Birla College of Arts, Science and Commerce, Kalyan

PROJECT
ON

TRADE IN SERVICES
in the subject

Economics of Global Trade and Finance

SUBMITTED TO

UNIVERSITY OF MUMBAI,
FOR SEMESTER I
of

MASTER OF COMMERCE
BY

Miss. Dhanashree Sanjay Gandhe.

(Roll No-06. Seat No )
UNDER THE GUIDANCE OF

Dr Radhika Lobo

YEAR - 2014 15

Birla College of Arts, Science and Commerce, Kalyan

DECLARATION BY THE STUDENT

I, Dhanashree Sanjay Gandhe student of M Com Part-I Roll Number 06 and

Seat Number--------hereby declare that the project for the Paper Economics of
Global Trade and Finance titled, Trade in services submitted by me for
Semester I during the academic year 2012-13, is based on actual work carried out
by me under the guidance and supervision of Dr. Radhika Lobo. I further state
that this work is original and not submitted anywhere else for any examination.

Signature of Student

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on
Trade in services submitted by Dhanashree Sanjay Gandhe, Student of M Com
Part-I.
This project is original to the best of our knowledge and has been accepted for
Internal Assessment.

Internal Examiner

External Examiner

Dr Radhika Lobo

Internal Assessment: Project 40 Marks

Name of the Student
First name

Class

Roll
Number

M COM

06

: Dhanashree

Fathers Name: Sanjay

PART I
Surname

: Gandhe

Subject: Economics of Global Trade & Finance

Topic for the Project: Trade in services.

Marks Awarded
Documentation
Internal Examiner
(Out of 10 Marks)
Documentation
External Examiner
(Out of 10 Marks)
Presentation
Internal Examiner
(Out of 10 Marks)
Viva and Interaction
External Examiner
(Out of 10 Marks)

TOTAL MARKS (Out

of 40)

Signature

Seat
Number

SR.N0.
1.1
1.2
1.3
1.4
1.5
2.1
2.2

PARTICULARS
CHAPTER 1
Introduction
Review of Literature
Concept
Definition
Recent policy reforms
CHAPTER 2
Importance of service sector

PAGE NO.
8
9
11
12
13
16
19

Trade in services (% of GDP) in India

2.3
3.1
3.2
3.3
3.4
3.5

4.1
4.2

World trade in services

CHAPTER 3 Case Study
Tourism Services Liberalization in the CaribbeanEuropean EPA negotiations
The Issue
The Solutions
The outcome
Reasons for success
CHAPTER 4
Summary
Conclusion
APPENDICES
Abbreviations
Bibliography

Acknowledgement

20
22
23
24
25
26

27
28
30
31

I would like to thanks from bottom of my heart to those who were involved
directly or indirectly in this project work. A great teacher is not simple one who
imparts knowledge to his student, But one who awakens their interest in it.
This idiom without doubt fit with Prof. Radhika Lobo who has been my
teacher, guide. she guides me and gave knowledge in details & help me to make a
very effective project. So, I thank her for precious time that she spent for me for
my project work.
I am grateful to my parents & friends who encouraged & inspired me at
every stage of project work by providing immeasurable help, care & moral support
as well.

CHAPTER-1

1.1 Introduction
1.2 Review of literature
1.3 Concept of Trade in services
1.4 Definition

1.1 INTRODUCTION

The services sector is key to economic growth, competitiveness,

and poverty alleviation. Comprising more than two-thirds of the world economy,
services are now commonly traded across borders, helped by technological
progress and the increased mobility of persons. In recent years, a number of
developing countries have looked at trade in services as a means to both
respond to domestic supply shortages and to diversify and boost exports. Any
country can tap into the trade potential of services, but not every country can
become a services hub across sectors. The opening of the services sector
potentially comes not only with large benefits, but also fears and costs that should
not be overlooked. This book provides useful guidelines for the assessment of a
country's trade potential, and a roadmap for successful opening and export
promotion in select services sectors.
It looks at both the effects of increased imports and exports, and
provides concrete examples of developing country approaches that have either
succeeded or failed to maximize the benefits and minimize the risks of opening. It
focuses on sectors that have been rarely analyzed through the trade lens, and/or
have a fast growing trade potential for developing countries. These sectors are
accounting,

construction,

distribution,

engineering,

environmental,

health,

information technology, and legal services.

It is designed for non-trade specialists to understand how trade can
help improve access to key services in developing countries, and for trade
specialists to understand the specific characteristics of each individual sector. It
will be a useful tool for governments to design successful trade opening or
promotion strategies, and for the private sector and consumers to advocate sound
domestic policy reforms accompanying an offensive trade agenda.

