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Final - Jan 1998

TRADE IN SERVICES -

BRINGING SERVICES INTO THE MULTILATERAL TRADING SYSTEM

Geza Feketekuty

 

Introduction

One of the most innovative and important accomplishments of the Uruguay Round of Multilateral Trade Negotiations was the negotiation of the General Agreement on Trade in Services and the associated annexes and national schedules of commitments. The negotiations resulted in a comprehensive set of rules for preserving and expanding market access for internationally traded services, an integrated framework for addressing interrelated policy issues affecting the operation of global companies producing services, and significant commitments with respect to the most rapidly growing trade in information-based business services.

In the not too distant past, services were considered non-tradable. This was partly a matter of definition, because services were defined as being produced where they were consumed. International transfers of services that took place through the movement of service providers from one country to another were considered an international movement of a factor of production, not trade. The computer revolution changed this fundamental dichotomy by making it possible to produce information-based services in one country and to make the item available to a consumer in another country.

In order to fully appreciate what was accomplished, it is therefore necessary to understand three things:

  • First, the emergence of intra-corporate telecommunications networks and the growth of trade in information-based services through these networks has been the major driving force behind the globalization of production in both the manufacturing and services sector. It has enabled global firms to rationalize the production of internal business services and to coordinate production schedules at widely dispersed facilities on a global basis.
  • Second, the rapid growth of trade in services has largely involved the procurement of business services by global enterprises who have been in the best position to procure services inputs on a global basis.
  • The sale of consumer services, particularly infrastructure services and services sold to consumers through local establishments, has been highly regulated. In contrast, the sale of many business services has remained relatively free of government regulation, and businesses with a global presence can get around restrictions on local retail establishments by dealing directly with global suppliers.

In addition to the information revolution, two other long term economic trends fundamentally changed the role and tradability of services. First, the microelectronic revolution opened the door to greater competition in the provision of infrastructure services. Modern computer technology enables competitive providers of infrastructure services to share network facilities such as cables or pipelines and to coordinate the interconnection of independent networks. Other technological advances have created alternative modes or channels for delivering infrastructure services, e.g. cellular phones, Second, changes in the technology of production have significantly increased the role and share of business services in the production process, while the increasing technological complexity and customization of products has forced businesses to concentrate on their core activities and to outsource many of their business services.

The most important accomplishment of the Uruguay Round negotiations on services in the near term was the establishment of a framework and a set of commitments for keeping international trade in information-based business services relatively unencumbered. This was crucial, because trade in such services has been the major source of growth in international trade of services, and has been at the core of the productivity enhancing globalization process in both manufacturing and services.

Over the long term, the General Agreement on Trade in Services will be remembered as one of the major achievements of the Uruguay Round. It created the basic framework for the progressive liberalization of trade in services and the reform of sectoral regulations which now and in the past have retarded productivity improvements in the largest sector of the economy. Services not only account for the largest and most rapidly growing sector in most economies, but are increasingly the key to the maintenance of a high growth rate in the economy as a whole. Inefficiencies in highly protected domestic service industries have become the major bottlenecks to economic growth in many of the more advanced developing countries While these countries managed to achieve high growth rates in the past through an export-led expansion of manufacturing, they failed to reform regulations which restrict competition and trade in the business services and infrastructure services those manufacturing enterprises must use to compete in global markets.

The GATS agreement also paved the way in establishing a comprehensive framework for dealing in an integrated fashion with a broad range of policy instruments that affect international trade and investment. The globalization of production is creating political pressures for an expansion of the range of issues addressed in the World Trade Organization, including issues such as investment and competition policy which are covered in the GATS agreement. While the GATS agreement undoubtedly can be improved as a constitutional document, it constitutes a working model for integrating a wide range of policy instruments in a coherent way.

Much has been written, particularly in the popular press, about the shortcomings of the Uruguay Round results in services. This pessimistic assessment is based in part on a lack of understanding of what was accomplished with respect to information-based business services. In part it is based on a correct assessment that little was accomplished with respect to fundamental reforms in domestic regulations which have the effect of restricting international trade and competition in infrastructure services and consumer services sold through local retail establishments. The latter was not achievable under any realistic scenario. At the same time, the framework established in the Uruguay Round creates a solid foundation for addressing these sectoral regulatory restrictions in the future. This has already been demonstrated in the subsequent negotiation of the Agreement on Basic Telecommunication Services.


What Was Achieved in the Uruguay Round

Fifteen years ago most trade officials and economists would have denied that services had anything to do with trade. In fact, trade in services was considered an oxymoron. Policy measures affecting the production and sale of services were considered a domestic matter, and international discussions of services were largely seen as an exercise in resolving national regulatory conflicts. Little credence was given to international specialization in the production of services, and to the economic benefits that could be derived from trade in services.

Against that background, the results of the Uruguay Round are significant. The negotiations served to legitimize issues affecting international transactions in services as trade issues, to established a comprehensive set of international rules for liberalizing trade in services, and an initial set of market access commitment on services that will reduce the uncertainty facing foreign providers of services.

The negotiators were successful in developing a comprehensive legal framework for trade in services, the General Agreement for Trade in Services (GATS). The GATS covers the full range of issues identified in the original analysis as critical to the achievement of effective market access, including provisions covering domestic regulations, establishment of a local presence, foreign investment and labor mobility. While the provisions of the GATS does not establish substantive, across the board commitments on such issues as market access and national treatment, it provides a legal framework for the negotiation of such commitments, and spells out the obligations assumed by countries with respect to negotiated commitments.

