Reducing the Barriers to International Trade in Accounting Services is one in a series of new AEI studies on negotiations to liberalize trade in services. Each study focuses on a particular service sector, in this case, accounting services.

Services account for more than 80 percent of U.S. production and employment. It is estimated that about 30 million Americans are employed in professional services such as accounting, law, architecture, and engineering. The combined professional services sectors contribute some $10 billion to U.S. balance of payments receipts, according to figures compiled by the U.S. Department of Commerce.

Because accounting is the most global of all professional services, the World Trade Organization Working Party on Professional Services--under the auspices of the General Agreement on Trade in Services (GATS)--selected this sector as its first priority. The Asian financial crisis of the late 1990s heightened awareness of the urgent need for more sophisticated and more rigorous internationally agreed-upon accounting rules. It is widely agreed that poor accounting practices contributed to a lack of transparency regarding the true financial condition of many Asian manufacturing and financial firms and that inadequate investor information and the general distrust of available information has impeded economic recovery in a number of countries.

In this monograph, Lawrence J. White of the Stern School of Business at New York University first describes the "public good" contribution of liberalizing accounting services by showing how increased competition between domestic and foreign firms leads to improved professional standards and ultimately to more efficient capital markets. White identifies and analyzes two distinct sets of issues that are the main focus of GATS accounting negotiations, market access and domestic regulatory practices:

1. White rebuts much of the traditional rationale regarding market access issues, which exclude foreign competition on the basis of consumer protection. He argues that the widespread market access restrictions faced by accounting firms force them into inefficient compromises. White identifies the major impediments to market access that will form the basis for coming negotiations, including, among others: restrictions on price competition, differential taxation treatment, restrictions on crossborder flow of information, residence and establishment requirements, discriminatory licensing requirements for foreign accountants, and limitations of the types of accounting services that can be provided by foreign accounting firms. These barriers to true competition can be lowered only through commitments by individual WTO members to liberalize their accounting practices.
2. Regarding domestic regulatory accounting rules, White describes the drawbacks and benefits of harmonizing accounting standards, as well as the pros and cons associated with the mutual recognition of standards such as services providers' qualifications. He also provides a list of procompetitive regulatory principles for establishing “best practices” that would serve as a model for all nations and possibly become the basis for a new GATS accounting agreement similar to the reference paper on regulatory and competition policy that is included in the GATS telecommunications agreement.

White uses the accounting sector to illustrate the continuing tension and problems in almost all highly regulated service sectors. He notes that domestic regulators can become impediments to trade liberalization unless they can be convinced that such liberalization serves the national interest. For example, the U.S. Securities and Exchange Commission has thus far opposed new international accounting rules because of its belief that new WTO rules would weaken regulatory safeguards in the United States. White points out that the challenge for U.S. trade negotiators in overcoming the apprehensions of U.S. regulators is as great as overcoming the opposition of other WTO member states to accounting liberalization.

This AEI trade and services project was established in conjunction with a number of other research institutions, including the John F. Kennedy School at Harvard University, the Brookings Institution, and the U.S. Coalition of Service Industries.