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Prepublication Draft



Geza Feketekuty1

The over 130 countries that belong to the World Trade Organization are likely to launch a major round of negotiations on trade in services on January 1, 2000. It is a date full of symbolism, because services will be at the center of the 21st century world economy, which is emerging in the wake of the computer revolution. The liberalization of domestic and international competition in services will be critical to the future economic growth of nations, and the new round of negotiations on trade in services therefore will have an important role to play in supporting future economic growth.

Over the past two decades, the East Asian economies achieved remarkable rates of economic growth by orienting their economies to global export markets, and allowing international market forces to guide their industrial development. Their success was so convincing that most countries in the world have now adopted similar economic policies, often abandoning highly protectionist, import substitution policies and highly interventionist industrial policies.

In recent years most of the high growth economies of the 1980’s and 90’s have experienced a major slow-down in their growth rates. One of the reasons for that slowdown has been the emergence of bottlenecks, often associated with inadequate infrastructure services. Moreover, their failure to loosen regulatory controls and protectionist policies in services have left their services sector overall relatively inefficient. Many of them have yet to come to terms with the fact that it is the services sector that drives growth in the post-industrial, information-based economy that is emerging from the computer revolution.

As recently as 1980, the very term trade in services was considered an oxymoron, since services were defined as economic activity that was tied to a particular geographic location. The computer revolution had made services tradable, but most countries had not yet recognized that reality. International discussion of the growing magnitude and importance of trade in services led to a decision in 1986 to include the topic on the agenda of the Uruguay Round of Multilateral Trade Negotiations. The resulting agreement, the General Agreement on Trade in Services (GATS), established a basic framework of rules and national commitments on market access for services produced by foreign suppliers. While the negotiation of the GATS framework was a major achievement, the market access commitments incorporated in each country’s schedule fell short of expectations.

Negotiations on a number of unfinished agenda items continued after the adoption of the Uruguay Round package of agreements. A decision by ministers at the occasion of the signing of the agreements at Marrakech, Morocco on April 15, 1994, set separate target dates for negotiations and work on specific subjects on the services agenda. Negotiations on some of these subjects have either been concluded, as is the case for basic telecommunication services, or still in progress, as is the case with respect to financial services and accounting services. Negotiations on other subjects such as labor mobility, sea and air transportation services, government procurement and subsidies for all practical purposes have become tied to a wider, future round of negotiations on services

The GATS contains a provision on future negotiations, and specifically calls for the start of another major round of negotiations on trade in services no later than January 1, 2000. To prepare for a new round of negotiations, the Agreement tasks the Council for Trade in Services with the establishment of negotiating guidelines and procedures, after having made both an overall and a sector by sector assessment of trade in services with reference to the objectives of the GATS. This paper is designed to provide a contribution to the assessment called for in the GATS prior to the launching of a new round of negotiations.

The paper will first examine in greater depth the role of both services and trade in services to economic growth, and the operation of the world economy. This will be followed by an examination of the challenges facing national economies in adjusting their policies to meet the demands of global competition and the new technologies of production, and the role that the liberalization of barriers to trade in services can play in meeting these challenges. A third section will examine the General Agreement on Trade in Services and the various associated agreements and schedules in terms of their current status, their value, and their shortcomings.

The paper will next provide an in-depth analysis of the various negotiating issues, including both the unfinished agenda items from the last negotiation and what might be added to the new negotiating agenda. This will be followed by a review of constitutional issues, particularly the relationship between the rules for trade in goods and the rules for trade in services. A final section will include a number of general conclusions and observations about the negotiations.

The Role of Services in the New Information-Based Economy

The launching of a new round of negotiations on trade in services in 2000, and their preparation over the next few years, provides countries an opportunity to reflect on the role of services in their economic growth, and what they must do to reform their domestic regulations to unleash the growth potential in the services sector. Services are at the heart of the new economic revolution that is transforming the industrial economy that emerged from the industrial revolution of the 18th century and merging national markets and production systems into a single global market and production system.

This new economic revolution is driven by the introduction of computers into every aspect of economic activity. The influence of this computer-driven revolution of production is pervasive, and affects everyone tied into the world economy. Effective participation in global trade, and in globalized production systems, depends increasingly on state of the art information systems that provide access to timely information about markets, about production schedules, and about product designs.

Services are at the heart of the new economic revolution, since they drive economic activities based on the new production paradigm. No country can be successful in its effort to adapt the new technologies to its own needs, or to link itself to the broader global economy, without establishing the basis for a thriving, productive and innovative services industry. Regulatory reform and liberalization of trade in services are crucial tools for achieving this objective, because over-regulation and restrictions on entry by foreign service providers inevitably result in low quality, high value, and outdated services. The new round of negotiations on trade in services therefore has to be seen as a key catalytic event in facilitating domestic reform of regulatory systems that prevent individual countries from seizing the new economic growth opportunities.

