Modelling the Trade in Services Agreement: Preliminary Estimates of Mode 1 and Mode 3 Liberalization

Abstract

This paper quantifies the economic implications of reducing barriers to services trade in the context of the Trade in International Services Agreement (TISA) using an extension of the GTAP model which incorporates a dynamic mechanism, a MONASH-style investment function, and disaggregated foreign-owned service sectors. By directly representing foreign direct investment in services sectors, the model allows estimates of both mode 1 (cross-border) and mode 3 (commercial presence) trade impacts and thus the interaction between trade and foreign affiliate sales. The impact of liberalization of mode 3 services trade is assessed based on a phantom tax which captures the implicit cost imposed by FDI restrictions on the inflow of foreign capital. A gravity model is established to estimate the elasticity of FDI restrictiveness on foreign capital supply. We apply the model to estimate the impact of full liberalization of services barriers as evaluated by the OECD’s services trade restrictiveness indexes in order to provide a measure of the potential scale of impacts; this represents an upper bound on the likely outcome of the negotiation which build on the limited progress achieved in the stalled Doha Round and the actual level of liberalization achieved under the most ambitious preferential agreements amongst the parties. We estimate welfare gains from the TISA on the order of US$96 billion in 2030 for the participants and about US$82 billion for the world overall level welfare (which reflects losses for non-participants on the order of US$14 billion due to trade diversion given the preferential nature of the TISA).

Keywords: TISA, GATS, services trade liberalization, Mode 3, foreign affiliate sales, foreign direct investment, FAS, FDI, CGE, GTAP

JEL Classification: C68, F13, F14, F17, F21