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Institute for International Integration Studies IIIS Discussion Paper - page 7 / 41





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restrictions in both the origin and destination countries. Overall, EC (2002) concludes there is a strong bias against foreign producers in the supply of services in the EU and this serves to underline the importance of the services directive currently under debate within the EU.2

2.2 Estimation of Tariff Equivalents

Much analysis has already been undertaken on quantitatively assessing the effects of non- tariff barriers (NTBs). Anderson and van Wincoop (2004) survey and critique the literature on modelling and quantifying trade costs. Ferrantino (2006) provides a more detailed review of the literature that focuses specifically on quantifying NTBs to trade in goods.

In this section, the three most widely used methods for quantifying NTBs to services trade and the subsequent generation of the tariff equivalents of these barriers are described: frequency indexes, price-based measures and quantity-based measures. These techniques can be applied to goods or services trade, although the majority of the literature to date has focussed on the former.

A frequency index is essentially a list of the barriers that are in place, in this case the barriers to the import of services into a country, which is used as a measure of the policy stance of that country. Typically in the case of services, a country’s GATS commitment schedule is used as the source for information on barriers imposed by each country.3 Hoekman (1995) was one of the first to construct such a frequency index. The tariff equivalents are calculated by assigning a tariff equivalent to the most protectionist country for the sector in question. Other countries’ tariff equivalents are calculated by comparing their coverage ratios (the level of their commitments) relative to this benchmark.

There are severe limitations to this method, the principal being the arbitrary estimate of the tariff equivalent of the most protectionist member. In addition, the effect of the same barrier may vary across sectors or countries (Whalley, 2004) and the index is based on the GATS classification rather than information on actual policies.4 Despite these drawbacks, Hoekman’s (1995) estimates and approach have been widely used in the literature.

Others have developed ways to improve frequency indexes to better reflect actual barriers. Researchers at the Australian Productivity Commission (APC) have developed a series of augmented frequency indexes for a range of sectors and countries.5 Improved data sources (in many cases based on surveys) are used to assemble data on actual barriers to trade (rather than based on GATS commitments), allowing a better distinction

2 For more information on the services directive see: http://ec.europa.eu/internal market/services/services-dir/index en.htm

3 Under the General Agreement on Trade in Services (GATS) each WTO member country must list the level of market access and degree of national treatment they provide for each of the four modes of supply in each service sector. This is referred to as a country’s schedule of commitments. A low number of commitments implies a relatively protectionist policy position.

4 There is some evidence to suggest that GATS commitments are close to actual policies. For example, Mattoo (1999) finds a close resemblance in many cases in the financial services sector.

5 Most of the APC research is published in Findlay and Warren (2000) and is available at http://www.pc.gov.au/research/rm/servicesrestriction/index.html. Dee (2004) provides a broad summary of the APC methodology.


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