Answer to Chapter1.doc

ProblemsChapter 11. What are the four modes of services supply? Please give examples of each mode.Answer: The four modes of services supply：(1)Cross-border (mode 1): services supplied from the territory of one Member into the territory of another. An example is software services provided by a supplier in one country through mail or electronic means to consumers in another country. (2)Consumption abroad (mode 2): services supplied in the territory of one Member to the consumers of another. Examples are tourism or education services.(3)Commercial presence (mode 3): services supplied through any type of business or professional establishment of one Member in the territory of another. The example is an domestic company establishing a foreign branch by means of FDI. (4)Presence of natural persons (mode 4): services supplied by nationals of one Member in the territory of another. This mode includes both independent service suppliers and employees of the services supplier of another Member. Examples are a doctor of one country supplying through his physical presence services in another country, or the foreign employees of a foreign bank providing services on a temporary basis. 2. What are the positive(or benefits) and negative effects(or flaws) of services trade liberalization?Answer: The active effects: (1)SECTORAL EFFECTS:Removing barriers to trade in services in a particular sector is likely to lead to lower prices,improved quality, and greater variety.(2) ECONOMY-WIDE EFFECTS: Estimates of benefits vary for individual countries-from under 1 per cent to over 50 per cent of GDP-depending on the initial levels of protection and the assumed reduction in barriers.The gains from liberalizing services may be substantially greater than those from liberalizing trade in goods. Liberalization would create spillover benefits from the required movement of capital and labor.The negative effects: (1)flaws in reform programs, if privatization of state monopolies is conducted without concern to creating conditions of competition, the result may be merely transfers of monopoly rents to private owners (possibly foreigners). Similarly, if increased entry into financial sectors is not accompanied by adequate prudential supervision and full competition, the result may be insider lending and poor investment decisions. (2) Adverse Effects on the poor: Opening up essential services to foreign or domestic competition could have an adverse effect on the poorwhich is often cited as a reason for the persistence of public monopolies.If a country is a relatively inefficient producer of a service, liberalization and the resultant foreign competition are likely to lead to a decline in domestic prices and improvement in quality.Liberalization such as elimination of restrictions on entry implies an end to cross-subsidization because it is no longer possible for firms to make extra-normal profits in certain market segments. 3. What are the three problems caused to market failure in services liberalization, and how to settle these problems?Answer: market failure is attributable to three kinds of problems: natural monopoly; inadequate consumer information; and considerations of equity and protecting the poor.The settlement of natural monopoly depends on trade-off between the scale economy and monopoly inefficiency, the expansion of the market or market access through regionalism can conduct competition and at the same time keep the scale economy.The settlement of inadequate consumer information usually through domestic regulation. The settlement of social equity and protecting the poor can accommodate universal-serv