International Trade - Theory and Policy, 2010a

Trade in services has become an increasingly important share of international trade. Trade in
transportation, insurance, banking, health, and other services now accounts for over 20 percent of world
trade. However, trade in services is not restricted by tariffs, largely because services are not shipped in a
container on a ship, truck, or train. Instead, they are transmitted in four distinct ways. First, they are
transmitted by mail, phone, fax, or the Internet; this is called cross-border supply of services, or Mode 1.
Second, services are delivered when foreign residents travel to a host country; this is called consumption
abroad, or Mode 2. Third, services trade occurs when a foreign company establishes a subsidiary abroad;
this is called commercial presence, or Mode 3. Finally, services are delivered when foreign residents travel
abroad to supply them; this is called presence of natural persons, or Mode 4. Because of the transparent
nature of services, economists often refer to services as “invisibles trade.”
Because services are delivered invisibly, services trade is affected not by tariffs but rather by domestic
regulations. For example, the United States has a law in place called the Jones Act, which prohibits
products being transported between two U.S. ports on a foreign ship. Consider this circumstance: a
foreign ship arrives at one U.S. port and unloads half its cargo. It then proceeds to a second U.S. port
where it unloads the remainder. During the trip between ports 1 and 2, the ship is half empty and the
shipping company may be quite eager to sell cargo transport services to U.S. firms. After all, since the ship
is going to port 2 anyway, the marginal cost of additional cargo is almost zero. This would be an example
of Mode 1 services trade, except for the fact that the Jones Act prohibits this activity even though these
services could be beneficial to both U.S. firms and to the foreign shipping company.
The Jones Act is only one of innumerable domestic regulations in the United States that restrict foreign
supply of services. Other countries maintain numerous regulations of their own, restricting access to U.S.
and other service suppliers as well. When the original GATT was negotiated in the 1940s, services trade
was relatively unimportant, and thus at the time there was no discussion of services regulations affecting
trade. By the time of the Uruguay Round, however, services trade was increasingly important, and yet
there were no provisions to discuss regulatory changes that could liberalize services trade. The Uruguay
Round changed that.
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