This section will provide a brief but in depth overview of the technological revolution, and the critical role of trade in services. The key manifestations of the transformation of the production process are the automation of production, the mass customization of both goods and services, the shortening of product life cycles, the flattening out of industrial organizations, the tradability of services, and the globalization of production, firms and markets. Each of these aspects of the new production paradigm are explored next.

Computer control of industrial machinery has led both to the increasing automation of production, and the ability to produce customized goods on mass production lines. Automation not only reduces labor costs, it also increases quality. This is because computers and machines do not get bored or lose attention like human beings, and can therefore produce to more exact tolerances more consistently than human beings. Automation also makes it possible to produce a larger variety of goods as cheaply as it was previously possible to produce uniform goods, thus enabling producers to meet different consumer tastes. It also makes it easier and cheaper to reprogram production lines for new products, and thus to introduce new products more rapidly when consumer tastes shift.

Computer driven advances in materials science, electronic controls, chemical and biogenetic engineering and software allow firms to design products with an ever increasing range of potential features and performance characteristics. At the same time, the more rapid diffusion of technology leads to a greater convergence of direct production costs and an increase in competitive pressures, and this in turn has increased the importance of customization and consumer satisfaction to commercial success in the global market place. Products that are not targeted at what different consumer groups want to buy or products that are not adapted to shifts in consumer tastes will fail the market test.

In order to compete successfully in this new economic environment and to prosper economically, producers in each country have to be able to (a) develop information about what consumers want to buy, (b) acquire information about the best available technology to design and engineer the products consumers would like to purchase, © find information about least cost methods of production, (d) exchange information among all facilities involved in the production chain to shorten the time it takes to respond to shifts in consumer tastes and minimize idle or unsaleable inventory, (e) distribute information about new products to potential buyers (f) establish an information system to closely track what goods and services are being sold, to whom, and where. The key element in all this is the acquisition, processing and distribution of information.

Competitive success in this new environment also requires constant innovation and flexibility in adapting production to the requirements of the market place. This in turn has led to a rapid decline in product life cycles, i.e. the average life of a product from the time it is designed to the time it is replaced by another product in the market place. The actual product life cycle differs from product to product, but virtually all products traded in international commerce have experienced a sustantial increase in the pace of change and innovation.This phenomenon has contributed to a flattening of the organizational structure of firms, because large and complex hierarchies tend to slow down decision making and the rate of innovation.

The introduction of computer technology has also led to the automation and tradability of information-based services. It has vastly increased the amount of information that can be processed and transmitted from one location to another instantaneously, The use of ever faster and more complex computers and software has brought down the cost of producing information intensive services, and the ability to transmit the resulting output over great distances virtually in real time. This in turn has made it possible to reduce the cost of producing information-intensive services by adopting mass production techniques in the production of services.

The ability to collect, process and transmit information in real time has simultaneously increased the possibility of introducing competition in many network -based infrastructure services such as telecommunications, energy and transportation. It has made it possible to separate the management of the physical infrastructures such as telephone lines, electric power grids and pipelines, from the services provided through that infrastructure. This in turn has made it possible to allow different service providers to use the same infrastructure, yet compete with each other in supplying the services involved to consumers. It has also made it possible to create virtual networks, by tying together telephone lines or modes of transport owned by different companies as if they were integrated systems, under a unified management. Overall, these changes have both created new types of services in the market place, and a new level of potential competition in the provision of these infrastructure services.

The increased capacity to process and transmit information, and the associated tradability of services. has led to the globalization of production in both goods and services. It has become possible for firms to locate the production of individual components and business services in geographically separated locations, and to carry out different stages in the processing or assembly of a product in different places, while at the same time maintaining a high degree of control and coordination of all downstream and upstream production processes. This enables enterprises to seek out the optimal global location for each production activity, thus taking advantage of the locational advantages each place has to offer. At the same time, the enterprise can preserve all the advantages which close control and coordination have to offer, namely low inventories, and being able to shift production rapidly in response to changes in the market.

The impact of the globalization of production has been pervasive. Few products can be produced on a globally competitive basis today by using exclusively national inputs. No company drawing on purely national resources can possibly match the cost advantages enjoyed by a company that is able to take advantage of the cheapest inputs obtainable globally.

The globalization of production, in turn, has lead to the increasing globalization of firms. Unlike the typical multinational of the 1960’s and 70’s, the new global corporation tends to be far more integrated on a global level in terms of product development and staff management responsibilities. At the same time, the new technologies have facilitated the outsourcing of production activities that are not one of the core competencies of a firm, thus allowing managers to concentrate on those activities that are most crucial to the competitive success of the firm. This has reinforced the flattening out of organizational structures, thus enabling firms to increase the rate of innovation and their response to market signals. It has also expanded opportunities for international trade in business services.

