Regulatory Innovation Is the Key to Expanding Free Trade in Services

In merchandise exports, Korea ranked 5th in the world in 2017. By contrast, in services trade it recorded its largest trade deficit since the global financial crisis. In fact, Korea has been struggling with a chronic deficit in its services trade balance throughout the 2000s and beyond. As a country that prides itself on being a leader in global free trade, with FTAs in force with 52 countries, what should Korea prioritize right now in order to expand free trade in services in a way that matches its status?

One important factor affecting free trade in services is barriers to services trade. According to domestic and international trade research, even after taking into account the exporting country’s production capacity, the importing country’s import demand, the economic size of the exporting and importing countries, and such obstacles to bilateral trade flows as physical distance, economic institutions, language, and whether the two trading partners share a land border, the impact of services trade barriers on service exports between trading partners remains statistically significant. In other words, easing regulations on services trade increases bilateral service exports. According to my empirical analysis of the causal relationship between bilateral export data by service industry and the Services Trade Restrictiveness Index for 44 OECD member countries from 2014 to 2017, including Korea, improving services trade regulations increases service exports by reducing production costs and raising productivity for service firms.

From 2014 to 2017, the OECD conducted firm surveys covering 44 countries over four years and 19 service industries to examine the state of regulations that hinder free trade in services. It assessed the severity of regulation from five perspectives: whether there are restrictions on market entry for foreign multinational firms, restrictions on the movement of people, barriers to competition, discriminatory measures, and whether regulations are transparent. By compiling the survey results, the OECD quantified the degree of restrictiveness in services trade regulations and expressed it as an index ranging from 0 to 100. Among OECD member countries, the average level of services trade restrictiveness was 24.2, with a standard deviation of 11.8. Korea, by contrast, recorded 32.7. Korea’s services trade regulations are higher than the OECD average, and by a margin that exceeds one standard deviation. In other words, compared with the OECD countries that have carried out regulatory innovation most successfully, Korea belongs to the bottom 15 percent of countries with the most severe regulations. Korea ranks among the world’s top 10 economies. Yet the severity of its services trade regulations, which does not even meet the OECD average, is a major reason why Korea’s services trade continues to suffer from a chronic deficit.

The Moon Jae-in administration is implementing a services trade promotion policy with the goal of increasing service exports by 2022 and turning the services trade balance from deficit to surplus. To expand free trade in services, barriers to services trade must be reformed in a sweeping way. Korea’s services trade barriers should be lowered at least to the level of OECD countries.

Jeju Special Self-Governing Province and Saemangeum present contrasting cases of free trade in services policy in Korea. Jeju innovated regulations so that special rules could apply only within the island, making use of its geographic characteristics. In 2014, the Saemangeum region revised its development plan with the goal of becoming a global free trade hub. It is developing the area into a deregulation- and incentive-specialized city and creating a special regulatory zone at the highest level in the country. Jeju and Saemangeum share a common goal of promoting innovation in service regulation. The difference is that Jeju actually carried out regulatory innovation, while Saemangeum is still preparing for implementation.

The outcomes in the two regions are strikingly different. In Jeollabuk-do, which includes Saemangeum, arrivals of foreign direct investment were $89 million in 2017 and $12 million in the first half of 2018, ranking 12th and 13th, respectively, among the nation’s 17 local governments. By contrast, Jeju recorded foreign direct investment arrivals of $900 million in 2017 and $110 million in the first half of 2018. Compared with Jeollabuk-do, Jeju posted results roughly 10 times higher.

Services trade takes place through cross-border service transactions, overseas local purchases by consumers, the commercial presence of multinational service firms, and the movement of natural persons who supply services. In the supply of services, the local presence of multinational firms plays a major role. Therefore, along with an expansion of foreign direct investment, the creation of a favorable domestic business environment for multinational firms is evidence that Korea’s competitiveness in services trade is improving. To expand free trade in services, Korea must prioritize regulatory innovation in services trade. The breakthrough for expanding Korea’s free trade in services is regulatory innovation.

Namseok Choi / Professor, Department of International Trade, Jeonbuk National University

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Original title: 서비스 자유무역 확대의 돌파구는 규제혁신이다

Author: Nam-seok Choi

Date: 2018-08-22

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=17&idx=11068