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Cooperation in Services
Can it help the developing world?
Linda Schmid
Independent Consultant
International Trade Policy and Development
© 2008 The German Marshall Fund of the United States. All rights reserved.
No part of this publication may be reproduced or transmitted in any form or by any means without permission
in writing from the German Marshall Fund of the United States (GMF). Please direct inquiries to:
About GMF
The German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grant-
making institution dedicated to promoting greater cooperation and understanding between the United States
and Europe.
GMF does this by supporting individuals and institutions working on transatlantic issues, by convening leaders
to discuss the most pressing transatlantic themes, and by examining ways in which transatlantic cooperation can
address a variety of global policy challenges. In addition, GMF supports a number of initiatives to strengthen
democracies.
Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF
maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC,
GMF has seven offices in Europe: Berlin, Bratislava, Paris, Brussels, Belgrade, Ankara, and Bucharest.
Transatlantic Regulatory Cooperation in
Services: Can it help the developing world?
April 2008
Linda Schmid
Independent Consultant
International Trade Policy and Development
Introduction...................................................................................................................... 3
Regulatory Cooperation in the Transatlantic Services Market.................................. 4
Effective Services Regulation Matters to the Developing World............................... 7
Current Weaknesses in Developing Countries’ Regulatory Systems......................... 9
What is the Current State of International Regulatory Cooperation?..................... 12
What the European Union and United States Should Do to Strengthen
Services Markets in Developing Countries............................................................. 14
The Importance of Working Together......................................................................... 18
Conclusion and Areas for Further Research............................................................... 20
Acronyms........................................................................................................................ 21
Annex 1: Total Financial Flows of Official Development Assistance...................... 22
Annex 2: Official Development Assistance by Major Purposes............................... 23
Annex 3: Additional Official Development Assistance Statistics............................. 25
Bibliography.................................................................................................................... 26
Linda Schmid is an independent consultant on international trade policy and development. She served as the trade in services officer
of the International Trade Center in Geneva. She also acted as trade director for the Caribbean Trade and Competitiveness Program
in Barbados. Previously, she was the vice president and director of electronic commerce for the U.S. Coalition of Service Industries in
Washington, DC. She is a contributing author to Managing the Challenges of WTO Participation, Lschmiddc@gmail.com.
1 Introduction
The European Union (EU) and the United States productivity in agriculture and manufacturing.
(U.S.) have dynamic services markets highly To improve their ability to trade internationally
integrated through deep trade and investment and take advantage of greater trade liberalization,
ties. Differences in regulatory approaches and developing countries have requested assistance
philosophies occasionally cause transatlantic from industrial countries and multilateral
disagreement regarding how each should respond organizations. Such assistance helps developing
to specific challenges or market needs. This is economies build regulatory capacity and oversee
particularly true in services, which tend to be more evolving services markets effectively, equitably,
highly regulated than manufacturing industries. and efficiently. Strengthening regulatory
Recent EU/U.S. summits have acknowledged how structures, independence, and technical
such differences can also limit transatlantic trade and competence improves regulatory oversight and
investment. A variety of EU/U.S. regulatory dialogues enforcement and allows developing countries to
have been created to increase understanding between stimulate more dynamic services industries.
policymakers on both sides of the Atlantic, share
best-practice and lessons learned, and minimize An EU–U.S. transatlantic initiative that emphasizes
divergent regulatory approaches. the value of legal and regulatory institutions will
foster services markets in least developed and
Transatlantic cooperation on regulatory issues developing countries and thus contribute to long-
can also help the developing world improve run economic growth. The European Union and
their services economies. Services consistently United States should work in partnership with
represent a significant portion of Gross Domestic developing countries to improve governance,
Product (GDP) in developing countries and regulatory oversight, and the predictability of the
global trade in services is growing. Furthermore, multilateral trading environment in services. This
services industries play a pivotal role as will measurably improve services markets around
intermediate inputs that influence trade and the globe.
