Many agreements to liberalize trade in services tend to be limited in scope. This is a puzzle considering the high share of services in total employment and value added and relatively high barriers to trade in services in many countries. In this paper we argue that neglected complementarities between services trade policies and domestic regulation may help to understand the limited ambition on services observed in many trade agreements. We show that the productivity effects of services trade liberalization are conditional on regulatory quality. Our findings suggest that greater effort to design trade agreements with a view to improving regulatory quality may be a necessary condition for deepening the services coverage of trade agreements and will enhance the welfare gains from services trade liberalization.
- As countries become ever more services‐intensive, more attention should be given to inclusion of services activities in trade agreements.
- Trade agreements can be mechanisms to improve the operation of domestic services sectors.
- More efficient services are important for economy‐wide productivity and the competitiveness of manufacturing.
- Improving the quality of economic regulation is a precondition for realizing the potential gains from services trade liberalization.
- Bolstering the quality of economic regulation should become more of a focus of trade agreements.