is the way things have always been done." The process of writing and implementing detailed regulations offers endless opportunities for discrimination against services offered by foreigners. Even less visible are barriers created not by open discrimination against foreign enterprises, but by a general bureaucratic tendency not to approve new activities. Even *the least protectionist-minded bureaucrat has an incentive to prove his or her worth by exercising control, and to exercise control is a matter of denying or delaying regulatory approval of new businesses, new service products, or changes in prices. While bureaucratic tendencies are likely to limit the competitive opportunities of new domestic as well as foreign suppliers of services, they tend to have a more restrictive impact on foreign firms because the competitive advantage of foreign suppliers is in their ability to introduce new products and new ideas and to sell at lower prices. Moreover, regulators tend to develop symbiotic relationships with the industry they arc regulating, which induces them to use their authority to shield the domestic industry from foreign competition. All of these tendencies are reinforced where the authority to regulate is delegated to the industry itself, as is the case for the professions such as lawyers, doctors, accountants, and brokers. Two examples, one from Japan and the other from the United States, help illustrate the points made here. In Japan the Ministry of Finance regulates every detail of the insurance business-who can sell insurance, the kind of insurance that can be offered, the specific risks that can be covered by insurance contracts, to whom the policies can be sold, and the prices that can be charged. Everything requires a license that must be approved by an official, who must be persuaded that a proposal makes sense, and persuading the official may take weeks, months, or years. If an enterprising insurance executive has a brilliant idea that there is a promising market for insuring suppliers of telephone poles against damage suits arising from defective poles, it is necessary to obtain a license from the Ministry of Finance. In order to obtain a license, the insurance executive must first initiate informal consultations with ministry officials, who must agree that it would be productive to proceed with a formal application for a license. A new insurance company may have even greater difficulties, because the ministry could have decided that the country has enough insurance companies and no licenses should be granted to any new companies. Needless to say, foreign companies have found it very difficult to gain a foothold and, once there, to develop a significant market share. Foreign companies account for only a small fraction of 1 percent of the insurance market. In the United States, the authority to regulate the licensing of lawyers and the practice of law has been delegated by the individual states to the various state bar associations. Many of these bar associations have adopted the rule that members admitted to the bar (that is, those licensed to practice in the state) are not allowed to form partnerships with lawyers in other states or other countries. This prohibition against interstate or international partnerships is clearly an arrangement that limits outside competition. Moreover, only a small handful of state bar associations have decided to grant foreign lawyers the right to provide legal advice on the laws of their countries or on international law. A proposal to license foreign legal consultants in the state of Illinois was turned down by the state bar because it might create new competition. Uncertainty about restrictive regulations governments might impose in the future can be as much a barrier to trade as restrictive measures currently in effect. In fact, many businessmen have expressed greater concern about barriers that might be imposed in the future than about existing barriers. Advances in communications and computer technology have enhanced the possibilities for trade in services for any firm that is prepared to invest large amounts of money in the latest communications and computer equipment. Numerous firms have invested billions of dollars in such facilities. It should not be surprising that these firms have expressed great concern about the possibility that future government regulations might limit their ability to use these facilities for sending information across national borders. While existing regulations concerning the use of private communications facilities inevitably restrict some potentially profitable trade in services, they can be factored into current investment decisions. Unexpected future restrictions could jeopardize the economic value of multibillion-dollar investments. Public monopolies create unique barriers to trade in services. The establishment of a monopoly prohibits trade in the set of activities covered by the monopoly. At the same time it can lead to a number of barriers and distortions to trade in services not covered by the monopoly. Barriers to trade in services outside the monopoly can be created where the monopoly is the exclusive supplier of essential support services and it uses its monopoly position to disadvantage foreign producers of services. This problem arises in particular in situations where the monopolist competes with foreign producers outside its area of monopoly. The following two examples illustrate the point. National airlines are frequently exclusive suppliers of ground handling services to foreign airlines flying into their country, while they compete with the same foreign airlines for international traffic. The natural temptation is to supply foreign competitors with inferior ground services, and many airlines cannot resist that temptation. American airlines flying air freight into Japan have thus argued that Japan Air Lines clears its own refrigerated freight in hours, while the refrigerated cargo of its competitors sits in the baggage handling area for days. Alitalia has been accused of landing foreign charter flights at an airport some distance from Rome, while Alitalia's own charter flights used the international airport closer to Rome. National communications monopolies are the exclusive suppliers of basic communications circuits in most countries. Many are also allowed to compete with other domestic and foreign companies in the rapidly growing area of value-added communications and information services. Since competing suppliers of such services must acquire the basic communications lines from the same national communications monopoly, a natural conflict of interest exists. The monopoly has every incentive to put its competitors at a disadvantage by dragging its feet in making available new lines, or by charging exorbitant fees. The Bundespost, the German communications monopoly, has thus been accused of changing the pricing structure on international leased lines so that less data traffic is diverted from their own network
The close relationship between barriers to trade in
services and governments regulations aimed at a broad range of policy
objectives complicates efforts to reduce such barriers. What may be
a barrier to a business could well be an essential regulation designed
to achieve mandated domestic regulatory goals. In order to decide
whether these barriers can be modified or eliminated in the course
of trade negotiations, each of these measures will have to be weighed
in terms of the extent to which its removal will adversely affect
the achievement of mandated regulatory objectives in other policy
areas and the extent to which the regulatory objectives could be pursued
by other measures that create less of a barrier to trade. How trade
policy can be used to accomplish this objective is the subject of
the next chapter. 1. For additional information about barriers to trade
in services in individual sectors see the other volumes in the Ballinger
American Enterprise Institute Trade in Services Series, which cover
aviation, banking, construction, films and television, professional
services, shipping, and telecommunications. Further information can
be found in Carter and Dickinson (1979) on insurance, Bohme (1978
on shipping, and Walter (1985) on banking. Also see the survey on
banking of the U.S. Department of the Treasury (1979). |