Free trade agreement and transport service trade

• Date: 01 July 2017
• Published date: 01 July 2017
• Author: Seong‐Hoon Cho,Jaimin Lee
• DOI: http://doi.org/10.1111/twec.12501

ORIGINAL ARTICLE

Free trade agreement and transport service trade

Jaimin Lee

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Seong-Hoon Cho

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1

School of Economics and Trade, Kyungpook National University, Daegu, Korea

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Department of Agricultural & Resource Economics, University of Tennessee, Knoxville, TN, USA

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INTRODUCTION

Trade in services plays a growing role in reducing trade costs and promoting trade and productiv-

ity in the world economy and all its sectors (Francois & Hoekman, 2010). For example, global

commercial service exports were valued at 4.6 trillion dollars in 2013, representing a quarter of

total exports worldwide (WTO, 2015). The annual growth rate of global commercial service

exports was 6.0% in that year compared with 2.5% for all exports (WTO, 2015). Trade in transport

services is becoming ever more important as the global economy relies more heavily on a transac-

tional environment supportive of increasingly complex global trade (Hoekman & Mattoo, 2013).

The cross-border supply of services, mainly consist of transport services trade, was 41.0% of glo-

bal services trade in 1997 (Grȕnfeld & Moxnes, 2003; Karsenty, 2000). Exports and imports of

global transport services in 2013 were valued at $905 billion and $1.17 trillion (or 19% and 27%

of the total value of global trade in services), respectively (WTO, 2015). The US export and

import values of trade in transport services in 2015 were $87.22 and $97.05 billion, respectively

(Bureau of Economic Analysis, 2016).

Despite the growing importance of trade in transport services, trade negotiations have been dif-

ficulty. For example, the US delegation during the Uruguay Round was backed by a vocal domes-

tic maritime industry that stood strongly opposed the liberalisation of cabotage services (Francois

& Wooton, 2001). As a result of such efforts, specific commitments on mariti me transport services

were not present at the conclusion of the Uruguay Round of the World Trade Organization (WTO)

agreement (WTO, 2016c). Although WTO member countries later made partial commitments on

the use of port facilities, auxiliary services and international shipping, the clauses and terms of

most-favoured-nation (MFN) status in the general trade agreement in trade services (GATS) were

restrictive for these services (WTO, 2016b). For example, the GATS applied to aircraft repair and

maintenance services, the selling and marketing of air transport services and computer reservation

system (CRS) services, but not to measures affecting air traffic rights or services directly related to

the exercise of such rights (WTO, 2016a).

The challenge facing free trade agreements (FTAs) for transport services is that transport ser-

vices involve different layers of services (e.g., from shipping to port facilities services) and each

service is related to other transport services in complex and integrated ways. The market struc-

ture of each transport service is unique and independent of other transport services. Some ser-

vices (e.g., bulk shipping) are relatively competitive, while others (e.g., liner shipping) are

DOI: 10.1111/twec.12501

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governed by rate-setting conferences, bilateral arrangements or monopolistic and oligopolistic

firms. In addition, many transport services are managed by regional entities and are protected by

strong domestic political lobbies and labour union practices (Munari, 2012). Moreover, domestic

regulations and technical difficulties with land transport systems conflict with GATS even

though most WTO countries have commitments for land transport services in GATS. For exam-

ple, China and Russia use different railway track gauges

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than most other countries, and thus,

railroad companies in those countries have difficulty providing services within China and Russia

(Yeo & Sohn, 2015). Some transport services (e.g., trucking) face challenges in penetrating for-

eign markets even under the GATS because heavy capital investments are required to establish a

business in a foreign country and most trucking companies are small and have limited capital

(World Bank, 2016).

Compared with other service and manufacturing industries, transport industries employ rela-

tively lower-skilled workers (Abizadeh, Pandey, & Tosun, 2007; Buera & Kaboski, 2012). Buera

and Kaboski (2012) showed that most transport industries, except the air transport industry, have

low levels of high skilled workers (e.g., college educated workers). Abizadeh et al. (2007) also

showed that transport industries employ relatively unskilled workers compared to manufacturing

and other service industries. Several studies (Helpman, Itskhoki, Muendler, & Redding, 2012;

Helpman, Itskhoki, & Redding, 2010; Leamer, 1996; Slaughter, 1998; Wood, 1998) showed that

trade liberalisation increases wage inequality between high and low-skilled workers, and some

studies (Bazen & Cardebat, 2001; Biscourp & Kramarz, 2007; de Pinto & Michaelis, 2014; Wood,

1995) provided evidence that trade openness increased the unemployment rates of low-skilled

workers. Thus, to avoid further inequity in wages and unemployment, unskilled workers in

transport industries may be less likely to support trade liberalisation through FTAs (Beaulieu,

Benarroch, & Gaisford, 2011).

Various FTAs reflect the challenges and limitations associated with FTAs in transport services.

The North American Free Trade Agreement (NAFTA) and the Chile-US Free Trade Agreement

are examples. These FTAs do not apply to domestic and international air transportation services

(Chile-US FTA, 2016) and apply to maritime transport services that are limited by domestic regu-

lations, For example, the Jones Act (The Merchant Marine Act of 1920) requires that all goods

transported by water between US ports be carried on US flag ships, constructed in the US, owned

by US citizens, and crewed by US citizens and permanent residents.

Because these challenges preclude unrestricted transport trade commitments, trade openness

has been low compared with other service sectors. Under the GATS, the average Hoekman

index (Hoekman, 1995)

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among Asia Pacific Economic Cooperation (APEC) members in 2003

was 0.19 for all service sectors, and the indices for transport services were lower than the

average for all service sectors, except for auxiliary services (Ishido, 2013). The average

Hoekman indices in 55 countries under the GATS for the air and maritime transport service

industries were below the partial commitment mark in 2008 at 0.2 and 0.25, respectively (Roy,

2011).

A branch of literature focuses on the effects of air and maritime transport liberalisation on the

volume of trade in transport service. Despite the challenges in establishing FTAs in transport

services, the literature found that: (i) liberalising air or maritime transport services increases air or

maritime traffic volumes (Brooks, 2009; Cristea, Hummels, & Roberson, 2014; Piermartini &

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China and Russia use wide railroad tracks (1,520 mm) while most other countries use standard tracks (1,435 mm).

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The Hoekman index (Hoekman, 1995) is one of the most widely used indexes to quantitatively measure service commit-

ments, with scores of 1.0, 0.5 and zero indicating full, partial and no commitment, respectively.

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