Is the crisis provoking protection in services?

Borchert, Ingo and Mattoo, Aaditya (2009) Is the crisis provoking protection in services? In: Evenett, Simon J, Hoekman, Bernard and Cattaneo, Olivier (eds.) Effective Crisis Response and Openness: Implications for the Trading System. Centre for Economic Policy Research, London, pp. 345-362. ISBN 9781907142017

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Abstract

In this chapter, we first examine (in Section 2) changes in US policy for any sign of explicit protection so far, and we find only a few examples. Each is of limited economic significance, and to some extent is constrained by multilateral or regional trade rules (Section 5). We also identify certain developments that could lead to more subtle forms of protection – notably, increased government ownership of, and conditional financial support to, firms, as well as the growing political and social aversion to „moving jobs abroad‟. These nascent forms of protection could have much more serious economic impact because they affect a much larger share of economic activity and are not meaningfully restrained by international rules.

An examination of recent trends in US services imports in Section 3, however, reveals no sign of adverse policy effects. Even as goods imports have declined, by as much as one-third, imports of private services as a whole, and business services in particular, have continued to grow. Imports of transport, travel, and financial services have declined but that was only to be expected in the current circumstances.

The domestic services sector is, unfortunately, less resilient. We show in Section 4.3 that services employment has not suffered the precipitous declines seen in durable goods and construction (of 12 percent since April 2008), but it too has declined, by around 4 percent. How can we reconcile sustained growth in imports of business, professional, and technical services (by about 7 percent) with significant declines in employment in domestic business and (or) professional services (by about 6 percent)? One possibility is that firms in industrialised countries, under increased pressure to cut costs during the crisis, are turning to outsourcing.

While growing trade and declining employment can generate pressure to protect, there are other countervailing forces (Section 4). Industrialised countries‟ firms have made large relationship-specific investments in outsourcing intermediate services; in turn, developing countries have become important markets for industrialised countries‟ banks, retailers, telecommunications, and transport providers. As a result, the business functions of customers and suppliers of services are highly intertwined. Any protectionist action would be self-defeating, because of its direct costs and because it could provoke retaliatory protection.

Item Type: Book Section
Schools and Departments: School of Business, Management and Economics > Economics
Subjects: H Social Sciences
Depositing User: Ingo Borchert
Date Deposited: 14 Jun 2012 11:53
Last Modified: 14 Jun 2012 11:53
URI: http://sro.sussex.ac.uk/id/eprint/39603
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