The new telecommunication and data processing technologies have also led to the globalization of many markets, a phenomenon that has been most pronounced in financial services. More recently, the emergence of trade based on the internet has created a truly global electronic market place for various information products. In these new global markets, prices are determined on the basis of global demand and supply conditions, and price changes in one part of the world are rapidly transmitted to other parts of the world.

The globalization of production, of firms and of markets, has in turn accelerated the globalization of many infrastructure services. The global firms of today increasingly demand integrated telecommunication and transportation solutions to support their global operations. The creation of virtual networks based on computer-controlled linkages among physical networks and facilities has significantly facilitated the development of customized infrastructure solutions.

The internet is taking this global economic revolution from the level of large multinational companies to small businesses and individual consumers. By doing so it will multiply the potential economic benefits, by enabling many more businesses and service providers (a) to market their products to foreign consumers, (b) to acquire information about products and prices available abroad, and © to sell and buy directly over the wire in the case of information-based products and services,. It will also increase competitive pressures on domestic firms, and the competitive burden imposed on domestic firms by inefficient and costly business services, and by infrastructure bottlenecks.

The production of services, and in particular, the collection, processing, analysis, manipulation and distribution of information, is at the heart of every one of the features of the new economic paradigm - the automation and customization of production, the shortening of product life cycles, the outsourcing of inputs, the flattening of industrial organization, the introduction of mass production techniques in services, and the globalization of production, firms and markets.
Inefficiencies in the production of services due to excessive regulation, the government protection of monopolies, and barriers to foreign trade and investment, translate themselves into excessive costs and a lack of innovation in business services. Since business services make up an increasing proportion of the cost of production, the increased cost of businesses services readily translates into increased costs for everything country produces. Moreover, the regulatory rigidities constrain innovation and the ability of firms to respond and adapt to changes in market signals. Finally, the bottlenecks in telecommunication and transportation stifle growth by putting a direct cap on economic activity.

The more rapid pace of economic change, and the raised expectation created by the new technologies, is increasing the cost of government social programs, and putting strains on government budgets. Governments around the world are struggling to finance rising costs of education, medical care and pensions. This leaves them with little room to finance large expansions in their telecommunications or transportation infrastructures. They thus face an increasing choice between privatizing and deregulating the provision of many public utilities, diverting funds from social programs into infrastructure projects, or living with infrastructure bottlenecks that constrain growth. Beyond the privatization of utilities, governments are under pressure to achieve productivity improvements and cost reductions in the provision of education and training, pension, and health services. The achievement of these objectives is closely linked to the reform of regulations related to financial, professional and infrastructure services.

Developing countries might be inclined to question the relevance of many of these changes in the world economy for them, since an abundant supply of unskilled workers and a limited supply of capital limit the scope for the automation of production in their economies. This perspective, however, misses a fundamental point, namely that the economic prosperity of developed as well as developing countries today is tied to world markets. What producers from any one country can sell in foreign markets is dictated by what producers from every other country are offering for sale.

Goods and services produced in developing countries have to meet the requirements of the new paradigm - products have to meet current consumer tastes and production has to adjust rapidly to shifts in consumer tastes to avoid wasteful inventory build-up. There is a niche for cheap, low quality, undifferentiated products, but that is a heavily populated niche. Such products also contain little value-added, and therefore will not sustain the increases in real income which developing countries strive to obtain.

In order to lift the standard of living of their people, developing country governments must seek to move to higher value production, and that in turn means producing parts and components, assembling, and supplying business service inputs into globalized production of high quality goods. Many developing countries have a large pool of educated and skilled workers, who are well qualified to produce world-class professional services. They will not be able to do so unless they are given access to world quality support services, in particular, a modern telecommunication and transportation system. Analysts at the World Bank and the Asian Development Bank have identified the lack of adequate infrastructure investment as the major bottleneck to sustained growth in many high growth developing country economies, and the projected investment requirements to overcome these bottlenecks amount to trillions of dollars.

To produce goods competitively, developing countries need to have access to business services that are competitively priced and of world quality. Any producer who cannot get access to capital at competitive rates of interest, reasonably priced insurance, world quality marketing and advertising expertise, and cutting edge engineering know-how will find it difficult to compete in world markets. Moreover, developing country budgets are even more strained than developed country budgets, and developing countries have as much a reason as developed countries to deliver social services as efficiently as possible.

The same set of economic pressures induced the U.S. government over the course of two decades to open up and stimulate competition in the provision of services through a major process of regulatory reform. These regulatory reforms have significantly enhanced the productivity and economic performance of the U.S. economy, and help explain why the United States once again is ranked number one in the productivity of its economy. The opening of competition and the reduction of the regulatory burden have greatly stimulated innovation, new investment, reduction in prices, and improvements in performance. It has created a virtuous cycle as price reductions and improvements in performance in previously overregulated services like telecommunications and air transportation have increased demand, which in turn has made possible further deep price reductions and improvements in performance.