The GATS provisions establish an across the board obligation on the transparency of laws and regulations affecting trade in services. Transparency is important for several reasons. Full information about the laws and regulations that will apply to a particular transaction is critical for an assessment of the costs associated with that transaction, and therefore the economic viability of that transaction. Without such information, the potential risks associated with the pursuit of an economic opportunity might be unacceptably high. Accurate information about current laws and regulations is also an essential prerequisite for any effort to change laws and regulations that create market access barriers for foreign businesses. Full knowledge of the conditions and costs associated with any particular international transaction is the first requirement for trade, because without such knowledge importers and exporters cannot calculate whether such trade is likely to be profitable. The framework also explicitly obligates governments to inform private parties that have submitted requests for operating licenses of the precise status of their applications.

The GATS agreement also contains a telecommunications annex that establishes significant commitments with respect to the use of telecommunication networks for the provision of services covered in the national schedules and for intra-corporate communications. Business users are assured access to public telecommunication networks and private leased circuits on reasonable and non-discriminatory terms and conditions. They are also given the right to acquire and attach equipment, to connect private leased line networks to the public switched network, and to use operating protocols of the service supplier’s choice. This telecommunications annex is one of the most important achievements of the services negotiations, since the most troublesome barriers to the expansion of cross-border trade in information-based services have been government regulations that limit access to state of the art telecommunication facilities at competitive prices.

The Telecommunications Annex to the GATS, and the more recent Agreement on Basic Telecommunication Services have created a solid foundation for the international commercial use of the Internet. Electronic commerce represents the next major revolution in international trade. It will bring the economic advantages of globalization down to the level of small enterprises and households. The rapid expansion of electronic commerce will create both unprecedented opportunities for individuals and small businesses to market goods and services to smart buyers around the world, and to buy the most competitive and attractive goods and services available in global markets. It will also create enormous regulatory challenges, many of which will have to be addressed in future trade negotiations. The agreements on trade in services negotiated in the Uruguay Round and since provide an essential foundation for both exploiting the opportunities and meeting the challenges of electronic commerce.

 

Market Access Commitments

Under the GATS framework, substantive commitments on policy measures that affect trade in services are incorporated in national schedules, which are negotiated with each country. Most developed countries and many developing countries have submitted national schedules that contain commitments on market access, foreign investment, temporary entry by service providers, and nondiscriminatory "national" treatment of foreign services and service providers. Overall, 80 countries submitted national schedules with initial commitments.

Generally, the commitments embodied in the schedules submitted in this first round of substantive negotiations guarantee foreign service providers existing levels of access to local markets in the sectors covered by the schedules. Commitments on market access within the constraints of existing regulations are of real value because they give businesses greater certainty. They reduce the risk that the potential gains from new investments or long term supplier contracts might be adversely affected in the future as a result of new trade or investment restrictions.

Current government regulations create very few barriers to the cross-border provision of many information-based services purchased by businesses. By committing themselves not to introduce new, more restrictive regulations on trade in such services, governments are committing themselves to keep their market open to cross-border competition.

The schedules submitted by developed countries guarantee existing levels of market access for most information-based business services. The schedules submitted by developing countries are less comprehensive in their coverage, but nevertheless contain useful commitments in the area of information-based business services

An Integrated Approach to Trade in Services

An increasing complaint from businesses is that governments have too many different approaches to regulations and policies that affect a company's ability to do business internationally. There are separate agreements and bureaucracies dealing with trade, investment, visa issues, international banking transactions, capital transfers, telecommunications, transportation, and they are not necessarily consistent with each other..

Concerns about this kind of fragmentation have substantially increased in recent years in light of the growing globalization of production. In a globalized business, business decisions regarding trade, investment, movement of personnel, and the development of private intra-corporate communication networks are all part and parcel of a corporation's strategic plan for organizing the global production and distribution of its output.

The GATS agreement, together with its annexes and the national schedules, provides an integrated approach for dealing with a number of different interrelated policy measures that affect the ability of service providers to do business in foreign markets. In the eyes of many business managers this represents a major advance over the GATT. Such an integrated approach provides the basis for a more informed dialogue between business and government regarding the effect of government policy decisions in areas such as trade, investment, work permits and domestic regulatory issues on business decisions concerning the location of production, research and distribution facilities and the development of markets. Government decisions on these issues are naturally motivated by a wide range of policy objectives and involve decisions by many different government departments and agencies. Bringing their impact on trade together under one roof nevertheless permits a more coherent analysis of trade-offs between trade policy considerations and different domestic policy objectives.

The structure of the national schedules also helps to focus on the alternative means by which a business enterprise headquartered in one country can choose to deliver a service to another country: by transferring the service across the border to the consumer (cross-border supply), by establishing the means for producing the service in the importing country (commercial presence), by moving the person producing the service temporarily to the importing country (presence of natural persons), or by selling the service to a foreign consumer in the exporting country (consumption abroad). This approach has the added advantage of highlighting the options open to a business in a coherent way.

The preference by business for an integrated approach is also reflected in business support for regional trade agreements that encompass a broad range of government policy measures that can affect trade and investment. In the future, we can expect increasing support from the business community to an extension of the GATT into new areas as investment as basis for establishing a more integrated approach for trade in goods.

 

The Basic Structure of the GATS Agreement

The GATS agreement establishes an across the board obligation of transparency for all internationally traded services. The transparency provision obligates member countries to publish all government measures which affect trade in services and to respond to requests for information on any of the above. The GATS agreement also establishes a general MFN obligation, i.e. countries are required to grant all foreign suppliers the same treatment, unless the country involved excluded a particular sector from the MFN obligation at the time the agreement went into effect. Members of a free trade area, however, are allowed to give each other preferential treatment.

