N ° 2008 - 53 Trade in services : cross - border trade vs commercial presence

One of the main characteristics of trade in services is that a limited number of services can be traded across the border. In fact, a larger number of services require physical contact between consumers and producers in order to allow the transaction to occur. In this respect, trade in services has been classified by four modes of supply: Mode 1, cross-border trade; Mode 2 , consumption abroad; Mode 3, commercial presence and Mode 4, movement of natural persons. This classification has already been widely recognised by economists, and has been adopted as a framework for current multilateral negotiations under the GATS. However, little research has been conducted regarding the interrelations between these modes of supply. Furthermore,it is tempting to assert that new communication technologies could exempt services from the need for physical presence, and in this context, they can generate a substitution effect from services originally provided by factor movement (Mode 3 andMode 4 ) and consumer movement (Mode 2 ) to trade in services supplied by Mode 1. However, new stylized facts on the United State’s commercial presence and cross border trade in services contradict this assumption. Not only is commercial presence the main mode of supply of US service exports, but it has also been growing at a faster rate than Mode 1. The purpose ∗I thank Carsten Fink, Marion Jansen, Juan Marchetti, Joscelyn Magdeleine, Philippe Martin and Martin Roy and participants at the European Trade Study Group Conference, September 2007, Athens. and to participants of the Ph.D. Support Programme, WTO, Geneva, September 2007. †Centre d’Economie de la Sorbonne (TEAM), Université de Paris 1 and ParisJourdan Sciences Economiques (PSE), 48 bd Jourdan, 75014, Paris, France. E-mail: [email protected] or [email protected] 1 ha ls hs -0 05 86 21 7, v er si on 1 15 A pr 2 01 1 of this paper is to investigate this puzzle by analyzing the relationship between Mode 1 and Mode 3. We postulate that these two modes of supply facilitate each other, and that, in contrast to the manufacturing sector, this complementarity might occur even at the level of horizontal investment. For the empirical analysis we make use of bilateral data on US majority-owned foreign affiliate operations (MOFAs) for both the services and goods sectors. After using two different estimating techniques results confirm this intuition, not only Mode 1 and Mode 3 are complements but also the complementarity relationship is stronger than that found in the case of goods. Moreover, the complementarity between this two modes of supply is also found at the level of horizontal FDI.