Points of Cooperation The EU and U.S. service economies are also well
integrated. Trade with Europe accounted for 40%
The European Union and the United States have of total U.S. cross-border exports and imports of
some of the most dynamic services markets in private services in 2005.3 In that year, the United
the world. The European Union was ranked the Kingdom, Germany, France, Switzerland, and the
number one exporter and importer of world Netherlands were among the top ten importers
commercial services in 2005, while the United and exporters of cross-border services to and from
States was ranked number two.1 Commercial the United States.4 The United States accounted
services represented 22.5% of total exports and for approximately 32% of the EU external trade in
21.2% of total imports for the European Union, and commercial services in the same year.5 Even more
28.3% of total exports and 14.4% of total imports significantly, the trade relationship is dwarfed by
for the United States. Measured by employment, the bilateral investment relationship. U.S. sales of
services dominate both economies: in 2005, 78.6% services through affiliate companies in Europe
of U.S. employment was in the services sector, with almost doubled cross-border trade in services in
the European Union approaching 70%.2 Both the 2004. European owned affiliates accounted for 68%
European Union and the United States thus have a of total sales of services by affiliates in the United
stake in the continued growth of the transatlantic States in the same year. The United Kingdom—
and the global services economy. followed by Germany and France—had the largest
proportion of such sales in the United States.6
1
World Trade Organization, International Trade Statistics, 2006, 3
United States Bureau of Economic Analysis, U.S. International
p. 20. Services Cross-Border Trade in 2005 and Sales through Affiliates
in 2004, October 2006, p. 24.
2
Organization of Economic Cooperation and Development,
OECD in Figures, 2006, p. 33. 4
United States Bureau of Economic Analysis, U.S. International
Services Cross-Border Trade in 2005 and Sales through Affiliates
in 2004, October 2006, p. 25.
5
Eurostat database http://epp.eurostat.ec.europa.eu
6
United States Bureau of Economic Analysis, U.S. International
Services Cross-Border Trade in 2005 and Sales through Affiliates
in 2004, October 2006, p. 36.
The Importance of Service Industries to hire, and how they find, market, and serve
Developing Countries their clients.
The pivotal role played by services in the economies • The formulation and administration of services
of least developed and developing country economies industry rules determines the fairness of services
is often under-appreciated. In fact, they are a valuable markets and the perceived integrity of the
source of employment and constitute, on average, an regulator.
expanding proportion of GDP. For example, in some
• Regulatory practices19 influence the ability Iriuscidunt verci
countries of the East African Community (EAC),
of businesses to easily understand the rules tinciduisi. Lis ad
services represent as much as 54% of GDP; in the
Southern African Development Community (SADC), governing services industry operations as well elessi. Um alis
services represent up to 67% of GDP.16 as a firm’s ‘time-to-market’, product quality, and dolor si. Ing eum
cost of providing services. dolorem nullaor
The share of global services trade from developing tionseq uipsum
countries is also growing rapidly. While world Together, these factors shape the quality of the
ipsusto dolore
commercial services exports increased, on regulatory environment20 and affect the ability
of a services firm to compete with domestic and feum quiscil iscilis
average, by 10% a year between 2000 and 2005, the
foreign firms. er si et vent amcor
comparable figure for Africa was 13% a year. 17
ad dio eum vel
However, regulatory weakness and inefficiency in The opportunities for growth are clear in
services sectors can prevent developing countries telecommunications and energy services.
from capturing the full benefits of a dynamic Competitively priced and vibrant telecommunications
services market. services diminish asymmetries in market
information and lower transaction costs across
Attention to regulatory infrastructure is required economic sectors. Likewise, because energy is an
to help capture the growth potential of services essential input to services firms, more consistent
industries and improve productivity across and affordable energy services enable firms to
the economy: carry out operations without frequent and costly
interruptions of electricity supplies.21
• Developing economies can strengthen the
competitive position and viability of agricultural,
manufacturing, and services exporters by 19
Regulatory practices that result in excessively burdensome
improving industry rules and regulatory accreditation, qualification, or technical standard requirements
delay time-to-market.
practices. 20
Rules may discriminate against foreign firms in registration
or authorization requirements, fees or taxes on repatriation of
• Industry rules influence the structure of the
18
earnings, or government procurement, for example.
services firm, where firms locate, whom they 21
Given the dramatic demand for energy in least developed
and developing countries, the European Union and the United
16
The World Bank World Development Indicators Database, States should undertake dedicated research to determine the
http://www.world bank.org. most effective oversight structure for energy markets that will,
in the near term, produce renewable energy that can be widely
17
World Trade Organization, International Trade Statistics, 2006. distributed at an affordable cost.
