Prefereal Trade Agreeme Serves ad Is mpa o Welfare Masaru Umemoo Researh Asssa Professor, ICSEAD Worg Paper Seres Vol. - Jue The vews epressed hs publao are hose of he auhor(s) ad do o eessarl refle hose of he Isue. No par of hs boo ma be used reprodued a maer whasoever whou wre permsso eep he ase of bref quoaos emboded arles ad revews. For formao, please wre o he Cere. The Ieraoal Cere for he Sud of Eas Asa Developme, Kaushu
Prefereal Trade Agreeme Serves ad Is mpa o Welfare Masaru Umemoo The Ieraoal Cere for he Sud of Eas Asa Developme, Japa umemoo@sead.or.p Absra Ths paper eames welfare effes of prefereal aess o a serve seor b a prefereal rade agreeme (PTA) serves. The aalss s odued wh a model where he domes serve mare s assumed o be mperfel ompeve. Ths paper also vesgaes he eve for he serve provders from he parer our of he PTA o ompee wh or ollude wh he domes moopols. The resuls dae ha he pro-ompeve effes of he PTA ause he oal profs of he parer our based frms o rease ad maes he domes osumer beer off. I addo, eve suaos where olluso wh he domes moopols s permed, he parer our s serve provder usuall ops for ompeo wh he domes moopols f here es few resros for he suppl of serve he domes mare. JEL lassfao: F; F; F5 Kewords: Prefereal Tradg Arrageme; Trade Serves; Imperfe Compeo
Prefereal Trade Agreeme Serves ad Is mpa o Welfare Masaru Umemoo. Iroduo Mullaeral rade egoaos orgall foused o rade goods ad dd o over rade serves. Ths suao has haged se he Urugua Roud ad he appearae of he World Trade Orgazao (WTO). Trade serves beame he ma op of he mullaeral rade egoao uder he Geeral Agreeme o Trade Serves (GATS). However, s slow ad dfful o promoe serve rade lberalzao mullaeral egoao suh as GATS. Ths s beause merel abolshg ross-border barrers suh as arffs ad quoas s o suffe o eable serve rade lberalzao. The ompeveess of frms he serve seors s usuall large par flueed b he omple regulaos he domes mare of eah our. Therefore, he lberalzao of serve rade would o beome meagful uless varous domes regulaos eah our were elmaed or adused. Uforuael, serve seors geeral have more regulaos ha maufaurg seors. Therefore, f he elmao of varous domes regulaos eah our requres deso b osesus of all members of he WTO, he serve rade lberalzao wll o proeed qul or smoohl. Thus, ma oures so far have bee aempg o fd dvdual parer oures ad esablsh prefereal rade agreemes (PTAs) serves wh hem. I fa, ma ree PTAs have serves dusres luded as a maer of ourse. These PTAs promoe he lberalzao of rade serves alogsde he lberalzao of he rade goods bu ol bewee dvdual parer oures, ad o bewee groups of aos. I hs ase, as ol he parer our s serve provders a aess he domes mare uder prefereal odos, he queso we eed o address s,
whh of he wo oures gas ad whh loses. There s eesve leraure o he welfare effes of PTAs o rade goods. However, he aalss of PTAs serves s sll beg developed. Eve leraure ha eames rade serves from a heoreal sadpo s sll a relavel lmed. To gve oe eample, Baer ad Bergsrad () eamed he effes of a free rade agreeme (FTA) serves. The researh assumed ha serves have hgher or more prohbve raspor oss ha goods, ad obaed smlar resuls o he ase sud of a FTA goods. Geerall, seems o be aural o ge smlar resuls parularl for ross-border serve rade. There are, however, some mpora dfferees bewee rade goods ad serves. As oed b he lass wor o he serves dusr, Hll (977), a ral dso bewee goods ad serves s ha serve rasao requres prom bewee provder ad osumer. The mporae of prom for serve rasaos meas ha rade serves ao be odued b ross-border