In summary, any country that wants to take advantage of the opportunities created by the new economic revolution must seek to reform its domestic regulations in services and liberalize barriers limiting its trade in services. What countries do to open up competition and improve economic efficiency in services will increasingly determine their economic growth and prosperity. The new round of negotiations on trade in services should be clearly seen as a major opportunity in facilitating the achievement of this objective.

The Policy Challenge - Regulatory Reform in Services

A typical characteristic of many services is that is that they are heavily regulated by governments to protect consumer interests - to assure the quality and reliability of services provided, to assure that all parts of the population are served by service providers, to prevent price gauging by providers with some degree of monopoly, and to assure network integrity. While most of such regulations serve an important social purpose, they often become the vehicle for protecting traditional suppliers from internal and external competition. Some of these protective devices are intentionally inserted in the regulations for protectionist purposes. In other cases, the protection results from a failure to adapt the regulations to changing technologies, or to take advantage of new insights about economically efficient regulation.

The need for regulatory reform is driven by four developments:· Technological innovations that have expanded the potential for competition in infrastructure services.

· Development of new products and services that do not fit current regulatory provisions.

· New insights into the economics of regulation, which offer the possibility for designing more economically efficient regulations.

· The globalization of production and markets, which has increased the cost of large national differences in regulatory standards.

These developments are explored in greater detail below.

First, many infrastructure services have traditionally been thought of as natural monopolies, because the major cost in providing the service was in the construction and maintenance of infrastructure facilities, rather than in the marginal inputs required to serve individual customers. Modern technology has fundamentally changed the economics underlying the provision of such services (a) by reducing the cost of the infrastructure facilities relative to variable costs, (b) by significantly enhancing the possibility of interconnecting independently provided services through computer intermediate systems, and © by enhancing the possibility of tracking, monitoring, and pricing services supplied over a single network by different producers. The net result is that competition has not only become more viable, but has become essential for the introduction of more efficient and innovative infrastructure services. Regulations that stifle and limit competition have become obstacles to economic adjustment and growth.

Second, technological advances have led to an explosion of new products or services. Regulations that are product or service specific tend to become increasingly distortive as such regulations prevent the introduction of new services. Such product or service specific regulations also become increasingly ineffective as markets substitute unregulated products and services for the regulated products and services. This has been particularly true in financial services.

Third, much has been learned about the incentive structures created by various kinds of regulations, and their relative effectiveness in achieving desired social objectives. Much has also been learned about the advantages and techniques for adjusting the scope of regulations to match the desired regulatory objective. Too often regulatory systems end up seeking to control all the activities carried out by a regulated firm, even if the regulatory objective has a bearing on only one aspect of the firm’s activities. For example, in order to assure that the owners of telecommunication or power lines do not charge exorbitant prices it is sufficient to regulate access to the line and the price charged for the use of the line by providers of various telecommunication and information services, and allow the market to determine the types of services that might be offered over the telephone line by competitive suppliers, and the prices charged for such services.

Fourth, the globalization of production has created pressures for harmonizing standards related to integrated production. The globalization of production makes economic sense only where national regulations allow the adoption of the same production and product technologies, information systems, and standards across the national frontiers. Large differences in national regulations that have a direct bearing on the production systems themselves or on the products supplied through such integrated production systems either add to the cost of globalized systems, or establish artificial barriers to the introduction of globalized production.

The internet is taking the need for regulatory reform one step further, by opening up the possibility for the efficient global distribution of many services. Governments will need to rethink their role in the regulation of many services, the locus of responsibility for services produced abroad but purchased locally though the internet, and the desired scope for international cooperation in creating a stable commercial environment for internet transactions.

The economic logic for regulatory reform has been most obvious in the case of telecommunication services, and not surprisingly regulatory reform in this sector is more advanced than in any other sector, globally. In other sectors, the economic logic has been less obvious, if no less compelling in reality, and regulatory reforms in these areas have lagged. This difference in the pace of domestic reform in different sectors is reflected in the progress or lack of progress in international negotiations aimed at the reduction of barriers to international trade in these sectors. Progress in domestic reforms in telecommunications thus opened the way for the successful negotiation of sectoral agreements for the liberalization of trade and international competition in telecommunication services. In contrast, the lag in domestic reforms in financial services and transportation has held back progress in international negotiations in these sectors. Negotiations on financial services are under way as this is being written, and the outcome uncertain. Negotiations on shipping and air transportation services have been postponed.

Careful thought needs to be given to this close relationship between domestic regulatory reform in services and negotiations aimed at the liberalization of trade and international competition in services. If progress in trade liberalization is to go beyond the removal of overt forms of discrimination against foreign service providers, and address the creation of a competitive regulatory framework for the provision of services, the negotiations will need to find a way of addressing domestic regulatory reform, and its relationship to the creation of an global regulatory framework for competition in individual services.