18
Industry rules can constrain service markets in least devel-
oped and developing countries; for example, industry rules that
limit foreign investment, geographic scope, or type or quantity
of service products.
60
Services are
a valuable
Value added by services (% of GDP)
50
source of
employment
40
and an
expanding
proportion 30
of GDP.
20
10
0
Source: The World Bank World Development Indicators Database.
As the following section demonstrates, developing • In the financial sector, inadequate bank
countries face significant challenges creating and supervision can permit lending based on political
administering transparent and robust regulatory pressure rather than creditworthiness; access to
environments for services markets. credit is also a significant challenge for many
service sector firms.24
Developing countries face greater regulatory
challenges than developed countries. Many are • In the telecommunications sector, distorted
still grappling with the transition to market- regulatory processes can mean that licenses
based economies, which requires new legislation, are granted to new providers based on opaque
new institutions, and the expertise to implement criteria rather than a transparent competitive
relatively new policy approaches. In general, process; substandard telecommunications
regulatory institutions in developing countries infrastructure can hinder development.25
operate in a weak institutional setting with minimal
resources and scant market information. • Inconsistent energy supplies are also obstacles
to expansion.
Despite the potential for growth, the cost and
quality of transport, finance, telecommunications, Business owners firmly believe they could operate
and energy services often hinder productivity more competitively if the regulatory environments
and trade in the agricultural and manufacturing at home and in neighboring countries were
sectors, at least in part due to weak regulatory and streamlined and more transparent.26
institutional frameworks. 22 Developing countries face a series of specific
• In the transport sector, a lack of coordination challenges in responding to this demand.
between maritime, rail, and road regulators Governments may lack public policy mechanisms
can create excessive costs for logistics services. to gather market information, and may, therefore,
The United Nations reports that “[i]n 2003, the be unable to accurately assess the scope or depth
international freight costs of African countries of problems that impede services industries.
as a proportion of the value of their imports Regulatory institutions may lack the personnel and
represented 11.9%, twice the world total of 5.4%, experience necessary to address challenges in their
and almost four times the costs for developed respective services market. Government ministries
market economies of 3.9%.”23 may create conflicting and overly burdensome
requirements because they do not communicate.
22
Two thirds of manufacturing costs, on average, are typically
purchases of intermediate goods and services, consequently, 24
Service firms in least developed and developing countries
input cost and quality has a direct effect on firms’ costs and consistently complain about the inability of financial institutions
competitiveness. For an explanation of the theory of trade in to provide credit appropriate to a service firm business model,
intermediate inputs and its benefits, see J. Hodge and H.K. Nor- which is built on intellectual rather than physical assets.
das, Liberalization of Trade in Producer Services—The Impact on
Developing Countries, Chr. Michelsen Institute, 1999.
25
Despite telecommunications liberalization in many least
developed and developing countries, the cost and availability of
23
UN Council on Trade and Development, Negotiations broadband for commercial purposes remains uncompetitive. See
on Transport and Logistics Services: Issues to Consider, 2006 P.A. Stern, Assessment of the Telecommunications Services Sector
Document:UNCTAD/SDTE/TLB/2005/3, p. 4. in CARICOM: Convergence Issues at the Regional and Interna-
tional Level, Caribbean Regional Negotiating Machinery, June
2006, p. 41–42.
26
European Commission Trade Related Technical Assistance
Program for Pakistan, Services Capacity Report, September 2005,
http://www.wto-pakistan.org/Pages/Publications_1.html.
28
IAIS, IOSCO, and BIS emphasize the importance of coopera-
tion between regulators in their respective “core principles” to
ensure rigorous oversight.