rade aloe bu requres he esablshme of loal afflaes (.e. dre vesme). Ths paper wll develop a model ha a be appled for he aalss of boh ross-border barrers ad barrers o loal esablshme. Cosequel, rade lberalzao serves requres he elmao of boh ross border ad domes resros, whh lm mare aess serve seors. Ths paper does o provde a omprehesve aalss of PTAs serves, bu fouses o he welfare effes of prefereal elmao of resros agas aess o he domes serve seors b a PTA serves uder a mperfel ompeve mare seg. The remader of he paper s orgazed as follows. I Seo, we develop a model of rade serves uder odos of mperfe ompeo. I Seo, we eame he welfare effes of a PTA serves wh wo seps of lberalzao: elmao of resros ad promoo of ompeo. Seo 4 eames he odos uder whh he parer our s frms wll brg ompeo o he serves seor o hallege he loal moopols. Fall, he resuls are summarzed Seo 6. See Maruse (989), Fraos (99), Hoema (994), ad Fraos ad Wooo (). Sampso ad Sape (985) dsuss he aalal mplaos of prom serve seors. 4
. The model To eplore effes of a PTA serves, hs seo gves a model of a parular serve seor ha s mperfel ompeve. I addo o he domes dgeous frms, here are foreg frms who provde serves he home our. There are, however, barrers proeg he domes frms from ompeo wh foreg frms. Wh hs framewor, we eame he mplaos of a PTA whh elmaes hese barrers ad promoes he parer our s frms aess o domes osumers. I hs model, here s he home our (), a parer our (), ad a o-parer our (). There are deal frms our ( {,, } ) ad he provde a parular serve he home our s mare. The verse demad for he serve he home our s p q, () where p s he mare pre of he serve ad mare b a our based frm. q s he qua suppled o he Idgeous frms he home our fae a osa margal os, whle he foreg frm ha s based our addoall has o pa o provde he serve o osumers he home our. Ths os ma refle o us ross-border arffs, bu all oss semmg from he resros o foreg serve provders he home mare. Cosequel, margal oss of eah frm are MC. () Ths model mposes he Couro assumpo ha frms se qua sraegall wh o subseque reao b ompeg frms. Usg smmer, s assumed ha eah frm hooses he same level of oupu as oher frms orgag from he same our. The serve provder s pereved margal reveue s ( ) q q MR. () The serve provders ma also sell serves a hrd mare. However, we are assumg mare segmeao here. 5
Equag margal reveue () o margal os () for eah frm elds he reao fuo q ( q ) ( ) q ( ). (4) The serve provder s reao urve a be eraed wh eah oher our s reao fuos o esablsh he po of mare equlbrum. The equlbrum oupu levels are ( ) ( ) q. (5). Effes of a Prefereal Trade Agreeme Serves We ow osder he mplaos for osumer welfare ad he profabl of eah our s frms whe he ompeve sruure of he serve dusr s haged as a resul of a PTA bewee he home our (our ) ad he parer our (our ). Ths hage a arse boh hrough gvg he frms whh are based he parer our beer mare aess o he home mare ad hrough forg he home mare for he serves o be more ompeve... Elmag resros for mare aess Aess o he home mare of he serves for he parer our based frms s mproved b redug, all he resros he parer our based frms faes serve suppl o he home our s (our ) mare. If he parer our based frms would be aorded reame equvale o frms whh have he rgh of esablshme our s mare whou a resros. Cosequel he would be able o ompee o a equal foog wh he frms dgeous o our. We a esablsh he pre of he serve a suao where he dgeous 6