Ideally, further negotiations on heavily regulated sectors in services would be preceded by broad-based discussions on the relationship between regulatory reform and trade liberalization, such as discussions currently being pursued in the OECD. Second, member countries should consider an amplification of Article VI of the GATS which deals with the impact of regulations on trade in services. Various suggestions for deepening Article VI are discussed in a later section of this paper. A strengthening of Article VI along such lines would go a long way towards establishing an international framework for competition in regulated services. In some sectors characterized by a history of extensive regulation it may be necessary to go further in addressing the issues of common regulatoruy concern in sectoral discussions, with the objective of establishing some common reference points around which international competition in the sector could be organized. Some suggestions with respect to the way forward on the more difficult sectors is covered in another section of the paper dealing with future sectoral negotiations.

The General Agreement on Trade in Services - A Summary and Evaluation

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

(a) 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;
(b) limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economics needs test;
(c) 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;
(d) 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;
(e) 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 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.

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 are continuing. Major progress appears to have been made in expanding meaningful offers from many of the most advanced developing countries, but it remains to be seen whether they can be concluded by the current target date of 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..

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.

Market Access Commitments in 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 commitments from countries to preserve the existing degree of market access in as many sectors as possible. Maximum coverage was important because a number of disciplines incorporated in the GATS are triggered by the existence of 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 has been relatively free of restrictive regulations, and the establishment of a binding commitment to preserve the existing degree of market access could help stem pressures to impose restrictions on these services once competitive pressures mount.

Based on the two criteria - maximum coverage and binding of the current level of market access - the results were somewhat disappointing with respect to the schedules of the more advanced developing countries. The paucity of stand-still commitments is particularly puzzling since many of the countries involved have unilaterally liberalized their policies in some areas in an effort to attract more foreign investment and to improve the performance of their economies. While developing countries have traditionally viewed the services sector as the employer of surplus labor, many of them have begun to recognize that inefficiency and a lack of productivity in key services can handicap 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.

Notwithstanding the paucity of market access commitments by the more advanced developing countries, the negotiations achieved a major purpose of the negotiations, namely to keep international trade in information-based services from being encumbered by new restrictive regulations. The schedules submitted by developed countries guarantee existing levels of market access for most information-related business services such as data-base services and consulting services. The schedules submitted by developing countries are less comprehensive in their coverage, but nevertheless contain useful commitments in the area of value-added telecommunication services, which includes data-base services. This leaves trade in information services largely free of major barriers to cross border trade. This has become all the more important as the commercialization of the internet has vastly expanded the potential volume of electronic commerce in information and related products and services.

Meeting the Challenge of the Information Revolution. In addition to keeping the lid on possible restrictive regulations on cross-border trade in information services, the negotiations resulted in a major agreement to guarantee open access to telecommunications networks for the purpose of delivering a wide range of information-based services to customers in other countries. The Telecommunications Annex to the GATS grants business users access to public telecommunication networks and private leased circuits on reasonable and non-discriminatory terms and conditions. It also establishes 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. In short, it allows businesses to establish their own networks, and to use such networks freely either for their own internal use, or to reach their vendors and customers.

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.

Expanding Market Access Commitments in 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.

The Unfinished Agenda on GATS Rules

The negotiators identified three areas of rulemaking for follow-up work. The three areas are safeguards, 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 it difficult to develop one disciple 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 discipline should cover all four modes equally, or whether separate disciplines 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.

Preparing the Way for Trade Liberalization in Regulated Sectors

As mentioned earlier in the paper, real progress in liberalizing trade in heavily regulated sectors will require parallel domestic regulatory reforms. This might be accomplished in three steps - a discussion of regulatory reform per se, a strengthening of Article VI, and a resumption of sectoral negotiations on the most heavily regulated sectors.

A preparatory discussion of regulatory reform should be firmly anchored in a recognition that regulatory reform in the first instance is in the economic interest of the country itself. Regulations which are more costly or more restrictive than necessary to achieve the desired social objectives are a dead loss to a country’s citizens. They raise the cost of living, reduce choices, limit economic growth, and restrict employment opportunities in the most highly productive and therefore most highly paid jobs.

The discussion on regulatory reform should have several aims: it should educate regulatory and trade officials on the rationale for regulatory reform, it should help build domestic political support for reform, and it should lay the conceptual groundwork for international sectoral agreements that spell out the groundrules for international trade and competition in key regulated sectors.

International discussion can serve a useful educational function by allowing officials responsible for administering regulations to learn from the experiences of officials in other countries, and to benefit from studies carried out by highly qualified professionals employed by international organizations. International discussions can also help educate a country’s voters about the potential economic gains from reform through the wide dissemination of information about such gains. Findings by international bodies that convey broad international consensus on a subject often carry considerable weight in domestic consensus building efforts. Finally, international discussions can help overcome domestic political resistance to reforms that might benefit the country as a whole but disadvantage stakeholders in protected industries.