29
International Organization of Securities Commissions, Objec-
tives and Principles of Securities Regulation, May 2003. 30
Institute of International Finance, Proposal for a Strategic
Dialogue on Effective Regulation, December 2006, p. 24.
36
The ICAO, IMO, and ITU are regulatory oversight standards 38
Financial Service Industry Technical Assistance Provider, Of-
setting bodies and associated with the UN. ficial Interview, March 14, 2007.
Federal Trade Commission, Official Interview, March 22,
37
2007.
The European Union and United States how developing economies administer services
collaboration on regulatory capacity building can markets.56 The European Union and United States
make it easier for least developed and developing have demonstrated that they can work together
countries to absorb technical assistance. A in this way. For example, the U.S. Millennium
consistent message from the European Union Challenge Corporation established in 2004 extends
and United States will also have greater political technical assistance if developing countries meet
influence on policymakers in developing countries specified policy indicators. In Benin, under a
Cumsan hendio than divergent approaches. As argued above, the “compact” with the government, the United States
con vullaorem European Union and United States have experience responded to the government’s request for a
zzrilit laorting building institutional capacity that can help future program to strengthen the judiciary. The European
el do exer si tin efforts in developing countries, and should work Union had a similar project and, at the field level,
ulputem iure together to avoid providing conflicting regulatory project managers worked to allocate assistance
velendrer sequat. recommendations to developing countries. without overlap.57 Such experience will help in
future efforts.
Ummy nissis eum Developing countries face challenges absorbing
dolummy nullaor technical assistance from the multitude of official By working together, the European Union and
amconsecte development assistance channels that often have United States can offer an analytical approach
exercilisl ut differing objectives, timelines, and reporting that enables regulators in developing countries to
vullandio odo requirements. This is why, in 2005 under the “Paris determine the best response to regulatory issues
Declaration on Aid Effectiveness,”53 developed given their domestic environment, by recognizing:
countries agreed to harmonize aid delivery and
adhere to principles for the effective provision of • Firstly, that a lack of consistency in their
technical assistance to developing countries. The respective approaches might harm developing
European Union and United States should apply countries. A transatlantic initiative designed to
the tenets of the Paris Declaration to transatlantic build regulatory capacity in developing countries
capacity-building efforts. would require the European Union and United
States to compare their regulatory approaches
Moreover, technical assistance providers believe and identify divergences. They would work
they have a greater impact when the European to address regulatory differences that have a
Union and United States deliver the same message negative impact on developing countries.
at the same time. For example in the Southeast
Europe Initiative54 the United States supported • Secondly, that due to the binding nature of trade
EU efforts to deliver legal and trade policy agreements, the European Union and United
technical assistance to help establish the Central States must consider the potential negative
European Free Trade Agreement.55 Delivering the impact of divergent regulatory provisions in
same message on the value of effective legal and their respective bilateral agreements. They have
regulatory institutions can positively influence a responsibility to compare regulatory provisions
53
http://www.oecd.org 56
Millennium Challenge Corporation, Official Interview,
54
http://www.cldp.doc.gov March 9, 2007.
http://www.europa.eu/rapid/pressReleasesAction.
55
57
Millennium Challenge Corporation, Official Interview,
do?reference=IP/06/1837 March 9, 2007.
Regulators in developing countries face a variety developed and developing countries successfully
of internal and external challenges. Institutions achieve effective regulatory oversight and the
themselves may suffer from a weak mandate impact of regulatory provisions in bilateral
or wavering political support. They may lack trade agreements on the multilateral trading
resources, expertise and experience, and environment. Three areas, in particular, require
operate under ad hoc regulatory processes. The further attention:
institution may have insufficient enforcement
Cumsan hendio capacity, without access to appropriate oversight • The first area would examine developing
con vullaorem practices and stakeholder input. Furthermore, countries that effectively achieve high-quality
external public policy practices may not protect regulatory oversight with limited resources.
zzrilit laorting
against unduly influential interests. Given the Analysis would identify those countries
el do exer si tin
magnitude of regulatory challenges in developing that effectively use and adapt international
ulputem iure oversight standards and investigate their
velendrer sequat. countries, developed countries should provide
substantially more support to international practices. Research would also include an
Ummy nissis eum assessment of regional regulatory integration
regulatory cooperation.
