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June 3, 2016

Chapter Four: Barriers to Services Trade

I feel like I’ve been gone so long! A lot has been going on in the trade world in the last month, so I’ve been a little busy. In the last few posts I hope I’ve established that trade is (generally) a good thing. Today I want to cover barriers to trade, and more specifically, services trade.

According to the Oxford Dictionary, trade barriers are defined as "an impediment to free trade; specifically a policy or regulation that restricts or discourages trade between countries."

Obviously, from that definition a trade barrier could encompass quite a bit. Traditionally, trade barriers were thought of as tariffs (or taxes) governments placed on goods entering their country. However, barriers can come in all shapes and sizes, which is why it’s important to have tools, like trade agreements, to address them. Below are some common barriers to services trade:

1. The prohibition of free flow of data across borders (barring safeguards of privacy/security)*. Some countries don’t allow businesses to share digital data across borders, which can hinder anything from buying that s’mores cooking set on eBay (I have camping on the brain) to allowing businesses to share internal data across borders. *There is a large EXCEPTION here that I put in parenthesis up above. Governments are never required to share data that is pertinent to the privacy and national security of its citizens. Trade agreements don’t delve into that.

2. Forced data localization of operations, including data storage. This is a huge deal for services companies. Multinational companies generally have a select number of servers around the world to house all of their data. But imagine if they had to keep a server in EVERY single country they operated in. First of all, that is crazy expensive. Second of all, it raises the security risk for the data they do keep. I haven’t even gotten started on the smaller companies that don’t have the funds to place a server in all the countries they want to work in, or the companies that only have a digital/cloud platform they do business from. Basically, forcing companies to place a server in each country they do business in is super inefficient and risky.

3. Discriminatory or unfair treatment of foreign companies participating in a local market. This type of barrier can take on a number of forms, but can be as simple as domestic companies receiving special treatment for license approvals (to do business, etc) compared to their foreign competitors. It’s important to make sure there is a level playing field when doing business in a new market. Read: Fair competition.

4. SOEs distorting competition in a domestic market. State-owned-enterprises (SOEs) are companies that are wholly or partially owned or supported by the government. The SOEs themselves aren’t the problem. It’s when SOEs get special treatment from the government when they compete against private companies in the commercial market. That tends to distort the market, making things unfair for businesses and consumers.

5. Imposing equity caps or restrictions on the type of establishment for foreign companies. Some countries dictate how companies can enter their market, limiting the foreign parent’s ownership in the company or making it partner with a local company in order to do business. The lack of flexibility and uncertainty makes it difficult for foreign companies to succeed in a new market.

These are a few broad examples of barriers to services trade. It is always the goal to eliminate as many barriers as possible (within reason) so that businesses are able to compete fairly and consumers (like us) get the best options for services. Hope that gave a little bit of insight into services trade and trade barriers! Next time on the CSI blog…digital trade!


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