It might be argued that the successful negotiation of the General Agreement on Basic Telecommunication Services (GBT) proves that progress can be made without a discussion of domestic regulatory reform per se. The difficulties experienced in financial services and transportation services, on the other hand, tends to support the utility of a more basic dialogue about the advantages of domestic regulatory reform and trade liberalization in preparation of negotiations leading to substantive trade liberalization and expanded international competition. In the case of financial services, many industry observers recognized belatedly that an educational campaign aimed at explaining the advantages of regulatory reform and trade liberalization of financial services could have facilitated the negotiation of market access commitments by developing countries.

The OECD has laid the foundation for a global dialogue on regulatory reform. In 1995 the Japanese government proposed that various OECD Committees analyze the issues related to domestic regulation, with the objective of seeking to crystallize principles for the reform of such regulations. The Japanese government believed that such an effort might assist governments in designing more effective and economically efficient regulations, while also reducing potential barriers to trade. Work undertaken by the OECD since that time has helped to deepen understanding of the issues among its members, and has generated documents that can serve as a useful input into discussions held elsewhere, including in the World Trade Organization.

Strengthening Article VI of the GATS on Regulations

Article VI of the GATS provides a basic framework for minimizing the disatortions of trade created by domestic regulation. A strengthening of this article could go a long way in facilitating real market access liberalization by commiting countries to the reform of regulations that impede market-oriented competition. Article VI now provides (a) that regulations be administered in a reasonable, objective and impartial manner, (b) that countries establish procedures for the review of regulations at the request of service suppliers, and © that regulations be based on objective and transparent criteria, not be more burdensome than necessary to ensure the quality of the service, and in the case of licensing procedures, not in themselves, restrict the supply of the service. These provisions could be strengthened in a number of ways.

Article VI could expand on the scope of GATS Article I on transparency by requiring members to explicitly state the public policy objectives served by a regulation. This would facilitate any examination of whether the regulation is “more burdensome than necessary to ensure the quality of the service,” as provided in Article VI (4) (b).

A revision of Article Vi could also clarify that the words “quality of service” in VI (4) (b) refer not only to the reliability of the service from the perspective of an individual consumer, but that they also encompass the reliability of the service from the broader social perspective - covering the full range of commonly accepted social objectives. This broader interpretation of the term quality of service is consistent with the overall thrust of Article VI, but is not necessarily clear if the sentence involved is taken by itself, outside the broader context of Article VI as a whole. .

Article VI could also contain a new provision that would encourage members to limit the scope of a regulation to what is necessary to achieve the objective served by the regulation. This would be fully consistent with the spirit of the requirement that regulations not be more burdensome than necessary to ensure the quality of service, and would amplify that rule. Countries would be encouraged to regulate only those activities that have a direct bearing on the regulatory objective, and not seek to regulate ancillary activities carried out by the same firm. Such a provision, for example, would encourage countries to focus their regulation of infrastructure services on the terms of access to physical infrastructures such as pipelines and electric transmission lines, giving competitive suppliers of services provided over the network equal access to the network . It would no longer be necessary to regulate the services distributed through the network, because market competition would establish both an optimal price and quality of service.

Article VI could also include a general restatement of the competitive safeguards built into the Telecommunications Annex and the Agreement on Basic Telecommunications (GBT). Such a provision would help assure that monopoly providers of essential services would not abuse their monopoly position by either charging unreasonable fees or by giving themselves preferential access to essential services in the competitive provision of downstream products. This provision could apply not only to “transport services” provided over electric conduits or pipelines, but also to a variety of other monopoly inputs such as water.

Another addition to Article VI could encourage countries to adopt performance oriented regulations, rather than regulations that directly seek to establish bureaucratic control over the specific activities carried out by enterprises. Such a provision would parallel a similar provision embedded in the GATT Code on Technical Barriers to Trade, and would also be fully consistent with and amplify GATS Article VI (4) (a) which requires regulations to be based on objective and transparent criteria.

Another possible addition could encourage member countries to use market-based incentives and disincentives to achieve regulatory objectives, where that is feasible and appropriate. Market based regulations tend to achieve desired social objectives with greater economic efficiency than directive regulations that seek to control the behavior of market participants. For example, it would be far more efficient in economic terms to allocate scarce resources such as landing slots through an auction than through a system of licensing that benefits incumbents.

Finally, Article VI could encourage self-regulation by industry where that satisfies the achievement of the desired social objective. At the same time, it should require member governments in such cases to ensure that compulsory private regulatory or standards-making activities be open to all service providers, including foreign service providers.

The Sectoral Negotiations

In some heavily regulated sectors, some degree of international rulemaking on a sectoral basis is inevitable, particularly where the regulations specifically limit competition or competitive entry, or where the regulations set high performance standards for service providers. Countries with regulations that permit open entry and competition are concerned about market accesss conditions in countries that limit competition. Countries with strict performance standards are reluctant to grant open entry to foreign firms that are not required to maintain adequate performance standards by their own governments. International trade and competition in these sectors therefore may require some degree of international understanding on the allowable forms and extent of competition, and of the minimum performance standards that should be met.