A number of provisions apply to all internationally traded services that fall within a sector covered by a commitment entered into a national schedule. With respect to all such services, governments are obligated

 

  1. to notify service suppliers of any changes in government measures which affect trade,
  2. to administer regulations in a "reasonable, objective and impartial manner" and to establish procedures that meet a due process standard,
  3. to record in their national schedule all government measures which limit access to the domestic market through any of the four modes of entering the market, i.e. cross-border trade, consumption abroad, local establishment, or temporary entry by service providers, and
  4. to provide national treatment to foreign services and foreign service suppliers, i.e., to treat foreign services and providers no less favorably than domestic services and providers.

Unlike the GATT, the GATS covers not only cross border transactions, but also the supply of a service through a locally established foreign firm in the importing country. In sectors where market-access are undertaken, countries are committed to avoid restrictions on foreign investment and to provide foreign investors national treatment unless the country takes a specific reservation. The measures covered by this provision include

  1. limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test;
  2. limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economics needs test;
  3. limitations on the total number of services operations or on the total quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;
  4. limitations on the total number of natural persons that may be employed in a particular service sector or that a service supplier may employ and who are necessary for, and directly related to, the supply of a specific service in the form of numerical quotas or the requirement of an economics needs test;
  5. measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service; and limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment.

A third set of provisions are applicable to individual services covered by specific commitments entered into the national schedules. Governments are required to ensure that any regulation which affects trade in these services (1) is based on objective and transparent criteria, (2) is not more burdensome than necessary, and (3) will not in itself constitute a restriction on supply in the case of licenses. Governments are also required to ensure that monopoly suppliers of services treat foreign customers of covered services like domestic customers, and that they avoid anti-competitive practices when supplying covered services on a competitive basis.

A separate Telecommunications Annex establishes rights concerning access to and use of public telecommunications networks for services covered by commitments. Suppliers of such services have a right to obtain leased lines at reasonable and nondiscriminatory conditions where they are available; to move, store and process information over the network; to use the network for intra-corporate communications and provision of services; and to buy or lease and attach customer premises equipment to the network, provided such equipment does no harm to the network. The Annex also guarantees users of leased lines the right to interconnect leased lines, to connect leased lines to the public network, to use their own protocols and to attach their own equipment.

Other provisions cover issues such as subsidies, recognition of licensing and certification standards and procedures, and dispute settlement.

The substantive commitments on market access are contained in national schedules, which are divided into two parts. The first section contains general commitments on laws or measures that apply to all industry sectors listed in the schedule. The second section contains detailed, industry-specific commitments.

The industry specific commitments address each of four possible "modes of supply": (1) services supplied across the border, e.g. information-based services transmitted through telecom networks or the mail, various transportation services, and goods shipped for repair or processing; (2) services consumed abroad, e.g. tourism, education, and medical services purchased by travelers to other countries; (3) services sold through locally established businesses, e.g. services provided by locally established, foreign owned banks, insurance companies, or advertising agencies; (4) services provided by individual service providers who reside in the exporting country, but have gained temporary entry into the importing country for the express purpose of producing a service locally, e.g. services provided by foreign orchestras, sports teams, professors, doctors, or architects.

For each mode of supply, a country can offer either a full or partial commitment. A full commitment means that there are no industry-specific restrictions on market access and no limitation on national treatment, i.e., that all foreign services and service providers will be treated like their domestic counterparts in the application of domestic regulations. A partial commitment binds the country to a particular level of market access or to a particular degree of national treatment, i.e. the country commits itself not to adopt any laws or regulations that would be more burdensome than the laws or regulations bound in the schedule.

Subsequent negotiations on basic telecommunication services led to an agreement on basic telecommunication services. It accomplished what would have been difficult to envision only a few years back - a new international regime in telecommunications based on market competition. This constituted a major shift from the previous regime, which was primarily designed to preserve national monopolies and regulated prices. While individual countries have established their own transition schedules, and their own national conditions and reservations, the document clearly defines a new competition-oriented norm for international telecommunications.

The Telecommunications Annex and the subsequent General Agreement on Basic Telecommunication Services (GBT) are among the most important achievements of the services negotiations, since the most troublesome barriers to the expansion of cross-border trade in information-based services have been government regulations that limit access to state of the art telecommunication facilities at competitive prices.

The more recent commercialization of the Internet has increased the importance of preserving open access to the telecommunications network by foreign service providers. For the first time, foreign services providers can have direct access to a retail distribution network for information and information-based services. The Telecom Annex and the GBT provide an essential foundation for agreements that will need to be negotiated to permit the expansion of international economic commerce. Some ideas on the content of such an agreement is addressed in a separate section below.

While much was accomplished in the negotiations on international in services during the Uruguay Round, there is considerable room for improving the existing provisions of the various agreements, for expanding the coverage of commitments contained in the national schedules, and for eliminating restrictions to trade in services. The negotiators themselves identified a number of areas where they had failed to reach agreement, and where they felt negotiations needed to continue. These issues are examined in the first section below. Another set of issues concerns the coverage of commitments contained in the national schedules, and a third set of issues relates to constitutional shortcomings of the GATS agreement.