7 frms of our behave o-ooperavel b subsug he equlbrum oupus, Equao (5), o he verse demad fuo, Equao (), eldg ( ) h h p (6) Thus, equlbrum profs are alulaed b subsug Equao (), (5), ad (6) ( ) ( ) π. (7) The omparave sa aalss llusraes he effes of redug he serve rade barrer,, o pre p, ad profs of eah our s frm, π : > h h p, (8) ( ) ( ) > π, (9) ( ) ( ) ( ) < π, () ( ) ( ) > π. () Aordg o he above equaos (8)-(), he mare pre falls as he barrers ome dow se all serve provders fae progressvel reasg ompeo from he parer our based frms, resulg more ompeve pres. The lower he barrer o he parer our based frms aused b a PTA formao, he larger her
8 mare share ad her profs, whle he home dgeous frms ad he o-parer our (our ) based frms suffer a drop profabl. Whe all he resros agas our s frms operag our s mare are elmaed, he dgeous ad parer our based frms ompee uder equal odos ad reeve he same level of profs as eah ohers... Ireasg esablshme of serve provders ad promog ompeo We ur e o effes of reasg esablshme of he parer our based serve provders. Wh he omparave sa aalss of hs paper, we llusrae he effes of reasg he umber of he parer our based frms, o he mare pre, p, ad profs of eah our s frm, π. < h h p, () [ ] < π, () ( ) ( ) < π, (4) ( ) ( ) [ ] ( ) ( ) [ ] < π. (5) Aordg o hese resuls, Equaos ()-(5), all frms suffer redued profs. Ths s beause he umber of ompeors rease ad eah frm loses some of s share he home mare. However, se he mare beomes more ompeve, he mare pre of he serves fall ad osumers welfare reases.
Neher he profs of eah frm or he oal ombed profs of all he frms ha are dgeous o he home our or are based he o-parer our of he PTA rease se he umber of frms does o rease hs eperme. I a suao where he umber of parer our based frms reases happes o he oal profs of hose frms? Π [ ] ( ) > Π π (6), wha Aordg o Equao (6), larger umbers of he parer our based frms wll lead o a rease he osumers welfare he home our ad hgher oal profs of he parer our based frms, despe lower profs of eah dvdual frm he mare. 4. Codos for Avodae of Colluso wh a Idgeous Moopols Ma of he serve seors, suh as bag, surae, ad eleommuaos, have bee regulaed more heavl ha he maufaurg seor. These regulaos have helped o ol o repress ompeo drel, bu also ed o help he domes moopols or arel o survve. I a suao where he domes frms have alread made a arel or he mare has bee moopolzed, s usuall dfful for oher domes frms o eer he mare. Foreg serve provders, however, mgh be able o eer he moopolzed mare, ad brg pressure o rease ompeo. Domes resros ofe blo foreg ompaes from eerg he domes mare. I order o rease ompeo ad eradae moopols odos he domes mare, s eessar o abolsh prohbve resros ad rease he umber of provders eerg from foreg oures. I hs seo, he effes of a PTA serves ad a dssoluo of he domes moopols are dsussed. So far, has bee assumed ha eah frm behaves depedel ad egages pure Couro ompeo wh eah oher he domes serves mare. Ths seo, however, 9
assumes ha he serve provders of he parer our of he PTA have a rgh o hoose wheher o ompee wh or o ollude wh he domes moopols (.e. o mae a arel wh a dgeous frm). The verse demad fuo of he serves he home our s [( m ) q ( m ) q q ] p, (7) where m s he umber of he our based frms ha ollude wh he dgeous moopols he home mare of he serve. The assumpo of he margal oss eah our s frms does o hage from he oe we se he seo. Se he foreg serve provders ompee wh eah oher he home mare, he margal reveue of eah frm of our ad are he same as he prevous seos: [( m ) q q ( m ) q ] MR, (8) [( ) q ( m ) q ( m ) q ] MR. (9) The ospraors from our, however, ollaborae wh he dgeous moopols ad adus her serve oupu b he same apaed amou. Therefore, he pereved margal reveue of he dgeous