Trade in infrastructure services: A conceptual framework

AbstractThis chapter discusses what many infrastructure industries have in common — economies of scale or scope — and how this poses some significant policy challenges for successful trade policy reform. These conditions can lead to natural monopoly. The problem is that the single producer may abuse its monopoly power by restricting the quantity or quality of output and pricing above costs. Opening this market to trade creates opportunity for alternative suppliers but also creates challenges of arranging the transition to a new provider and regulating them appropriately. The chapter discusses how international trade negotiations can contribute to ensuring successful outcomes. The key messages are that while natural monopoly is a common feature of the infrastructure sector, care should be taken not to exaggerate its importance. There are circumstances in which no policy problem arises. Further, even if there is an apparent natural monopoly, it is important to separate that part of the chain of supply from other elements in which competition can develop. Even so, natural monopoly elements remain. The GATS is relevant to natural monopoly markets and contains some disciplines on policy in those markets. Trade-policy reform can contribute to performance in markets in which natural monopolies have some influence. However, market opening has to be complemented by the appropriate regulatory structures to capture these benefits, for example, related to the terms on which competitive firms have access to bottleneck facilities. Commitments made through international trade negotiations can facilitate the necessary regulatory reform.Philippa Dee and Christopher Findla