 

The Unfinished Agenda

The Uruguay Round negotiators identified a number of areas where further negotiations were required over the near term. This, in essence, represents a consensus view that the negotiations fell short of expectations in these areas. These unfinished agenda items fall into three categories:

  1. cross-cutting issues such as subsidies and government procurement, which may need to be covered by a rule-making provision in the GATS agreement;
  2. sectors such as shipping and financial services, where a sectoral annex may be necessary to achieve more substantive commitments in national schedules and the elimination of national reservations on most favored nation (MFN) treatment;
  3. functional policy areas such as labor mobility, where a functional annex is thought to be necessary to achieve more substantive commitments in national schedules.

 

GATS Rules.

The negotiators identified three areas of rule-making where it had not been possible to agree on substantive provisions, and where the GATS agreement therefore only contains procedural provisions that serve as place holders. The three areas are emergency safeguard measures, government procurement, and subsidies.

Developing appropriate disciplines in these areas will require a careful analysis of the special characteristics of services in general, and of individual services sectors in particular. There are four difficulties in developing substantive rules in these areas:

  • Uncertainty whether there is a sufficient problem to warrant the development of a discipline. The existence of GATT rules in these three areas for trade in goods leads some to conclude that parallel rules are needed in the GATS for trade in services. But there is little solid empirical data at this stage to build a persuasive case.
  • Data on production, consumption, costs, and prices are available only for broad categories of services, not for detailed products. This makes it more difficult to prepare objective analysis of price and cost data than is the case for internationally traded goods.
  • Significant differences in the industrial structure, method of distribution, and nature of various types of services. These differences make it more difficult to develop one rule that would cover all services in an equally effective manner, and may make a sectoral approach to the development of necessary disciplines more workable than a generic approach in some sectors.
  • Market access commitments cover not only cross border trade, but also trade based on local establishment, movement of consumers, and movement of service providers. The coverage of all four modes in the GATS makes it necessary to decide whether a single set of rules should cover all four modes equally, or whether separate rules need to be developed for each mode.

Each of these four factors - uncertainty, measurement and data problems, sectoral differences, and complexity of the four modes - affects the rule making effort in the three issue areas - safeguards, government procurement, and subsidies - somewhat differently. What is common, is the need for more detailed analysis of the issues that are likely to arise in the different sectors. There may also be a need for some empirical experimentation in specific sectors where the need for some discipline is most persuasive. With these caveats in mind, the following comments on each of the three issue areas might provide some further insights into the way forward.

Emergency Safeguard Measures. The purpose of a safeguards regime is to facilitate the negotiation of binding commitments by helping governments to overcome uncertainties with respect to the possible future domestic impact of liberalization commitments. By allowing governments to withdraw commitments temporarily when a surge of imports threatens to injure the domestic industry, the existence of an emergency safeguard measure can encourage negotiators to undertake more substantive commitments.

There are two basic problems in devising an appropriate safeguard rule for services. The first is that there is very little empirical data to inform the rule-making process. This lack of empirical data may be due to a lack of analytical work in this area. However, there may be a more fundamental reason as well - namely that trade in services is less characterized by surges than goods, and that many domestic regulations which restrict trade in services are less easy to liberalize through a series of marginal changes. Whatever the case, more information about real world situations where safeguard actions were either taken or could have been taken in a practical way would be helpful. It might also be useful to analyze how countries have managed the autonomous liberalization of internal competition of services, and the kind of transitional regulatory safeguards they found it necessary to adopt to manage the internal liberalization of sectors such as telecommunications, retail distribution, transportation, etc.

There are two possible interim approaches that could be adopted until the world community has gained more empirical data about the problems faced in managing the liberalization of trade in services. The first approach would be to encourage countries that hesitate to make a commitment to build an escape clause into their national commitment in the form of a reservation. The second approach would be to allow countries to propose specific safeguard measures when the need arises, subject to the approval of the Council on Services.

The second problem in devising a rule for safeguards concerns the difficulty in devising an approach that could apply equally to all four modes of importing services. Unlike the GATT market access commitments on goods, the GATS market access commitments on services cover not only cross border trade, but also trade based on local establishment, and movement of either the consumer or the supplier of services. This raises a key question. Should a country be allowed to limit the activities of locally established suppliers when the import disruption is due to cross border trade or vice versa? Should a country in such cases be allowed to limit the temporary entry of service suppliers, or the consumption of services abroad by its own citizens.

One of the things that has limited the protective effect of safeguard measures taken on cross border trade in goods is that such measures did not prevent the foreign producers from expanding their investment in the importing country. The protective effect of safeguard measures taken by a number of countries in the steel and automobile industries, for example, were significantly cushioned by foreign investment in these industries. This would suggest that countries should be forced to justify safeguard actions taken with respect to any one mode in terms of the injury or threat of injury that exists from imports in that mode. In other words, safeguard actions should be mode-specific.

Subsidies. The rulemaking effort on subsidies breaks down into two components - the possible discipline on subsidies and the nature of an appropriate remedy. Under GATT rules, subsidized imports are subject to countervailing duties, while distortions created in the home market of the subsidizing country or in third markets are subject to the potential remedies available under the dispute settlement system.

There are few, if any, instances of direct export subsidies in services. Following the example of the GATT in prohibiting direct export subsidies should therefore not pose an insurmountable problem. The bigger issue concerns domestic subsidies, which tend to be concentrated in a few sectors such as sea, air and land transportation, telecommunications, and in public "goods" such as health, education, and pension systems. This may lead one to conclude that the optimal approach would be to adopt a general subsidies discipline, with a carve out for difficult sectors. The general subsidies discipline could follow the pattern of the GATT Subsidies Code. The sectors carved out from the general code could be covered by sector-specific commitments.

With respect to health, education and pensions, it needs to be recognized that most governments consider these activities as public goods that are legitimately subsidized by government. Sector-specific agreements on subsidies in these areas would have to give governments wide room to subsidize public services, while leaving room for the provision of privately provided services to those who can afford it.