1.2 Review of Literature

The dominant theme in the theoretical literature on services trade

is the extent to which trade in services differs from trade in goods, and how this
affects previous theoretical results for goods trade. Authors such as Hill (1977)
argue that a key characteristic of most services is the joint production requirement
that consumption and production must be simultaneous Deardors (1985) and
Melvin (1989) argue that this feature invalidates, or at least requires
reinterpretation of, the
law of comparative advantage for trade in services. Mirza and
Nicoletti (2004) point out that, as a result of joint production, inputs from the
exporting and the importing countries are usually required to trade a service.
Other authors stress the similarities between goods and services trade For example,
Hindley and Smith (1984) argue that none of the differences between services and
goods trade change the normative implications of existing theoretical approaches.
Similarly, Bhagwati, Panagariya and Srinivasan (2004) propose that the gains from
trade in producer services can be understood using the same theoretical
frameworks as those used for goods trade.
This review of the literature has two broad implications for the
present research. First, as already pointed out, all the existing theoretical
contributions work either with perfectly competitive frameworks or representative
models. This raises the question of whether this abstraction from heterogeneity is
defensible. If it is not, then what are the stylized facts that heterogeneous models
for services trade should be able to explain? Second, there is extensive discussion
in the literature of the similarities and differences in services and goods trade, but
9

conclusions are mixed. Empirically, the more recent gravity literature on services
trade shows there are some remarkable similarities between the two types of trade.
In view of these results, it seems natural to extend the comparison of goods and
services trade to the level and ask whether the existing heterogeneous models for
trade in goods are applicable also to services trade.

10

1.3CONCEPT
Trade in Services refers to the sale and delivery of an intangible product,
called a service, between a producer and consumer. Trade in services takes place
between a producer and consumer that are, in legal terms, based in different
countries, or economies, this is called Trade in Services.
International trade in services is defined by the Four Modes of Supply of
the General Agreement on Trade in Services (GATS).

(Mode 1) Cross border trade, which is defined as delivery of a service from

the territory of one country into the territory of other country;

(Mode 2) Consumption abroad - this mode covers supply of a service of one

country to the service consumer of any other country;

(Mode 3) Commercial presence - which covers services provided by a

service supplier of one country in the territory of any other country, and

(Mode 4) Presence of natural persons - which covers services provided by a

service supplier of one country through the presence of natural persons in the
territory of any other country

11

1.4 Definition of Trade in Services

Article I: 2 of the GATS defines the concept of trade in services as the supply
of a service within one of four defined modes of supply This definition of
trade in services through the four different modes of supply is fundamental to
understanding the scope and operation of the GATS. It is especially important
when in relation to specific commitments inscribed by Members in their GATS
Schedules relating to market access and national treatment.
Trade in services is the sum of service exports and imports divided by the value of
GDP, all in current U.S. dollars.

There are two broad categories of services viz.

1. Those that necessarily require the physical proximity of the provider and the
user.
2. Those that do not, though such physical proximity may be useful.

1.5 RECENT POLICY REFORMS & ISSUES

12

13

14

CHAPTER-2

2.1Importance of Service Sector

2.2 Trade in services (% of GDP) in India
2.3 World trade in services

15

2.1Importance of Service Sector

The services sector is the world's largest employer, and produces 70

percent of global gross domestic product (GDP). In the United States, services
generate more than 75 percent of the national economic output and provide 80
percent of private sector jobs. Broadly defined, a service is a product of human
activity aimed to satisfy a human need, which does not constitute a tangible
commodity. There are many types of services, ranging from heart surgery to road
construction, electricity transmission to education, and childcare to water
purification. Services are important for employment and employment growth. This
is because many traditional services, including distribution, education and social
services, are labour intensive. In many services sectors it has also proved more
difficult to substitute capital for labour than in manufacturing. The expansion of
services and the emergence of new services have been driven by income-related
demand shifts, technological developments, falling costs of communications and
the increased presence of transnational corporations. In particular, the new
information and communication technologies and the incessant compulsion on
companies to cut costs have led to the growth of outsourcing of services. In recent
years this outsourcing is now being off-shored to low-cost countries such as India,
Philippines etc.
The TISA has the opportunity to address major and fundamental
barriers to trade in services affecting the United States and the globe. Some barriers
16

to services trade include limited movement of data across borders, unfair

competition from state-owned enterprises, lack of transparency and need for due
process of law, and forced local ownership and discrimination in obtaining
business licenses and permits.

