Tradability of Services: The Role of Identity Maintenance

Abstract

This contribution is motivated by two observations that do not seem to have been seen in conjunction up to now. On the one hand, when the “French exception” was inserted in the General Agreement on Trade in Services (GATS) of the World Trade Organization (WTO), this was motivated by the fear that imports especially of cultural services would undermine a country’s identity. On the other hand, while services presently account for up to 70% of the GDP of major industrial countries, their imports of services lag far behind with less than 20% of total imports. This raises the question of whether the desire to maintain a country’s identity might exert a limiting influence on the trade in services. The analysis combines Lancaster’s new theory of demand with (relative rather than absolute) identity maintenance (RIM) to derive a set of acceptable outcomes of service production in characteristics space. For trade in services to occur, the sets of trading countries need to overlap, resulting in three testable predictions: 1) The more stringent the countries’ RIM, the smaller the volume of services trade between them; 2) In the presence of RIM, the volume of trade in services increases with the similarity of the countries’ preference structures; and 3) in the presence of RIM, the volume of trade in services is the lower, the greater the difference in countries’ incomes. While current evidence supports these predictions, it needs to be completed when more data on bilateral trade flows in services become available.