# **4.2.5 Tackling discriminatory policy barriers**

Progressively opening up services markets through negotiations remains centrally important to reducing trade costs. But attention also needs to be paid to reviewing the design and implementation of sectoral regulations and associated administrative and licensing procedures to ensure they do not place an undue burden on new entrants and market operators. This latter dimension is primarily what ongoing multilateral discussions of domestic regulation in services and investment facilitation focus on as proponents of the WTO talks on investment facilitation are adamant that these not entail a market access (i.e. liberalization) component.

There is little doubt that creating such a wedge and divorcing investment facilitation from market opening reduces the effectiveness of the investment facilitation initiative and its ability to drive down investmentrelated trade costs. This is unfortunate given that explicitly discriminatory regulatory measures, many of which target Mode 3 transactions, account for a major share of trade costs in services (see Figure 16). Such measures include contestability-impairing foreign equity limitations, discriminatory licensing conditions, forced technology transfer requirements, data localization restrictions, or the non-recognition of qualifications acquired abroad by key personnel employed by foreign established firms.

All of the above measures impose costs on the entry and operation of foreign suppliers and make services markets less efficient and contestable. Restrictions on foreign presence are particularly damaging if they prevent local companies from accessing more and higher quality foreign inputs, therefore benefiting from linkages with foreign companies through participation in regional and global value chain production.

In considering the impact of divorcing investment facilitation from investment liberalization, it bears recalling that the success of the WTO’s Trade Facilitation Agreement governing goods trade relates centrally to its ability to ensure that countries manage their physical borders in a manner that does not nullify or impair the legally binding market access commitments WTO members exchanged at the negotiating table. Facilitating investment may prove challenging in the continued presence of a host of measures that deter market entry, raise the costs of firms, reduce market competition and restrict consumer choice.

Regulatory costs in services show considerable modal and sectoral variance. Figure 16, which draws on the OECD’s Services Trade Restrictiveness Index (STRI), documents the restrictiveness of services policies by sectors and modes of supply. Overall, cross-border supply (Mode 1) is found to face the least trade restrictions of all service sectors. Commercial presence (Mode 3), which involves setting up an office, branch or subsidiary in a foreign country, is the most restricted mode of services supply. Restrictions on foreign direct investment are particularly high in air transport, rail freight transport, as well as in legal and accounting services. The movement of natural persons (Mode 4) also faces high trade costs owing to stringent qualification and licensing requirements, especially in regulated sectors such as engineering, architecture, legal, medical and accounting services. Because of the close links between foreign investment and the deployment of key personnel, impediments to Mode 4 compound Mode 3 establishment and operating costs (Shingal, 2019).

In sum, despite the far-reaching liberalization of host country investment regimes pursued in recent decades, investment in services remains, relative to investment in primary (agriculture, mining) or secondary (manufacturing) sectors, subject to a wider range of entry and post-establishment barriers.

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