With respect to transportation and telecommunication, any sector specific subsidy agreements would have to deal with two issues - transitional issues related to the adjustment of inefficient national champions in both industries and the subsidization of socially-desirable services such as the provision of telecommunication and transportation services to rural areas, the elderly or the poor, and the use of environmentally-friendly forms of transport.

The issue of an appropriate remedy is more complex. For a variety of reasons having to do with the special characteristics of services, it would be difficult to devise a workable countervailing duty. First, the invisible nature of many service imports would make it as impractical to impose a countervailing duty as it would be to impose a tariff on cross border trade. Second, the difficulty associated with identifying the production costs of an individual unit of services would make the imposition of a countervailing duty on the purchase of a specific service a completely arbitrary exercise. A more workable remedy might take the form of the remedies currently available under the dispute settlement system for subsidized competition in the home market of the subsidizing country or in third markets.

Government Procurement. The development of a discipline on government procurement will need to address two special characteristics of services. First, government procurement of many services is made on the basis of small contracts that would fall under the thresholds built into the Government Procurement Code for goods. While it would be possible to lower the threshold for services, it may prove too costly to impose the requirements associated with the Code on many small transactions.

The second issue is that the procurement of many services, particularly professional services, involves judgment calls about the quality of service. In fact, many professions have discouraged competition and marketing based on price, on the argument that the choice of a professional is all about quality and reputation. Without pandering to that view, an approach to the procurement of professional services would need to address how judgments about professional competence can be factored into objective decisions.

There are a number of services where neither scale nor hard to quantify quality judgments are an overriding issue. It would make considerable sense to apply the procurement code to these services. Some prominent examples include transportation services, telecommunication services, construction, and financial services.

Sectoral Agreements

In four services sectors - telecommunications, financial services, shipping and professional services - the Uruguay Round negotiators decided that efforts to conclude a meaningful agreement on substantive commitments needed to continue. This decision was influenced by the absence of meaningful coverage of these sectors in the national schedules of many important trading nations, and by the decision of some countries, in particular the United States, not to apply the MFN provision to the first three of these sectors. The GATS agreement also provided for further negotiations in professional services and for a future review of air transportation.

  • Negotiations on basic telecommunication services led to a major breakthrough in the spring of 1997.
  • Negotiations on financial services were concluded at the end of 1997.
  • Negotiations on shipping failed to make any progress, and the negotiators have decided to postpone the resumption of these negotiations to the start of the next round of comprehensive negotiations on trade in services, which are scheduled to start in 2000.
  • Negotiations on professional services have initially focused on accounting services, with an end of 1997 target date for the completion of an agreement..

Some comments are offered here on the challenges facing negotiators in the two sectors where negotiations will need to continue: transportation and professional services.

Transportation. Negotiations on all forms of transportation are likely to make more progress in the future if the negotiations were reorganized in terms of the different user communities. The current approach, which is to organize negotiations on the basis of sea, air and land transportation strengthens the hand of suppliers and regulators who would like to leave these sectors protected by restrictive national regulations.

A user-oriented approach to negotiations on trade in transportation services would focus the negotiations around each of the following four user communities: (1) global corporations who need to ship parts, components and assembled goods among their various facilities, (2) tour operators who provide organized leisure travel, (3) business users of express parcel and courier services, (4) users of scheduled public transport services. An organization of the negotiations along these four categories of users would make it easier to identify the requirements of users and to come up with provisions that will meet user requirements, and would force transportation companies to face up the needs of their customers. It would change the politics of the negotiations by making it easier for the different user communities to identify their common interests and to organize themselves politically, with the objective of breaking down national regulatory barriers to international competition.

The global corporation has special requirements for assuring a high degree of reliability and control over the transportation of parts and components between facilities located in different parts of the world. Depending on its needs, the corporation may need to be able to exercise control to assure timely delivery to meet just in time inventory control requirements, or they may need to assure customized handling of particular types of cargoes. They may also wish to have an ability to track the shipment of individual parts and components, in order to empower them to reroute shipments if particular routes are blocked by strikes or natural disasters. In effect, these corporations need to be able to set up virtual transportation networks, or to entrust the management of such virtual networks to a global transportation manager. In either case, the corporation has to have some leeway to construct a network by linking together owned or leased facilities and modes of transport.

There is a close analogy with the need of these global corporations for control over their telecommunications with their various facilities around the world. Recognition of their telecommunications needs led to the negotiation of the user oriented GATS Telecommunications Annex. The Annex gives them the ability to lease and interconnect lines, and to use these lines freely for the transfer of information. A similar approach covering all modes of transport and warehousing facilities would generate similar benefits.

The second major, and politically powerful user community is represented by leisure travel. This community not only involves consumers of organized travel services, but also travel operators and the extensive network of travel agents. Charter services are already relatively free of many of the regulatory controls on scheduled public transportation, and it would not be a large step to negotiate an agreement providing for international competition in this area of transportation. Such an agreement would appeal to the public at large, and could be sold by every country as a measure to promote tourism, a financially attractive industry for most developing as well as developed countries.

The third group of users are business users of express package delivery and courier services. This is a highly competitive, international industry has developed in response to user needs. Resistance to the growth of the industry has come largely from the postal monopolies, and most regulatory restrictions are designed to protect these monopolies. An across the board approach to the problems faced by competitive providers of these services might prove more productive than the current piecemeal approach, and might enable these companies to better serve consumer needs.