moopols ad our s ospraors s [ ( m ) q ( m ) q q ] MR. () The, he frms equlbrum levels of oupu are esablshed b he erao of he orrespodg reao fuos: q q q ( m ) ( m )( m ), () ( ) ( m ), () ( m )( ) ( m ). () Compared o Equao (5), he equlbrum qua of oupu whe here s o moopol power or olluso, eah frm supples he same level of oupu as before he formg of a PTA bewee our ad our ad he gvg o he parer our s frms permsso o ollude wh he domes moopols. We a esablsh he equlbrum pre of he serve ad prof levels whe he home frm s a moopols wh he followg equaos:
p ( m )( ) ( ) (4) m [ ( m ) ] ( m )( m ) π, (5) [ ( )] ( m ) π, (6) [ ( m )( ) ] ( m ) π. (7) Smlarl, ompared o Equao (6) ad (7), he equlbrum pre of he serve ad profs of eah frm whou a moopols, hose wh a moopols are eal he same uless m >. The, wha happes whe our ad our form a PTA serves ad offall perm he parer our s frms o ollaborae wh he home moopols? If some of he parer our s frms dede o ollude wh he moopols (.e. o o he home frm s arel), hs would mea a rease m. Is effe o he serve pre s p m ( ) [ m ] >. (8) As Equao (8) shows, he more he parer our based frm olludes wh he home moopols, he hgher he serve pre beomes. Ths s beause olluso bewee he home moopols ad he parer our based provders represses he degree of ompeo he home serve mare. The effes of reasg umbers of parpas he arel o he home dgeous frm ao be oluded from he omparave sa aalss used hs model. However, ma be possble ha he arelzed parer our s frms apure a par of he moopols s ome from he home dgeous frm. If hs s so, he more he parer our based frm olludes wh he home moopols, he lower profs of he dgeous serve provder beome. O he oher had, he effes o he profs of he foreg serve provders ha do o o he olluso s π m [ ( )] ( m ) >, (9)
π m [ ( )][ ( m )( )] ( m ) >. () Ths resul meas reasg he umber of osprg frms rases he profs of foreg depede frms regardless of wheher he are based he parer our or o. Ths s beause he a beef from he effes of he dereased level of ompeo brough abou b he olluso. To sum up, olluso of he parer our based frms wh a domes moopols auses a reduo he level of serve o he home osumers ad, probabl, a derease he profs of he home moopols 4. Therefore, he home our eeds o be areful ha he parer our s frms do o ollude wh he moopols afer formg a PTA ad permg free av o he parer our s frms he home mare. A parer our s frm seles o ollude wh he home moopols whe he prof uder olluso s larger ha uder ompeo wh eah oher. Therefore, f he home mare of he serve has a evrome whh a parer our s frm s able o ompee o a eve foog wh he home our s frms, ad hus geerae suffe profs hrough ompeo, olluso wll o happe. Oe of he was o mae he parer our s frm ompee wh he home moopols s o rela he resros o provdg he serve he home mare. Fgure llusraes a smulao of he effes o he profs of he parer our s frm of a relaao of resros odos of olluso ad o-olluso. 5 Fgure demosraes ha he more resros are eased (.e. he value of dereases), he less he profs of a frm whh olludes wh he home moopols, ad he greaer he profs of oe whh ompees. I hs smulao, whe he value of s less ha, a parer our based frm would sele o ompee raher ha ollude wh a home moopols o oba hgher profs. Ne, b usg a smulao, we vesgae he effes o he profs of eah frm ad o osumer s welfare of a PTA ad he relag of regulaos for he parer our based frms. Fgure llusraes he level of profs of a parer our based 4 I a suao where effes of eoom of sale are uusuall srog or ha he foreg maageme resoures mproves produv, however, he resuls ma dffer. 5 Ths smulao ses 5, m, ad.
