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Daniel Gorfine
Adjunct Fellow; Vice President, External Affairs and Associate General Counsel, OnDeck
Capital Access and Capital Markets and Demographics and FinTech and Global Economy and Public Policy
Daniel Gorfine is an adjunct fellow at the Milken Institute and vice president, external affairs and associate general counsel at OnDeck, a technology-based company focused on transforming small business lending.
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MI-GU Hill Briefing: Global trade in services: The potential for greater liberalization and increased economic growth
By: Daniel Gorfine
October 19, 2012
   
   
The Milken Institute's Center for Financial Markets and Georgetown University's Center for Financial Markets and Policy at the McDonough School of Business recently hosted the latest in their joint Capitol Hill briefing series. The discussion focused on the opportunities and barriers related to further liberalization of the global trade in services.

The panelists were Alan M. Dunn, partner at Stewart and Stewart; Edward Gresser, director of the Progressive Economy Project at GlobalWorks Foundation; and J. Bradford Jensen, professor of International Business and Economics at Georgetown University's McDonough School of Business and a senior policy scholar at the Georgetown Center for Business and Public Policy. Sandeep Dahiya, associate professor of Finance at Georgetown University's McDonough School of Business, moderated the panel.

The panelists agreed that based on its comparative advantage in a number of service industries, the U.S. would benefit from trade liberalization, though the road to new agreement may not be smooth. Indeed, non-tariff barriers in service trade are difficult to eliminate because they are not always transparent or tangible, and countries will frequently seek to protect domestic industry. Yet overall, the global benefits of trade liberalization in services outweigh the costs.

Potential Benefits
Trade liberalization in service industries, which include engineering, architecture, accounting, law, media, and finance, can bring substantial economic and political benefits to the U.S. The U.S. frequently enjoys a comparative advantage in service industries because of its relatively better educated, high-skilled labor force, which stands to benefit economically from increased liberalization in services. One panelist highlighted a recent study that estimates a $300 billion net benefit to the U.S. economy annually from service trade liberalization.

Additionally, many tradable services are facilitated by the internet and information technology services, sectors in which the U.S. also enjoys a competitive advantage. These services decrease U.S. export costs and promote e-commerce and online ventures; according to one panelist, this highlights the importance of promoting global transparency and privacy standards in order to facilitate the flow of data and information.

The panelists also discussed benefits from trade liberalization that go beyond pure economics. For example, increased global trade and commerce may be linked to spreading democratic freedom, promoting labor rights, reducing armed conflict, and increasing standards of living. While the panelists agreed that there will inevitably be some costs resulting from further liberalization, including labor displacement, these costs are outweighed by the benefits.

Need for Data
One panelist emphasized that better data about trade flows would help quantify the benefits of increased trade liberalization and could strengthen the arguments for new international agreement. Countries require data to negotiate accurately and make effective policy, but that data is currently lacking for service trade -- unlike the level of detail available for the manufacturing sector. One panelist is currently focused on better aggregating and reporting service-related data, thereby hoping to build the case for further trade liberalization, particularly in the U.S.

Challenges to a New Agreement
The panelists agreed the opportunity to further liberalize trade in services is not without its challenges. First, in the midst of a presidential election year marked by concerns over the looming fiscal cliff and potential trade conflict with China, it remains doubtful that the U.S. will muster the political will to push for a global services agreement. Second, U.S. negotiators would need to have fast-track authority in Congress in negotiating any potential agreement to demonstrate to partner countries that negotiations wonaEUR(TM)t be futile. Third, the U.S. and the EU would have to agree on the structure of a new General Agreement on Trade in Services, referred to as GATS II, before approaching the BRICS. The U.S. prefers a negative industry-list (where all service industries are covered by the GATS II terms unless specifically excluded), while the EU prefers a positive industry-list (where only industries specifically listed are included). The EU is of the view that the BRICS and developing countries are more inclined to go along with a positive list approach, so as to protect a broader group of domestic service industries from global competition.

Likely Outcomes
The panelists concluded that the prospects of a multilateral agreement through the WTO are slim due to the divergent perspectives of the U.S., EU, and BRICS countries. The Doha Development Round, the current trade-negotiation round of the WTO, has been stalled for more than ten years, and there is little indication that it will restart anytime soon.

Consequently, a number of countries, including the U.S., have been pursuing an International Services Agreement (ISA) -- a plurilateral agreement open to all WTO members that embodies rules split out from GATS II. Panelists pointed out that this type of plurilateral agreement has a better chance of success. Alternatively, they anticipate that the U.S. will continue to pursue bilateral agreements that include provisions for the further liberalization of trade in services.

For more information on this briefing, please contact Dianna Dunne, Director of Government Affairs, at ddunne@milkeninstitute.org.