It would be a mistake, however, for the WTO to establish highly detailed regulations. It needs to take to heart the principle of subsidiarity, and avoid excessive rule making. As was the case with respect to the GATT treatment of standards, the WTO should focus on establishing legally binding obligations centered on some key principles and procedures, while leaving much of the substantive detail to other international organizations, national governments, and voluntary private bodies to implement. This calls for a judicious blend of legally binding obligations on key principles, voluntary guidelines that could serve as reference points for international regulatory norms, and references to standards and work carried out in other public and private organizations.

An overview parer such as this cannot go too deeply into the content of individul sectoral agreements. However, the following discussion might provide some useful ideas on how one might move forward in key sectors.

Financial Services. The GATS agreement contains an Annex on Financial Services, which primarily deals with prudential issues. The key objective of the financial services negotiations currently under way is to obtain a sufficient number of market access commitments by the most advanced developing countries to meet the minimum requirements of countries that have taken an MFN exemption in this sector, principally the United States. Many developing countries have a wide array of restrictions on both cross border transactions and on the participation of foreign financial institutions in local financial markets.

Whatever the outcome of these negotiations, it will represent the beginning, rather than the end of negotiations in this sector. In order to achieve the ultimate objective of open international trade and competition in financial services, two things will have to happen. First, most developing countries, and many developed countries, will have to reform their domestic regulations. Second, the financial authorities in these countries will need to expand international cooperation on issues related to the prudential supervision of financial institutions under their jurisdiction.

In general, the challenge of regulatory reform is to shift the nature of regulation from a system under which the financial authorities exercise supervision by authorizing specific types of transactions by financial institutions to a system under which they exercise supervision by monitoring the overall financial condition of financial institutions. Short of an overhaul of regulatory systems, the liberalization of trade involves a negotiation over the number of licenses issued to foreign financial institutions, and the authorized volume of activity under such licenses. To get beyond a piecemeal negotiation over individual licenses or quotas will require ultimately a more comprehensive reform of financial regulations in many member countries and expanded international cooperation on fiduciary issues.

Cooperation on fiduciary issues is becoming increasingly necessary as a result of the high degree of international integration of financial markets. Financial markets, more than other markets, have become globalized, and it is this high degree of globalization that leads countries to hesitate in opening up their financial systems more fully to international market forces. The Annex on Financial Services recognizes that the treatment accorded to financial services from another member can take into account the degree to which the prudential measures taken in that country satisfy its own prudential standards. The Annex also explicitly provides for the negotiation of bilateral and plurilateral agreements on the recognition of another country’s prudential measures for internationally traded financial services.

The need for more in depth negotiations is likely to arise earlier rather than later, because the internet provides an increasingly usable vehicle for supplying financial services across the border directly to individual consumers. Until the advent of the internet, cross border trade in financial services was a practical reality only for large corporations with an extensive international presence. The commercialization of the internet promises to change that, and make it feasible for small businesses and households to buy foreign securities, to borrow or deposit money in foreign banks, or to take out insurance policies over the net. While most governments have mechanisms for exercising control over some of these transactions, for example by stating that only insurance policies obtained from authorized firms will satisfy compulsory insurance requirements, many of these transactions will be beyond the ability of governments to control in a practical way.

Progress on the liberalization of trade in financial services may well also depend on a deeper understanding of the domestic advantages of liberalization by some of the more advanced developing countries. Some of the more important advantages that could be cited, for example, include (a) improved access by national firms to international capital markets, thus reducing their cost of capital and expanding their potential pool of capital, (b) improved rates of return on funds invested by pension funds, thus reducing future claims on government funding, © diversification of risk insured by domestic insurance carriers. Beyond an analysis of the advantages of regulatory reform in financial services, a dialogue on domestic reform might also focus on the appropriate regulatory tools for discharging the fiduciary responsibilities of government. Contrary to widespread impressions by many developing country governments, regulatory reform and trade liberalization in financial services need not result in unsound financial conditions.

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, interllining 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.

Retail Distribution. The retail distribution sector has not been targeted for sectoral negotiations. Many countries have made market access commitments in this sector. The reason why it might nevertheless be useful to initiate sectoral discussions in this area and to develop a sectoral annex is because this sector is of strategic importance to the operation of the international trading system as a whole. Commitments on market access do not have much meaning if goods cannot be distributed at the retail level, and in highly concentrated industries new foreign suppliers may find it difficult to distribute their goods through retail channels dominated by the domestic industry. At the same time, many countries have laws that make it difficult to establish large retail outlets as a means of protecting small retailers in an area, yet it is precisely large retail outlets that are most likely to be a channel for the distribution of competitive products from abroad. An agreement that clearly establishes the rights of outside suppliers to establish and invest in retail outlets is likely to be a critical component of a well functioning trading system.

