Freedoms, rules and services markets integration

Giuseppe Bertola

27 June 2007

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The Treaties establishing the European Community (EC) provide for freedoms of movement aimed at depriving member countries’ governments of the power to restrain cross-border economic interactions.  Prohibiting all barriers to movement and trade (or “negative integration”) yields a single market, which may or may not be characterised by “free and undistorted competition,” but certainly does require a single-policy framework. Since trade is barrier-free within the EU, for example, there can be only one external trade policy for all member countries.

Not only goods should be free to move, however. Reversing the order of previous Treaties, the draft Constitution covered “Persons and services” (in Title III, Chapter I) before “Goods,” and before “Capital,” perhaps wishfully listing first the areas where effective integration is weakest. Personal mobility is formally unrestrained within the EU, but labour market integration is hindered by subsidiary and non-harmonised policies. As to services, the Bolkenstein proposal meant to complete the single market was strongly opposed in the European Parliament, and the Directive (2006/123/EC, in force as of 2007) that emerged from the co-decision process is almost inconsequential. 

Why are some markets so much more difficult to integrate than others? A paper by Lorenza Mola and myself seeks answers by analysing trade in services through personal mobility, an interesting middle ground between essentially liberalised goods trade and highly problematic migration in both the European and the global economic integration processes. Political and cultural factors may play a role.  As usual, economic integration can be resented because of its distributional implications, which are regressive in the case of low-skill services and can be progressive in the case of highly skilled professionals. Perhaps services markets integration lets foreign competition threaten the incomes of better educated and politically more influential white-collar workers. And trade in services, when it entails personal mobility, may encounter some of outright immigration’s cultural and political resistance. Human societies are not only kept together by markets, and may feel socially threatened by visible manifestation of the same diversity that makes economic integration beneficial from the economic point of view.

Resistance to economic integration, however, is also rooted in the greater need for regulation of more complex market interactions. Removing barriers to trade increases the efficiency of competitive market interactions; but most markets are not perfectly competitive, and trade is not completely free within each country, where it is restrained by taxation and by regulation. Since what is traded in services markets is often hard to evaluate precisely, regulation may be meant to protect markets from asymmetric information and mistrust, rather than to protect producers from competition and influence the distribution of economic welfare. The distinction between protection of producers’ income and protection of consumers’ welfare is in fact less than crystal clear when difficult-to-assess quality is an issue. The work of Polish plumbers might indeed be subtly different from that of Luxembourg plumbers if poorer societies have more pressing priorities than less-than-obvious safety and quality aspects, and competitive stress may have side effects in some service situations: it is hard, if perhaps less than fully justified, not to share writer Michael Moore’s concerns with the low pay of deregulated airline pilots in his Stupid White Men (“I don't know about you, but I want the people taking me with them to defy nature's most powerful force – gravity – to be happy, content, confident, and well-paid.”).

Whether country-specific regulation reflects political-economic tensions or a genuine need to prevent particularly imperfect markets from malfunctioning, full liberalisation of trade in services across borders is not an appealing policy proposition in countries that do extensively regulate their services industries within their own borders and fear that stringent internal regulation would be undermined, in race-to-the-bottom fashion, by foreign competition. The Single Market Program did not simply abolish explicit barriers to trade. It also painstakingly harmonised regulation that would have functioned as implicit barriers to trade if left untouched, and would have left markets unable to function if simply dismantled. Like explicit tariffs and quotas, rules that aim at segmenting markets (and act as implicit barriers to trade) can be simply repealed simultaneously in all countries. But other aspects of technical specifications are meant to enforce quality standards that are difficult for individual customers to assess.  In pre-Single Market Europe, cars required yellow headlights to be registered in France, and headlight sweepers to be registered in Sweden. Some such differences may have been meant to limit trade; others reflected national peculiarities that, for the sake of tradability, could not be accommodated in the Single Market. Harmonisation also had to deal with less obvious quality-relevant aspects of goods production – such as the size of pens in chicken coops, and the definition of ‘apple,’ that reportedly failed to fit the small Swedish variety of that important fruit. The Single Market program eventually reserved harmonisation of national rules for essential requirements, such as safety aspects, and resorted to mutual recognition of country-of-origin rules in order to encompass trade of all goods, including those that (like Cassis, neither wine nor liquor) fell between the cracks of official classifications.

The Bolkenstein Directive’s attempt to apply the same principle to the services market clashed with more or less justified fears of market imperfections. In services markets, appropriate regulation is more difficult and more necessary than in goods markets. It is more complicated to define plumbers’ or medical doctors’ qualifications than the size of apples, and customers’ poor judgment can have even more severe consequences in the case of health services than in car safety. To build a single market in services, it would be important to harmonise rules meant to address market-efficiency concerns. Harmonisation would be even more important for labour markets, which are heavily and heterogeneously regulated and influenced by country-specific social policies. The different effective implementation of the different fundamental freedom arguably reflects the different extent to which common regulation (“positive integration”) would be necessary in theory, and is in practice prevented by structural heterogeneity and lack of political agreement.

To overcome resistance to integration of services markets, it would be necessary to harmonise regulation. In principle, freedom to provide services within the Community is established by art.49, par.1 ECT, whereby restrictions are prohibited as regards service providers who are nationals of another Member State. In practice, liberalisation is limited, and reflects the extent to which that prohibition has been enforced by Community case law, interacting with legislation and with external liberalisation developments. In our paper, Lorenza Mola and I discuss the extent to which European Court of Justice case law has been able to enforce freedom of movement in the services provision area. We also outline ways in which the tension between National regulation and supranational freedoms may be resolved by interactions with the external dimension of EU policies.

It is difficult to integrate sophisticated and imperfect markets when heterogeneous regulation reflects country-specific structural circumstances. As in the case of car headlights, however, integration problems also arise from avoidable complications, and may be suitably sidestepped by a coherent policymaking framework. External GATS negotiations do serve the purpose of facing member countries with their collective responsibilities not only towards the outside world, but also towards each other in matters of internal regulation. The assignment of legal competences in the EC system implies that it does speak with one voice (the Commission’s) in the GATS. Since there is no single market in services, however, commitments combine common positions with provisions applicable to specific countries. This awkward situation generates pressure towards harmonisation by third countries, whose service supplies face complex rules that differ across countries, and also by EC member countries, since external access for service providers under such rules can sometimes work as a back door to break into heavily regulated markets.  The force of global trade liberalisation and the fear of internal deregulation both pressure the EC to liberalise and harmonise its internal market in services. Along with Commission initiatives and European Court of Justice fundamental freedom-based case law, this should lead EU member countries to come to terms with the need to harmonise their service sector regulation.

The next and most daunting task would be achieving a “positive integration” framework of common rules in the labour market. The many statements of principle regarding social policy in European treaties and charters flag the problem. But integration is hard between the labour markets of countries whose different histories and income levels make it difficult to share concerns about equality. Multilateral negotiations, for similar reasons, do not exist in the migration area. They can neither foster the slow progress of the common immigration policy framework envisioned since the Amsterdam treaty and outlined in part II of the June 2007 European Council Presidency conclusions, nor encourage harmonisation and integration of labour market regulation and social policy. 

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Topics:  International trade

Tags:  barriers to trade, Bolkenstein Directive

Professore ordinario, Università di Torino; CEPR Research Fellow

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