Services are coming to dominate the economic activities of countries

at virtually every stage of development, making services trade liberalization a
necessity for the integration of the world economy.
In the high-income industrialized economies, the value added by services generally
exceeds 60 per cent of total output. In many developing economies, even allowing
for the fact that governments are major service providers (education, healthcare,
sanitation, etc.), the commercial market for services is huge and growing and the
trend is clear: as national economies develop and incomes rise, the commercial
service sector accounts for an ever-larger share of GDP. It is widely recognised that
liberalisation of trade in Services has manifold benefits. Some of them can be
listed as the following:
Free trade in services enables countries to better enjoy the benefits of globalization
and improves economic efficiency just as free trade in goods does. It contributes to
job creation, higher incomes, more consumer choice, downward pressure on
inflation, and a better quality of life.
More, better and lower cost services are important because
services are the "enablers" that permit economies to function and prosper. Some
form essential infrastructure - transport, communications, finance, information.
Capital markets, for example, cannot function efficiently without abundant, highquality information that can be quickly and frequently communicated. Other
services are critical to the success of manufacturing and agriculture.
17

Liberalization of trade in services is an important means to encourage the

continued rapid expansion of foreign direct investment, to integrate national
economies more effectively and to reduce income and other disparities among
countries. Because services production and consumption normally are proximate
and simultaneous, services trade usually entails a significant transfer of technology
and know-how from country to country.

18

2.2 Trade in services (% of GDP) in India

Trade in services (% of GDP) in India was last measured at 14.07 in 2011,

according to the World Bank. Trade in services is the sum of service exports and
imports divided by the value of GDP, all in current U.S. dollars. This page has the
latest values, historical data, forecasts, charts, statistics, an economic calendar and
news for Trade in services (% of GDP) in India.

19

Trade in services (% of GDP) in India was 13.99 as of 2011. Its highest value over
the past 6 years was 15.83 in 2008, while its lowest value was 11.91 in 2005.

2.3 World trade in services

.

20

CHAPTER-3

CASE STUDY

3.1Tourism Services Liberalization in the Caribbean-European EPA

negotiations
3.2 The Issue
3.3 The Solutions
3.4 The outcome
3.5 Reasons for success.

21

3.1Tourism
Tourism is the third largest industry and source of foreign exchange in the country
after oil and manufacturing. Revenues from international consumers accounted for
US$8.2 billion in 2000 roughly half of Mexicos current account. The tourism
sector has also been one of the most progressive supporters of sustainable
development. In 2001, the Ministry of Tourism (SECTUR) in collaboration with
the Ministry of the Environment and Natural Resources (SEMARNAT) completed
the sustainable development strategy for this sector. The strategy proposes, among
other instruments, a sustainable tourism certification programme based on the
findings from a survey, which showed that 69 percent of respondents were willing
to pay a price premium for sustainable tourism services.

22

Case study
Tourism Services Liberalization in the Caribbean-European
EPA negotiations

International Trade Forum - Issue 4/2009

In Barbados, collaboration between the public and private sectors successfully
secured better tourism trade conditions than that afforded by the World Trade
Organization's General Agreement on Trade in Services.
The Economic Partnership Agreement (EPA) between the CARIFORUM Group of
African Caribbean Pacific countries and the European Union (EU) represented
enhanced and new market access opportunities for CARIFORUM investors and
service providers in the tourism industry in the EU market. The outcomes of this
process demonstrate that the private sector in developing countries, including small
and vulnerable economies, can reap significant rewards from the adoption of a
proactive approach to and early engagement in trade negotiations.

23

THE ISSUE
From the perspective of the Barbadian and broader Caribbean tourism industries,
the global tourism industry is characterized by consolidated distribution channels
controlled by a limited number of large international players, many of which are
based in the EU. In spite of this situation, a key objective for the CARIFORUM
tourism services was to secure better market access conditions and trade
facilitation mainly to enable small service suppliers in the region to export for the
first time and/or increase exports to the EU.

THE SOLUTION

At the centre of the process was the Caribbean Regional Negotiation Machinery
(CRNM), which partnered with the Caribbean Tourism Organisation and the
Caribbean Hotel and Tourism Association to drive regional national collaboration
at the industry level. The Ministers of Tourism of the Caribbean Community
(CARICOM) and the CARICOM Council of Trade and Economic Development
supported these partners. The partnership created a new entity - the Barbados
Private Sector Trade Team (PSTT) - which was mandated to research, document
and promote private sector interests likely to be affected as a result of international
trade negotiations. The PSTT played an important business advocacy role in the
EPA process including lobbying, engaging in both formal and informal
consultations with the Ministry of Foreign Trade, and coordinating the public and
private

sectors

at

national,

regional

and

international

levels.

In conjunction with the Barbados Hotel and Tourism Association and other key
private and public stakeholders, the PSTT facilitated focus groups to identify the
tourism sector's offensive and defensive positions. PSTT prepared a report that
highlighted areas in which Barbadian service providers expressed interest in
24

gaining enhanced access to the European market and requested the removal of
specific barriers to tourism services exports.