frm a ase where ad as he fuos of he umber of olluded frms. Frs, we wll see ha he umber of he osprg frms beomes he ase. Ths s beause he prof level of a osprg frm would be hgher ha ha of a depede frm uder hose odos. However, here are o beefs osprg wh a home moopols whe. These are he resuls alread demosraed Fgure. Addoall, he smulao Fgure demosraes he effes o profs of he home moopols. The prof of he home moopols s eal he same level as ha of he osprg parer our s frm. Therefore, aordg o Fgure, se he home moopols ould oba hgher profs whe he resros are ompleel abolshed, he home moopols would ompee wh all he foreg based frms ad oba hgher profs ha he ase of where olludes wh a parer our based frm. I oher words, ompeo, sead of olluso, maes he home dgeous frm beer off. I addo, promog ompeo redues he pre level of he serve, ad reases he beefs o domes osumers. The ol loser b he PTA elmag resros for he parer s he o-parer our s frms aga. Ths s beause he sffer ompeo auses he o-parer our s frm o be worse off. 5. Coluso Nearl ever maor PTA ow has a serves dmeso. However, serves have more omple modes of rade omparso wh goods: o ol ross-border eraoal rade bu also rade hrough loal esablshmes. For hs reaso, oras o rade goods, egoaos for rade serves ae plae o ol ross-border rasao bu also vesme aspes. The approah hs paper s o use a model of a olgopol suao o vesgae he welfare effes of a PTA serves o domes, parer ad o-parer our s frms ad o domes osumers. The oluso s ha eah poeal beef from he PTA serves depeds rall o he hage he degree of ompeo he domes serve
mare. The frs aalal resuls Seo, gve a Couro ompeve serve dusr, are ha he prefereal mare aess for he parer our s frms (elmag resros ad reag hem as domes frms) resuls he parer our s serve provders havg a bgger mare share ad profs; dgeous ad o-parer our s serve provders beomg less profable, ad he home-mare pre drops. Moreover, osderg he effes of a rease he umber of he parer our s serve provders he domes mare afer formg he PTA, he mare of he serve beomes more ompeve ad redues profs of eah frm ad he domes pre of he serve. However, I a auall boos he mare share ad profs of he parer our s frms oal. The las fdgs from he aalss of hs paper are relaed o he eve for brgg parer our s frms o a domes moopols. Whe he domes resros o he parer our s frms eerg he mare are hgh eough, he frms are lel o ollude wh hose of he domes moopols. Ths represses he degree of ompeveess he home mare, ad reases he domes pre of he serve ad redues he welfare of he domes osumers. To preve olluso bewee dgeous ad parer our s frms ad mprove he welfare of he domes osumers, he domes pol maers mus suffel redue he serve rade-relaed barrers ad promoe ompeo bewee ompaes he dusr. I odos of low rade barrers, s more beefal for he parer our s frms o ompee wh he domes moopols frm ha o ollude wh. Addoall, our smulao promog ompeo maes hgher beefs o ol o he domes osumers bu also o he domes dgeous frm. 4
Referees: Baer, So L., ad Jeffre Bergsrad, (). Ieraoal Trade Serves, Free Trade Agreemes, ad he WTO, Rober M. Ser, Edor, Serves he Ieraoal Eoom, A Arbor, Uvers of Mhga Press. Fraos, Joseph, (99), Ireasg reurs due o spealzao, moopols ompeo, ad rade produer serves, Caada Joural of Eooms, Vol. No., pp. 9-4. Fraos, Joseph ad Ia Wooo, (), Mare sruure, rade lberalzao ad he GATS, Europea Joural of Polal Eoom, Vol. 7 No., pp. 89-4. Hll, Peer, (977), O goods ad serves, Revew of Iome ad Wealh, Vol. 4 No. 4, pp. 5-8. Hoema, Berard, (994), Coepual ad polal eoom ssues lberalzg eraoal rasaos serves, Ala Deardorff ad Rober M. Ser, Edors, Aalal ad Negoag Issues he Global Tradg Ssem, A Arbor, Uvers of Mhga Press. Maruse, James R., (989), Trade produer serves ad oher spealzed ermedae pus, Amera Eoom Revew, Vol. 79 No., pp. 85-95. Sampso, Gar ad Rhard Sape, (985), Idefg he ssues rade serves, The World Eoom, Vol. 8 No., pp. 7-8. 5
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