RIETI Report May 26, 2023

Reducing policy uncertainty attracts foreign direct investment in services: The role of regional trade agreements

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This bi-weekly newsletter will keep you updated with the recent columns, event information and research results by RIETI fellows and other leading economists in Japan and around the world.

In this edition, we present topics related to how policy uncertainty affects international trade and foreign direct investment in services. Miyazaki Municipal University Associate Professor Mitsuo Inada and RIETI Faculty Fellow Naoto Jinji’s study implies that reducing policy uncertainty will attract more FDI. Thus, they say that signing an RTA with a well-designed approach to scheduling binding commitments is important.

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Editors of RIETI Report (Facebook: @en.RIETI / Twitter: @RIETIenglish / URL: https://www.rieti.go.jp/en/)

This month's featured article

Reducing policy uncertainty attracts foreign direct investment in services: The role of regional trade agreements

INADA MitsuoAssociate Professor, Faculty of Humanities at Miyazaki Municipal University

JINJI NaotoFaculty Fellow, RIETI

There is no consensus in the literature on how policy uncertainty affects international trade and foreign direct investment in services. This column examines the impact on trade margins of five regional trade agreements between Japan and its partner countries that entered into force between 1995–2018. Results show that policy uncertainty regarding national treatment reduces the intensive margin of FDI in services, while policy uncertainty relating to most-favoured nation status reduces the extensive margin of FDI in services.

In the trade literature, policy uncertainty typically measures gaps between the actual trade regime and binding commitments under international trade agreements – for example, the gap between applied and bound levels of tariffs (Handley 2014). Against this backdrop, the role of regional trade agreements (RTAs) in reducing policy uncertainty has received attention in studies on trade in services. RTAs create a gap between the actual trade regime and commitments, allowing for a more restrictive regime in the future. The gap is created because some sensitive sectors – such as the communication, advertising and education sectors – are exempt from liberalisation in many RTAs. Two approaches preserve flexibility for introducing such exemptions, inspired by either the General Agreements on Trade in Services (GATS) or the North American Free Trade Agreement (NAFTA) (Roy et al. 2007). RTAs following the GATS-inspired approach use positive lists, whereby the relevant liberalisations are applied only to listed sectors subject to the inscribed exemptions. RTAs following the NAFTA-inspired approach use negative lists, whereby the relevant liberalisations apply to all services sectors unless they are exempted from certain commitments and obligations by a host country. Thus, this approach provides more comprehensive commitments than the GATS-inspired approach.

Lamprecht and Miroudot (2020) recently took a further step by focusing on the GATS-inspired approach to scheduling the commitments in services chapters of RTAs, quantifying the value of binding service trade regimes. Relative to Lamprecht and Miroudot (2020), we focus on the NAFTA-inspired approach to scheduling the commitments in services chapters of RTAs, and aim to quantify reservations for liberalisation commitments, such as market access, national treatment, and most-favoured nation (MFN) commitments.

To read the full text:
https://www.rieti.go.jp/en/columns/v01_0202.html

Related articles

“Detecting the impact of policy uncertainty on foreign direct investment”
INADA Mitsuo (Miyazaki Municipal University) / JINJI Naoto (Faculty Fellow, RIETI)
https://www.rieti.go.jp/en/columns/v01_0150.html

“Rising Policy Uncertainty in the United States and the United Kingdom: Japanese companies may hold back on direct investment”
ZHANG Hongyong (Fellow, RIETI)
https://www.rieti.go.jp/en/papers/contribution/zhang-hong-yong/01.html

Related papers

“The Impact of Policy Uncertainty on Foreign Direct Investment in Services: Evidence from firm-level data and the role of regional trade agreements”
INADA Mitsuo (Miyazaki Municipal University) / JINJI Naoto (Faculty Fellow, RIETI)
https://www.rieti.go.jp/en/publications/summary/23030019.html

“To What Degree does Policy Uncertainty Affect Foreign Direct Investment? Micro-evidence from Japan's International Investment Agreements”
INADA Mitsuo (Miyazaki Municipal University) / JINJI Naoto (Faculty Fellow, RIETI)
https://www.rieti.go.jp/en/publications/summary/20030014.html

Our latest discussion papers

“The Time Trend and Life-cycle Profiles of Consumption”
KITAO Sagiri (Senior Fellow (Specially Appointed), RIETI) / YAMADA Tomoaki (Meiji University)
https://www.rieti.go.jp/en/publications/summary/23050009.html

“International Economic Policy for Asia in an Era of Great Power Strategic Competition”
ARMSTRONG, Shiro (Visiting Fellow, RIETI)
https://www.rieti.go.jp/en/publications/summary/23050005.html

“Unsecured Loans and Intangible Investment
OGURA Yoshiaki (Waseda University) / UESUGI Iichiro (Faculty Fellow, RIETI) / IWAKI Hiromichi (Kanagawa University)”
https://www.rieti.go.jp/en/publications/summary/23050003.html

[List of discussion papers]
https://www.rieti.go.jp/en/publications/act_dp.html
[List of upcoming and past symposiums]
https://www.rieti.go.jp/en/events/symposium.html
[List of upcoming and past BBL seminars]
https://www.rieti.go.jp/en/events/bbl/

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