THE OUTCOMES

Creation of meaningful, innovative, market-opening rules for the sector

Establishment of a common understanding on issues facing the sector particularly in the area of standards and anti-competitive practices

Creation of mechanisms to make it easier for EU investors to choose the

Caribbean

Strengthening of the capacity of CARIFORUM operators to increase

tourism exports and the industry's competitiveness.

25

REASONS FOR SUCCESS

Determination of the private sector to engage actively in the negotiation

process

Effective use of business support organizations to formulate and convey

positions to the Government and the regional negotiation authorities

Commitment manifested by both the Barbadian Government and the

country's tourism stakeholders to creating and maintaining a constructive
and cooperative working relationship throughout the negotiating cycle

Ability of negotiators to successfully pursue the interests of private

operators.

26

Summary

An increase in share of services in the GDP and total

employment leads to economic development. The growing importance
of services is reflected in the international trade also. The services in
international trade is subject to a lot of restrictions. Protective measures
include visa requirement, investment regulations, restriction on
repatriation, marketing regulation, restrictions on the employment of
foreigners, compulsion to use local facilities etc. International Marketing
Chapter-16 Trade In Services

27

CONCLUSION

The main characteristics of trade in services are, first, that traded services often are
demanded as a byproduct of trade in goods; second, that trade in services often
goes hand in hand with international movement of factors; and third, that services
may be provided internationally by transnational firms, some of whose factors of
production make their contributions from a distance
In this project the four modes of trade in services elaborately discussed. Though,
the GATS tried to give a holistic definition of trade in services, the definition not
foolproof. Due to constant technological advances, it is sufficient for purposes of
the GATS to define only what is meant by "trade in services." Second, the
definition of trade in services should be as precise as necessary to capture all
modes for the service trade. Specificity allows the GATS to apply to all modes of
trade in services and it also ensures that commitments made by members toward
liberalization of their service sectors will encompass all modes for service trade,
unless, of course, a given mode is otherwise exempted in the member's schedule.
28

The GATS has failed to provide a definition of what "services" should mean for
purposes of the agreement and has shed no light on the requirements that a
transaction under which services are traded must meet in order to be governed by
the GATS. Failure to address these definitional matters is certain to raise issues
concerning the scope of applicability of the GATS.
Cross-border trade in goods involves or necessitates the supply of certain services.
The clearest example is the case of transportation services associated with the
transfer of goods from the country of export to the territory of import. The
importance of services would far outweigh that of goods if we assume, for
example, that operation and management services include the supply of engineers,
technicians, and other professional staff in the areas of operation and maintenance,
finance, marketing etc. for an extended period. But what impact may this have on
the applicability of the GATS. The GATS does not address this situation. It speaks
of trade in services through certain supply modes but not about transactions and
contracts for trade in services. Thus, the issue arises of whether such a
characterization is permissible under the GATS. Stated differently, whether a
member can require application of the GATS not only when trade in services
occurs but also when the underlying transaction can be characterized as one for
service trade.

29

Abbreviations
ASEAN

Association of South East Asian Nations

AUSTRADE Australian Trade Commission

BIE

Bureau of Industry Economics

EC

European Community

EU

European Union

FATS

Foreign Affiliate Trade in Services

FDI

Foreign Direct Investment

GATT

General Agreement on Tariffs and Trade

GATS

General Agreement on Trade in Services

GDP

Gross domestic product

I-O

Input-Output tables

IMF

International Monetary Fund

OECD

Organisation for Economic Cooperation and Development

R&D

Research and development

UN

United Nations

30

UNCTAD

United Nations Conference on Trade and Development

WTO

World Trade Organization

TISA

Trade in Services Aggremeent

BIBLIOGRAPHY

Bhagwati J. N., 1984, Splintering and Disembodiment of Services and Developing

Nations, The World Economy, 7(2), pp. 133-144
Baumol W. J., 1967, Macroeconomics of Unbalanced Growth: The Anatomy of
Urban Crisis, American Economic Review, 57(3), pp. 415-426; and Victor R
Fuchs, 1968,
The Service Economy, National Bureau of Economic Research, New York, NY
Bureau of Industry Economics, 1994,
Economist Intelligence Unit, 2010, Aiming higher: How manufacturers are adding
value to their business, The Economist Newspaper
Organisation for Economic Co-operation and Development, 2001, Open Services
Markets Matter, Policy Brief, OECD Observer, Paris
31

Tucker K. and M. Sundberg, 1998, International Trade in Services,

Manual on Statistics of International Trade in Services,
Economic of global trade and finance- Johnson, Mascarenhas

32