Services liberalization and global value chain participation: New evidence for heterogeneous effects by income level and provisions

• Author: Woori Lee
• Published date: 01 August 2019
• DOI: http://doi.org/10.1111/roie.12402
• Date: 01 August 2019

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© 2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/roie Rev Int Econ. 2019;27:888–915.

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INTRODUCTION

Global value chains (GVCs) have transformed trade and development since the late 1980s by frag-

menting the production process across borders (Baldwin, 2013, 2016). Coming under multiple labels

such as trade in tasks, international fragmentation, offshoring, and the second unbundling, GVCs have

attracted enormous attention from academics and policy makers in the developing and developed

world.

However, studies on GVCs and trade have focused mostly on the manufacturing sector, despite the

critical role of services. One of the most startling new facts concerning services has emerged from

the “value added trade” concept (Johnson & Noguera, 2012; Koopman, Wang, & Wei, 2014; Timmer,

Received: 26 February 2018

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Revised: 20 February 2019

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Accepted: 8 March 2019

DOI: 10.1111/roie.12402

ORIGINAL ARTICLE

Services liberalization and global value chain

participation: New evidence for heterogeneous

effects by income level and provisions

WooriLee

Graduate Institute Geneva and the World

Bank, Geneva, Switzerland

Correspondence

Woori Lee, Graduate Institute of

International and Development Studies,

C.P. 1672, 1211 Geneva 1, Switzerland.

Email: woori.lee@graduateinstitute.ch

Funding information

Swiss National Science Foundation, Grant/

Award Number: 100018 162511

Abstract

Participation in global value chains (GVCs) is a key element

in the industrialization strategies of many developing na-

tions. This paper investigates the role of services liberaliza-

tion in promoting participation in GVCs. Using the gravity

framework, I examine the impact of services trade agree-

ments on gross trade and GVC trade (backward and forward

participation) in goods. I find that services trade agreements

promote both, but especially GVC trade, although the ef-

fects are heterogeneous: the impact is bigger for developing

nation exporters. Moreover, services agreements that allow

the export of services without local presence (nonestablish-

ment rights) are particularly important in fostering GVC

participation.

JEL CLASSIFICATION

F13; F14; F15; F63

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889

LEE

Erumban, Los, Stehrer, & De Vries, 2014). A joint OECD–WTO project (TiVA) found that services

contribute more than 50% of total value added embodied in the exports from the United States, United

Kingdom, France, Germany, and Italy. Even for China, traditionally viewed as a goods exporter, about

one‐third of its value added exports come from the service sector.

The importance of services in GVCs, however, goes beyond their significant contribution to value

added. It has been argued that a well‐functioning services sector facilitates fragmentation, leading

to an international reallocation of production stages (Deardorff, 2001; Francois, 1990c; Jones &

Kierzkowski, 1990). The popularization of the GVC concept has highlighted this connection, with

many authors emphasizing how services are the glue that holds supply chains together and ensures that

they function in a fluid manner (Egger, Francois, & Nelson, 2015; Francois, Manchin, & Tomberger,

2015; Low, 2013).

Besides the rise of GVCs, another phenomenon—not unrelated—that characterizes trade since

the 1990s is the rapid surge of bilateral and plurilateral trade agreements.1

This proliferation has not

only been in terms of quantity but also the quality or “depth”. Recent trade agreements often include

provisions on services, investment, environmental and labor standards, as well as tariff reductions

(Hofmann, Osnago, & Ruta, 2017).2

These deep agreements are partly motivated by the interna-

tional expansion of production networks, since harmonization of certain national policies facilitates

cross‐border business and allows GVCs to work smoothly (Lawrence, 1996). Furthermore, the actors

involved in regional trade agreements (RTAs) have become more diverse. In 2010, South–South trade

agreements represented two‐thirds of all RTAs in force, compared with barely 20% three decades

earlier (WTO, 2011).

Using the variation in the coverage and members of RTAs, I examine the heterogeneous impact

of services liberalization on countries’ GVC participation. Specifically, I test whether a country pair

engages in more GVC trade when it has freer trade in services via RTAs, using the gravity equation.

By focusing on manufacturing GVCs, I seek to identify the role of services trade liberalization beyond

boosting trade in services, but as the “enabler” for a broader unbundling of production. The outcome

variable, therefore, is GVC exports (measured by exports in intermediate goods, backward and for-

ward linkages based on international input–output tables) as well as gross exports in manufacturing

between country pairs. The variable of interest is a dummy variable for an RTA in services. However,

taking into account the asymmetric and nondiscriminatory nature of services liberalization, the spec-

ification is adjusted to allow for heterogeneous effects by countries’ income levels as well as specific

provisions. To address the endogenous adoption of RTAs, I include country‐pair fixed effects and

hence, identify the effect of services trade agreements from country pairs that enter into RTAs during

the sample period (Baier & Bergstrand, 2007).

I find that services trade agreements (or substantive provisions on services) increase gross exports

and, to a larger extent, GVC exports in manufacturing from developing (South) to developed countries

(North), and between developing countries. The trade‐enhancing effect of RTAs that cover services

is more than double the effect of RTAs that only cover goods for Southern exporters. It is intuitive

that services RTAs have an asymmetric effect on Southern and Northern economies, considering

that services liberalization essentially brings “good” services into the South, hence reducing the high

coordination cost of carrying out supply chain activities in the South. Regarding specific provisions,

services agreements that allow the export of services without local presence (i.e., right of nonestab-

lishment) significantly increase GVC exports in manufacturing. This novel finding emphasizes that

reducing the fixed costs of building services linkages between production blocs is key to promoting

production sharing.

This paper is related to three groups of literature. First, it contributes to the small but growing

body of studies on the role of services in GVCs. Early theoretical research by Jones and Kierzkowski