Negotiations to liberalize international competition in scheduled public transportation will be the most is clear from what is happening in the market place that the provider difficult. Nevertheless, events in the market place are reshaping the industry. National airlines are reconstituting themselves into transnational transport companies through mergers, alliances, interlining agreements and other forms of cooperation. At some point the need for a new set of groundrules for international competition among these mega companies will become obvious.

Professional Services. Efforts to create some sectoral guidelines for the liberalization of trade in professional services have focused on the development of a model agreement for accounting services. These negotiations are still under way, with an end of 1997 target date. The basic goal of these negotiations is to expand on the provisions contained in Article VI (4) of the GATS. Negotiators are focusing, in particular, on three criteria built into this provision, namely that regulations be based on objective and transparent criteria, that they not be more burdensome than necessary to ensure the quality of the service, and that any licensing procedure in itself not restrict the supply of the service.

The basic issue for governments in accounting, as in other professional services, is to ensure the professional competence of the individual service provider, to monitor professional performance, and to discipline any lapses of professionalism. From a trade point of view the key issues are whether the standards and procedures adopted by individual governments constitute unreasonable barriers to trade. This can be the case if the standards or procedures established for evaluating the qualifications of an unnecessarily discriminate against foreign practitioners, or unnecessarily restrict entry by both domestic and foreign applicants, serving to restrict entry into the field rather than ensuring professional competence.

In most cases the qualifications, regulations and procedures established for the licensing of a country’s own professionals cannot be directly transferred to the licensing of foreign professionals - foreigners do not necessarily enter as apprentices, they may not have acquired a local educational degree, their professional experience abroad may or may not be directly relevant, and the fact that they may not permanently reside within the country may require alternative approaches for disciplining unprofessional behavior. The establishment of a separate set of regulations and procedures for qualifying and licensing foreign professionals may thus actually facilitate trade. In fact, Article VI (6) directs members to establish procedures to verify the competence of professionals from other member countries, thus implicitly recognizing the need for a specific procedure to license foreign practitioners..

The issue from a trade point of view is whether the qualifications, regulations and procedures established for foreign professionals are equivalent in their regulatory effect and not more burdensome than the procedures and standards imposed on a country’s own professionals. Any rulemaking under the GATS needs to establish some basic principles concerning the objectivity and equivalence of the qualifications and the procedures established for licensing foreign professionals. They should not get into substantive details, which are better addressed through bilateral agreements (as provided for in Article VII of the GATS) or international standards developed through appropriate international professional associations, (as provided for in Article VI (5)(b) of the GATS).

Nondiscriminatory standards and procedures for ensuring the professional competence and professional performance of accountants can over time become barriers to entry if they are used to limit entry into the profession, thus raising the income of current members. The second issue from a trade point of view, therefore, is whether a country’s regulations for the licensing of professionals are appropriate means for achieving legitimate social objectives, and whether they are not more cumbersome or restrictive than necessary to achieve that objective.

The best method of ensuring that professional licensing and qualification standards and procedures are not hidden devices to restrict competition is to require full transparency of both the regulatory objectives and the regulations. The rules should also stipulate that regulations achieve their stated objectives in the least burdensome manner. Transparency will enable everyone to test whether the objectives are legitimate and whether the regulations involved provide the least burdensome and least trade distorting method of accomplishing the objective. It may also be helpful to establish a link to established international standards in the field, by encouraging members to make use of applicable international standards. In most professions, international professional bodies have emerged for the development of model standards or norms. The GATT Code on Technical Barriers to Trade adopts a similar approach by encouraging countries to adopt international standards where they meet the desired level of performance.

 

Labor Mobility

Negotiators at the end of the Uruguay Round failed to make substantive progress on a comprehensive agreement on the temporary entry of service providers, and few countries made any meaningful commitments in the national schedules. Subsequent negotiations failed to achieve much progress, and they have now been recessed until the start of a new round of negotiations on trade in services in 2000.

This lack of progress is regrettable, since most countries have visa regulations permitting temporary entry, and should have been in a position to make commitments based on current national visa regulations.


Need to Expand Coverage of National Schedules

As previously noted, substantive commitments on market access and national treatment take the form of detailed national commitments in national schedules under the GATS. The major goal for the first round of negotiations was to obtain maximum coverage of internationally traded services, based on the degree of openness and non-discrimination in current laws and regulations. Maximum coverage was important because a number of disciplines incorporates in the GATS were activated by sector or product specific commitments in national schedules. Binding the existing degree of openness and non-discrimination was important because in most countries trade in information-based business services was relatively free of restrictive regulations.

Based on the criteria of maximum coverage and binding of the degree of openness and non-discrimination reflected in current laws and regulations applied in practice, the major disappointment was the limited coverage found in the schedules of the more advanced developing countries. The paucity of such stand-still commitments is particularly puzzling since many of the countries involved have unilaterally liberalized their policies in an effort to attract more foreign investment and to improve the performance of their economies. While many developing countries have traditionally viewed the services sector as the employer of surplus labor, many of them recognize that inefficiency and a lack of productivity in key services can stymie economic growth. It needs to be remembered, however, that these same countries have yet to bind tariffs in many goods, despite eight rounds of multilateral trade negotiation, carried out over 40 years.

Some critics have complained about the absence of a substantial liberalization of trade as a result of these negotiations. While some degree of liberalization was generally considered a desirable outcome, substantial progress in dismantling restrictive regulation in the first round of negotiation was never considered a realistic goal by most negotiators and informed outside experts, It was clear from the beginning that substantial liberalization in most countries and sectors would require major reforms in domestic regulations. This was clearly beyond what was achievable in an initial round of negotiations, particularly since there was little support from either the industries or the regulators in these industries for the negotiations. Nevertheless, the spotlight placed on trade in services as a result of the negotiations persuaded a number of countries to reevaluate longstanding regulations that had outlived their purpose. This led to a number of autonomous domestic reforms in the course of the 1980’s which were subsequently incorporated in commitments made in the national schedules.

