- Regulations affecting trade in services in Latin America and the Caribbean (LAC) vary widely, with some countries maintaining very high levels of protection.
- LAC shows the highest levels of intraregional regulatory divergence in the world (except in tourism).
- The policy agenda should combine regulatory liberalization with regulatory cooperation.
LAC could significantly expand its trade in services if countries in the region coordinated their regulations. The findings of a new IDB study highlight a major opportunity: in addition to liberalization, regulatory harmonization is also essential.
Regulations in the service sector typically pursue legitimate goals such as defining the quality or safety standards that providers of specific services must meet.
However, imposing restrictive regulations on foreign providers reduces imports, thus limiting the options available to consumers, with potential knock-on effects on prices and the quality of services. By limiting competition from abroad, these regulations can also make domestic firms less competitive, reducing their export potential.
A recent IDB publication, “Addressing Regulatory Barriers to Trade in Services in Latin America and the Caribbean,” looks at how LAC compares with other regions in terms of regulatory restrictions on trade in services and the impacts of those regulations.
How restrictive are the regulations governing trade in services in LAC?
Figure 1 compares regulatory restrictiveness in LAC across nine major sectors, based on the Services Trade Restrictiveness Index (STRI) developed by the World Trade Organization (WTO) and the World Bank. The solid red circles represent the average STRI value for LAC, while the small circles at the left and right ends of each line indicate the minimum and maximum values observed across countries in the region.
The figure presents a mixed outlook regarding regulatory restrictiveness in LAC. Although on average the region does not display the highest global levels of restriction in most sectors, neither is it the least restrictive. In almost every sector, at least one other region has lower levels of regulatory restrictiveness.
Specifically, in six of the nine services sectors—communications, computer, transport, distribution, financial, and tourism services—either North America or the European Union always exhibits lower levels of regulatory restrictiveness. In the three remaining sectors, LAC either scores lower than any other region (construction and health services) or shares the lowest score with another region (professional services).
Note: EU: countries in the European Union. North America: Canada and the United States. Asia: countries in the Asia-Pacific region, including RCEP member countries for which data is available—Australia, China, Indonesia, Japan, Malaysia, Myanmar, New Zealand, the Philippines, South Korea, Singapore, Thailand, and Vietnam.
Regardless of these averages, there is substantial variation across LAC countries. In every service sector, some countries score below the regional average for restrictiveness, while others score higher. Overall, trade in services in LAC shows mixed levels of restrictiveness, marked by substantial disparities across countries, some of which show very high levels of protection.
Regardless of the overall level of restrictiveness, differences in the regulations affecting trade in services across countries are another factor limiting trade in services. When countries adopt measures independently, it can create disparities that impose additional trade costs on service providers, who have to comply with different regulations in each market they wish to export to. It is therefore important to examine how far regulations diverge across countries.
Regulatory differences in trade in services
The IDB study uses the concept of regulatory distance to assess how different each country’s measures are from those of other countries. In simple terms, a regulatory distance of zero means that two countries apply identical regulations to a given service, while a value of one indicates that their regulations are completely different.
The solid red circles in Figure 2 represent the average regulatory distances among countries in LAC. Regulatory distance is greatest for transportation services (58%), professional services (56%), distribution services (55%), and computer services (54%). These are followed by financial and communications services (both with 50%), construction services (49%), health services (46%), and tourism services (43%).
The IDB study also shows that compared with the EU, Asia (RCEP members), and North America (Canada and the United States), LAC has the highest levels of regulatory distance in all sectors except tourism. The other dots in Figure 2 show the regulatory gaps between LAC and these regions. In many cases, the interregional regulatory distances are even greater than the distances within LAC itself. For example, the distances between LAC and Asia exceed LAC’s intraregional distances in all services sectors except transport. A similar pattern emerges when comparing LAC with the EU or North America, particularly in computer services, construction, and tourism. In no case do intraregional or interregional regulatory distances fall below 40%. Taken together, these results suggest that disparities in the regulations for trade in services are substantial both within LAC and between the region and the rest of the world.
How do regulatory restrictiveness and regulatory disparities affect trade in services?
The study also examines the impact of regulatory measures on trade in services using econometric estimates that combine data on services trade flows with the regulatory measures presented in figures 1 and 2. The results show that both the level of regulatory restrictiveness and the degree of regulatory disparity have negative effects on trade flows.
The impacts are substantial. For example, in the communications and computer services sectors, if LAC reduced its average STRI score from 41.5 to the level of the first tercile in the global distribution (39.5), trade flows would increase by an average of 18%. Likewise, if LAC reduced its average STRI score in the transport, distribution, and financial services sectors to the first terciles in the global distributions for each of these, trade in these sectors would increase by 14%, 31%, and 40%, respectively. Lowering the STRI score for professional services to the first decile of the global distribution would increase trade flows by 13%.
Similarly, the results suggest that reducing regulatory distance would have significant positive impacts. For example, a 10% reduction in the average intraregional regulatory distance in LAC would lead to substantial increases in intraregional trade: 23% in professional services, 36% in distribution services, 40% in financial services, 41% in transport services, and 60% in communications and computer services.
Regulatory liberalization is not a straightforward task. Many regulations are in place for valid reasons, including consumer protection, safety, and quality assurance. The challenge for countries in the region is not simply to eliminate regulations but also to distinguish between those that serve legitimate public policy objectives and those that restrict trade more than necessary or simply protect established interests at the expense of consumers and competitiveness.
Call to action
The findings are clear: lowering protection levels and harmonizing regulations could transform trade in services in LAC. So, what can governments do to foster cooperation on this matter? The study puts forward three concrete strategies:
- Review the most restrictive regulations and lower their levels of protection.
- Explore mutual recognition agreements with trading partners within LAC and potentially with partners in other regions.
- Use ongoing trade talks to incorporate strong chapters on trade in services.
The IDB is supporting several countries in advancing this process. Read the full study to learn more about how this agenda could be advanced.