dolummy nullaor arrangements, their approach to competition
amconsecte The European Union and United States are at a policy, and cooperation in finance, insurance,
exercilisl ut crossroads in influencing the nature of the global telecommunications, transport and energy.
vullandio odo trading environment. With the need for greater Research would describe regional arrangements,
transatlantic and global regulatory cooperation, the scope of their application, and their drivers.
the European Union and United States can take
the lead in building regulatory capacity that will • A second area for research would focus on
enable developing countries to experience the the regulatory provisions of U.S. bilateral
gains of vibrant services economies. A transatlantic agreements and those proposed for EU EPA
initiative to build regulatory capacity would negotiations. An index of regulatory provisions
create confidence in the developing world to in established Free Trade Agreement’s (FTA) and
manage globalization. proposed EPA’s would classify them according
to service sector and their cross sectoral
In this way, a transatlantic initiative would application. An examination of the prescriptive
contribute to the completion of the Doha Round of regulatory provisions of U.S. and EU bilateral
trade negotiations. agreements would determine their compatibility
to avoid contradictory regulatory requirements.
Adjustments in the multilateral trading
environment combined with domestic policy • The final area would identify differences
reforms offer the best prospects for greater gains in between European Union and United States
investment and trade creation that least developed regulatory approaches that are particularly
and developing countries need to grow their problematic for developing countries. Research
economies. The European Union and United States would pinpoint competing regulatory
must partner with developing countries in order approaches to services markets that create
to create and strengthen fundamental legal and institutional, administrative, or resource issues
regulatory institutions. for developing countries. Such a study would
also examine how conflicting requirements
Nonetheless, further research is warranted impact firms from developing countries.
in several areas. It should examine how least
Grants by NGOs — — — — — — —
Table 4: U.S. bilateral ODA by major purposes at current prices and exchange rates
United States 1994–95 1999-2000 2004–05 2004
USD USD USD Total
million Percent million Percent million Percent dac%
Social infrastructure and services 2,420 37 3,546 35 10,761 43 38
Education 370 6 292 3 635 3 9
of which basic education 71 1 155 2 499 2 3 Iriuscidunt verci
Health 536 8 392 4 1,141 5 5 tinciduisi. Lis ad
of which: basic health 205 3 331 3 998 4 3 elessi. Um alis
Population and reproductive dolor si. Ing eum
505 8 651 6 1,446 6 3 dolorem nullaor
health
Water supply and sanitation 76 1 164 2 981 4 4 tionseq uipsum
ipsusto dolore
Government and civil society* 430 7 602 6 4,871 20 13
feum quiscil iscilis
Other social infrastructure
503 8 1,445 14 1,686 7 4 er si et vent amcor
and services
Economic infrastructure ad dio eum vel
1,033 16 1,344 13 3,341 13 17
and services*
Transport storage* 24 0 12 0 748 3 5
Communications* 77 1 10 0 227 1 1
Energy* 210 3 100 1 1,707 7 8
Banking and financial services* 74 1 1 0 214 1 1
Business and other services* 647 10 1,221 12 446 2 2
Production sectors 982 15 368 4 1,500 6 6
Multisector 67 1 1,017 10 1,272 5 7
Commodity and program aid 980 15 1,127 11 1,034 4 3
Action relating to debt 102 1 2,211 9 11
Humanitarian aid 463 7 1,610 16 3,279 13 7
Administrative costs of donors 525 8 702 7 1,040 4 5
Core support to NGOs — — — — — — 2
Refugees in donor countries 254 3 503 2 3
Total bilateral allocable 6,470 100 10,069 100 24,942 100 100
For reference:
Total bilateral 8,028 79 10,085 80 24,942 90 76
Of which: unallocated 1,558 15 16 0 — — 2
Total multilateral 2,196 21 2,449 20 2,898 10 24
Total ODA 10,244 100 12,534 100 27,840 100 100
Source: OECD, United States Development Assistance Committee Peer Review 2006.
*Represents ODA components that partially include assistance to regulatory entities.