The foremost challenge in the new round of negotiations on trade in services will be to expand the market access commitments incorporated in the national schedules. In approaching this task, the negotiators should prioritize their efforts by giving top priority to full coverage of information-based services, followed by as complete a coverage as possible across all services sectors. The objective should be to encourage as many countries as possible to commit themselves to maintain the current degree of access to their markets, through all four modes of accessing the market - cross border trade, establishment, consumption abroad, and temporary entry by foreign suppliers. Developed countries should commit themselves to bind the current degree of openness in all sectors and in all areas, and developing countries should set a percentage target for coverage.

The next level of priority should be to liberalize overt barriers to trade in services such as embargoes, quotas or other forms of discrimination against foreign suppliers of services. Generally, these barriers can be tackled without a major change in the regulatory regime of the countries involved.

Negotiators should consider the adoption of a "formula" approach to the market access negotiations, whereby countries would agree to a percentage reduction or elimination of particular types of market access restrictions such as quotas, citizenship requirements, and limitations on the allowed volume of activity by locally established foreign firms. For certain types of barriers it might be possible to apply a formula to all sectors, while for other barriers it may be necessary to develop formulas adapted to the unique characteristics of that sector. Both horizontal and sectoral formulas could establish separate targets for developed countries, developing countries and least developed countries.

Achieving substantial liberalization of restrictive domestic regulations that do not overtly discriminate against foreigners will be difficult. To make progress in the heavily regulated sectors, governments most likely will have to address key regulatory issues on the basis of sectoral negotiations. This, of course, is already the case with respect to trade in telecommunications, financial services and accounting. To facilitate future negotiations in heavily regulated sectors, member countries should initiate a wider horizontal dialogue on the rationale and techniques for regulatory reform. They should also give serious consideration to a further amplification of the provisions on regulation contained in Article VI of the GATS. Some ideas on how this provision might be expanded is explored in another section below.

Negotiators should also consider ways and means of making the national schedules of commitments more user friendly to the business community. These schedules are very complex and difficult to read. Member countries should either revise the current scheduling rules or apply the existing scheduling rules on a more consistent basis. Member countries might also explore various presentational devices for organizing the information on a more consumer-friendly basis. The WTO is working on computer programs that might aid users in identifying the national commitments in particular sectors, and this might go part of the way towards providing greater transparency of national commitments.

 

Constitutional Deficiencies

A number of issues may need to be considered with respect to the constitutional architecture of the GATS. The most commonly raised constitutional issues concern the absence of an across the board national treatment commitment in the GATS, and the scheduling of exceptions to the MFN principle in particular sectors. Both of these issues, however, are transitional issues that will be self-correcting,

National Treatment - top down or bottom up.

Cross-border trade in services is not easily controlled at the border since the actual cross border flow is invisible. Barriers to services instead involve the discriminatory application of domestic regulatory measures. The application of national treatment therefore is equivalent to committing countries to abandon all barriers that favor domestic providers (though countries would still be able to keep regulations that protect incumbent firms from new domestic or foreign competitors. Most critics recognized the need for exceptions to national treatment, but would have preferred that countries be required to enumerate exceptions to national treatment, rather than to assume the absence of a national treatment obligation unless a country schedules a positive commitment. This is self-correcting, however, because the national treatment provision in the GATS automatically applies to any sector in which a country schedules a commitment, and is binding unless the country enters a reservation in its national schedule.

 

MFN

Under the GATS, countries are allowed to enter reservations to MFN in individual sectors at the time they adopt the agreement. Countries are expected to remove these reservations, however, as a sufficient number of countries agree to a balanced package of reciprocal market access commitments in these sectors. This has already happened with respect to basic telecommunications. As satisfactory agreements emerge in other heavily regulated sectors such as financial services and transportation, this problem too should be eliminated.

 

GATS and GATT - Forever Separate?

The more interesting constitutional question arises with respect to the relationship between the GATS and the GATT on issues that span both goods and services. The issue of how to handle cross-cutting issues has already arisen with respect to government procurement, in the follow-up to the decision at the Singapore Ministerial to pursue a new initiative to establish transparency in government procurement beyond the entities currently covered by the Code.

The issue of the relationship between GATT and GATS rules is likely to arise in a more pronounced way with respect to possible future WTO negotiations on an investment agreement. The aim of advocates of such an agreement is to develop a set of binding disciplines that would apply to all investments, unless a country entered a reservation for a particular service or activity. The question is, would it make sense to have different rules for investment in service producing industries as against investment in goods producing industries. Can one even distinguish between goods and services producing firms when an increasing number of manufacturing firms also produce services?

A similar issue could arise if member countries were to conclude that any commitments on the movement of natural persons should apply not only to persons engaged in the supply of services, but also to persons engaged in the supply of goods. Once disciplines on investment cover both goods and services it will be difficult to make this distinction in any case.

Another area where an issue of overlapping disciplines might emerge is restrictive business practices.

There are three possible approaches that could be taken with respect to disciplines that apply to both goods and services. The first would be to maintain a complete legal separation between services and goods by carrying out separate negotiations under each umbrella, even if the issues are essentially the same. The second approach would be to maintain the legal distinction between the two agreements, but to combine the negotiations of common issues into a single negotiation and to insert the resulting language separately into both agreements in parallel. The third approach would be to carve cross-cutting disciplines out of both the GATT and the GATS, and to place them under a combined umbrella. The third approach may well be the approach that should be taken, for a number of reasons.

