Services Liberalization in Preferential Trade Arrangements: The Case of Kenya

In this paper we develop an innovative computable general equilibrium model with foreign direct investment that allows us to assess preferential trade agreements that include commitments to multinational investors in services. The model, which we apply to Kenya, contains Dixit-Stiglitz productivity effects from additional varieties of imperfectly competitive goods or services. To assess the sensitivity of the results to parameter values, the model is executed 30,000 times, and results are reported as confidence intervals of the sample distributions. Our central estimate for Kenya regarding a preferential arrangement with the Africa region that includes services commitments is that it will obtain very small gains; but there is a two percent chance Kenya would lose from the agreement. These possible losses show that there is an imperfect competition analogy to trade diversion in goods, whereby preferential commitments in services could be immizerising. Further sensitivity analysis shows that losses are more likely the more technologically advanced are the excluded regions relative to the partner region, and the greater the rent capture on initial barriers in services. Estimated gains for a similar agreement with the European Union are two to three times larger, and these occur with probability one. Multilateral liberalization would yield gains five times greater than a preferential agreement with the European Union, but the largest estimated gains derive from removal of regulatory barriers that impose costs on Kenyan as well as multinational service providers.