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Measures of Restrictions on Trade in Services Database

Research memorandum

In a collaborative project, the Productivity Commission and the Australian National University have been measuring restrictions on trade in services for a number of economies in Europe, Asia, and North and South America. The results from this work have produced tax equivalents of the price and/or cost effects of restrictions in selected service sectors.

This research is published in Productivity Commission staff research papers and a book, Findlay, C. and Warren, T. (eds) 2000, Impediments to Trade in Services: Measurement and Policy Implications, Routledge, London and New York, December. The citations for this research are included in the databases.

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Measuring the effect of restrictions on trade in services

Restrictions on trade in services is more complex than restrictions on trade in goods. Restrictions on goods trade usually take the form of tariffs. These directly affect the price of foreign goods only, and this can be measured relatively easily by the size of the tariff. In contrast, restrictions on trade in services usually take the form of government regulation. These regulations can affect the entry and operations not only of foreign service suppliers, but also of new domestic service suppliers, and this can directly raise the price or cost of both foreign and domestically supplied services.

A methodology, developed from the collaborative project, estimates the direct price and/or cost effect of restrictions on trade in services. This methodology involves two steps. First, qualitative information about regulations is converted into a quantitative 'restrictiveness index'. Second, the effect of this measure of restrictions on prices and/or costs is estimated.

The trade restrictiveness index - classifying and quantifying restrictions on trade in services

The extent of government regulation of a particular service is quantified using a trade restrictiveness index. Trade restrictiveness indexes summarise the nature and extent of restrictions on trade in services for each economy. The more restrictions and the greater their severity, the more restrictive an economy is judged to be under the index.

Information is collected for each economy on the government regulation of a particular service and classified according to whether the restrictions are:

  • imposed on establishment or ongoing operations; and
  • non-discriminatory (treat domestic and foreign service suppliers equally) or discriminatory (treat foreign service suppliers differently from (typically less favourably than) domestic service suppliers).

Restrictions on establishment often include licensing requirements for new firms, restrictions on direct investment in existing firms and restrictions on the permanent movement of people. Restrictions on ongoing operations often include restrictions on firms conducting their core business, the pricing of services and the temporary movement of people. Depending on how each of these restrictions apply to domestic and foreign service suppliers, they could be non-discriminatory or discriminatory. The references listed below give details for each service sector.

A trade restrictiveness index score is calculated for each economy using a methodology of scores and weights. Restrictions that are common to a number of economies are grouped into restriction categories. Scores are then assigned to each restriction on the basis of a judgement about how stringent it is. The more stringent the restriction, the higher the score. Scores range from 0 to 1.

The restriction categories are then weighted together according to a judgement about their relative economic cost. The weights are generally chosen so that the total restrictiveness index score for an economy ranges from 0 to 1.

An index score is calculated separately for domestic and foreign service suppliers. A foreign index is calculated to measure all the restrictions that hinder foreign firms from entering and operating in an economy. It covers both discriminatory and non-discriminatory restrictions. A domestic index represents restrictions that are applied to domestic firms and it generally only covers non-discriminatory restrictions. The difference between the foreign and domestic index scores is a measure of discrimination against foreigners.

Price and/or cost effect measures

Price and/or cost effect measures are calculated using econometric models to estimate the effects of restrictions on the price and/or cost of services. These models have been developed from economic theory and include all the relevant determinants of economic performance (eg price, profit margin, cost or quantity) of service firms in that service sector - industry and economy-wide influences - plus a measure of trade restrictions, as measured by the trade restrictiveness index. Where possible, the subcomponents of the restrictiveness index are entered separately so that the econometrics can replace judgement in determining the relative weights to be attached to each subcomponent.

The econometric model is then used to estimate the determinants of economic performance in that service sector. Price and cost measures are calculated from the results of the econometrics and where necessary, a profit or quantity effect is converted to a price or cost effect.

Depending on the performance measure chosen, the results provide an indication of the extent to which restrictions affect price-cost margins, and therefore create economic rents, or raise costs above what they otherwise would be in the absence of restrictions.

The price and/or cost effect measures are classified in the same way as under the trade restrictiveness index, namely, according to whether they are on establishment or ongoing operations, and according to whether they are discriminatory or non-discriminatory.