First, the distinction between goods and services is already a difficult to make in many cases. For example, the information that is contained in goods such as books, records, tapes or computer chips can be transmitted electronically, and in that alternative format would be difficult to treat as a good. Yet to apply different rules, deepening on whether information was sold as a book or as an electronic transmission would not make any sense

Some have proposed to solve this problem by treating both the book and the electronic transmission of the information contained in a book as information products, subject to similar rules. This only raises new issues, such as whether the rules on goods or services should apply, and how one might distinguish between a book of architectural drawings and an architectural service. It has been suggested that a product is an off the shelf product sold as a commodity, while a service is a customized information supplied to a specific customer, which only raises different questions.

Disciplines concerning the treatment of enterprises as against the goods and services they produce create even more complex issues, because increasingly the same enterprises are engaged in both. An investment code that resulted in rights for the producer of a good would immediately raise the question o whether a particular enterprise which produces both goods and services should be treated as one or the other where different investment rules apply.

The second reason for developing a common set of disciplines is that over time trade in goods is increasingly taking on the characteristics of trade in services. As that happens, the need for different disciplines in goods and services will gradually disappear, and it should then be possible progressively to integrate the disciplines in the two areas into a common discipline. By splitting off individual disciplines that can apply equally to both goods and services, the transition could be managed as a step by step process.

The gradual erosion of the distinction between goods and services is due to both the effects of globalization and the increasing technological complexity of many goods. Manufacturing companies, as is true of services companies, increasingly have to be able to establish themselves in the importing market and to move technical, managerial and marketing personnel in and out of such markets. The need for disciplines on investment and the movement of natural persons thus is increasingly valid for both types of activities.

The more important impact of globalization, however, is the impact it is having on the whole structure of traditional trade measures, which are based on the assumption that products have a clear national identity. Trade measures such as tariffs, safeguards, anti-dumping duties and countervailing duties are imposed on the full value of a product entering a market, regardless of the national origin of its components and parts, and even if most of the value originated in the importing country. Countries have tried to get around the increasing illogic of this practice by circumventing it with various devices such as duty draw backs, free trade zones, etc., but each of these devices are complex and difficult to administer. The alternative response has been to eliminate duties altogether through sectoral free trade agreements or across the board regional free trade agreements. In the context of such agreements the distinction between goods and services tends to disappear.

 

Conclusion

The negotiations in services were a serious enterprise that yielded tangible results, however inadequate in some areas. Many services industries reported that the really important objective was to assure that new regulations would not block the growing volume of trade in information-based services over the telecom networks. As already noted, two issues were key to the achievement of this objective: (1) access to private leased line networks, and a commitment by governments not to interfere with the transborder data flows through these networks; (2) a commitment not to introduce new restrictive regulations on telecom-based trade in these services, which for the most part was not covered by traditional regulatory structures. More recently, the agreement on international competition in basic telecommunication services has further strengthened the basis for what has been dubbed electronic commerce.

A solid foundation has been built for future negotiations aimed at the liberalization of trade in services. The reduction of regulatory and other barriers to trade in services will clearly take time. The GATS calls for comprehensive negotiations every five years, with the first such negotiation beginning in 2000.

A substantial liberalization of international trade in services will require substantial reforms of long-entrenched national regulatory systems. Considerable thought will have to be given on how best to address domestic regulatory systems that create barriers to expanded trade in services. The challenge is to devise principles and concepts for assuring international competition, while at the same time allowing diversity in national regulatory systems. Clearly, the objective cannot be the harmonization of national regulations. At the same time, different regulatory systems will have to offer similar competitive opportunities if trade in regulated services is to be liberalized further.

 

References

Bhagwati, Jagdish. 1984, "Splintering and Disembodiment of Services and Developing Countries," The World Economy 7: 133-144;.

Feketekuty, Geza and Aronson, Jonathan. 1984. "Meeting the Challenges of the World Information Economy," The World Economy 7: 63-86;

Feketekuty, Geza. 1986. "Trade in Professional Services: An Overview" in Barriers to International Trade in Professional Services. Chicago: University of Chicago Legal Forum.

Feketekuty, Geza. 1988. International Trade in Services : An Overview and Blueprint for Negotiations. Cambridge: Ballinger

Hoekman, Bernard. 1995. "Tentative First Steps: An Assessment of the Uruguay Round Agreement on Services." in The Uruguay Round and the Developing Economies. Will Martin and Alan Winters, (eds.) Washington, DC : The World Bank.

Hoekman, Bernard and Kostecki, Michel. The Political Economy of the World Trading System. Chapter 5 :"Trade in Services."

Sampson, Gary P. and Snape, Richard H. 1985. "Identifying the Issues in Trade in Services", The World Economy 8: 171-181

Sauve, Pierre. 1995. "A First Look at Investment in the Final Act of the Uruguay Round". Journal of World Trade.

Sauve, Pierre. 1997. "Preparing for Services 2000: Buy Ten Commandments, Get One Free." In CSI Reports: The Service Economy. November 1997. Washington, DC: Coalition of Service Industries.

Snape, Richard H. and Bosworth, Malcolm. 1996. "Advancing Services Negotiations", in The World Trading System: Challenges Ahead, Jeffrey J. Schott (Ed). Washington, DC: Institute for International Economics.

World Trade Organization. 1994. The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts

 

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