Agreement with the EU; and (iv) also contrast this with the effects of bringing its MFN tariff rates on manufacturing goods closer to EU preferential rates. These comparisons give important insights into Tunisia’s trade policy priorities over the next few years.

# **2. Methodological approach to measuring services trade barriers**

Barriers in services trade vary by sector and a sector-by-sector analysis is needed to identify policy restrictions to entry and competition in services. The analytical framework that has been used to measure services trade barriers comprises three stages.

The <u>first stage</u> is to collect qualitative information about regulatory restrictions affecting services delivery, and to convert it into a quantitative index (or indexes), using weights that reflect the relative severity of the different restrictions. Sometimes the weights are based on a priori judgements drawn from detailed knowledge of the industry concerned. Sometimes the weights are derived using statistical techniques, giving greatest weight to restrictions that have the greatest variability within the sample. Studies along these lines include the OECD studies of product market regulation (OECD 2005a, 2005b, Conway, Janod and Nicoletti 2005), Findlay and Warren (2000), Kalirajan (2000), Kalirajan et al. (2000), Nguyen-Hong (2000), Doove et al. (2001), Copenhagen Economics (2005) and OECD (2005c).

Since services trade barriers typically operate behind the border, the <u>second stage</u> is to quantify the effects of these indexes of services trade barriers on some behind-the-border measure of economic performance — often prices or price-cost margins, but sometimes quantities or costs — while controlling for all the other factors that affect economic performance in that market. These econometric results are used to construct the counterfactual — what economic performance would be in the absence of the services trade restrictions, holding all other factors constant.

This does not give a ‘tariff equivalent’, because the ‘tariff equivalent’ concept (a) assumes services are traded primarily cross-border, whereas most are traded behind the border via the movement of people or capital, and (b) assumes that domestic and foreign services are perfect substitutes, whereas most are highly differentiated to particular users. Instead, the counterfactual comparison gives a behind-the-border ‘tax equivalent’, if the restrictions have raised price-cost margins, or a behind-the-border ‘productivity equivalent’, if the restrictions have raised real resource costs. Econometric studies along these lines include Findlay and Warren (2000), Gonenc and Nicoletti (2000), Steiner (2000), Kalirajan (2000), Nguyen-Hong (2000), Barth, Caprio and Levine (2004), Clark, Dollar and Micco (2004) and OECD (2005c).

In the <u>third stage, the ‘tax equivalents’ or ‘productivity equivalents’ are entered into a</u> computable general equilibrium model, which is then used to project the direct and indirect effects of services trade liberalization for each sector and for the economy as a whole. Examples include Dee and Hanslow (2001), Dee, Hanslow and Phamduc (2003), OECD (2004) and Copenhagen Economics (2005).

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