Electronic Commerce. The internet is rapidly becoming not only a new medium for exchanging messages and sharing information, but also a channel for selling and buying information-based products and services across the globe. Both businesses and individual households are getting connected to the net, and using it for everything from electronic banking to electronic shopping.

The potential opportunities created by the commercialization of the internet are enormous. It empowers small entrepreneurs located in out of the way places from the arctic circle to Patagonia to offer information products for sale to a world-wide group of consumers that is rapidly growing. It establishes the basis for a highly competitive market in which small producers can reach distant customers at relatively low cost. The regulatory challenges posed by the internet are equally large, since the internet transcends the limitations of geographic space and territorial jurisdictions.

The Telecommunications Annex to the GATS, and the subsequent agreement on Basic Telecommunication Services provide a solid foundation for the development of a stable trade regime for electronic commerce. What is required is an interpretation that clarifies the application of these agreements to electronic commerce based on the internet, and expands on the principles included in the Annex. The internet clearly falls within the definition of telecommunications services covered by the Annex. The only argument some countries might make is that the internet was not widely used by the general public when the Annex was adopted, and that its widespread use now has created what is essentially a new service. To remove that uncertainty, it would be useful to negotiate an explicit recognition that the Annex applies to the internet.

The provisions of the Telecommunications Annex could usefully be enhanced by adding a neutrality principle, which in effect would state that the use of the internet for a transactions should not alter the application of the regulations or taxes that would apply if the transaction were carried out by other means, e.g. orally or in writing, or if the information product that is being purchased or sold were transferred in another format, e.g., in the form of a book, a tape, or a disk. This would constitute a useful elaboration of the principle already contained in the Annex, which is that member countries place no condition on access to and use of public telecommunications by service suppliers in so far as such services are covered by commitments in the country’s national schedule.

A third provision might confirm the status quo with respect to the nonapplication of tariffs to information products and services traded over the internet. Under current agreement and practice, no duty is assessed on the intellectual content of information products. Where duties are imposed on books or tapes, the duty is generally assessed on the value of the physical medium, but not the value of the content. Application of the neutrality principle would maintain that practice, despite the absence of a dutiable physical medium.

Beyond these basic principles, governments will need to address numerous regulatory issues concerning the recognition of electronic contracts and digital signatures, payment mechanisms, the allocation of liability, privacy and content issues. For the most part, these issues will be best handled outside the trade area in other private and governmental institutions.

Issues Related to the Institutional Architecture

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.


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.

The GATS and Domestic Political Processes

Since future negotiation in trade in services will inevitably be more intrusive in the internal affairs of countries, the work in the WTO will have to become increasingly more transparent in order to meet public concerns about a democratic deficit in the WTO. Much useful progress has been made in reaching out to the public through an expanded dissemination of information about WTO activities, through expanded contacts with private interest groups, and through the activities of issues coalitions among WTO members. More will have to be done in the future to assure skeptics that the WTO is not a secret conspiracy to rob them of their democratic rights.

Concluding Thoughts

The liberalization of barriers to international trade and investment in services can contribute to growth in two ways. First, negotiations on international trade in services can spur the removal of barriers to internal competition within individual countries, thus removing internal constraints to the achievement of greater economic efficiency in the production of services, and the removal of infrastructure bottlenecks. Second, such negotiations can lead to the removal of barriers to external competition in services, making available the gains from increased trade - expanded markets for competitively produced services, domestic gains in productivity as domestic producers respond to the foreign competition, and lower prices for consumers. The gainers will be business users of services, as well as household consumers.

Regulatory reform and a search for increased international cooperation on regulatory issues is likely to be a central issue for government policymakers in the years ahead. In considering how progress can be made, it will be extremely important to keep the focus of any international discussion or negotiations on regulatory reform on the domestic economic benefits of such reforms.

Domestic political support for such reform efforts can be bolstered by focusing on the needs and interests of the users of services, and on the contribution that the right kind of reforms can make to good governance - namely improving the quality, objectivity and professionalism of government regulatory bodies and reducing the opportunities for bribery and corruption.

As the WTO seeks to define a role in the area of regulatory reform in services, it needs to take to heart the principle of subsidiarity, and avoid excessive rule making. As in past efforts in areas such as standards, the WTO should focus on establishing legally binding obligations centered on some key principle and procedures, while leaving much of the substantive detail to other international organizations, national governments, and voluntary private bodies to implement. This calls for a judicious blend of legally binding obligations, voluntary guidelines, and references to standards and work carried out in other public and private entities.

Since future negotiation in trade in services will inevitably be more intrusive in the internal affairs of countries, the work in the WTO will have to become increasingly more transparent in order to meet public concerns about a democratic deficit in the WTO. Much useful progress has been made in reaching out to the public through an expanded dissemination of information about WTO activities, through expanded contacts with private interest groups, and through the activities of issues coalitions among WTO members. More will have to be done in the future to assure skeptics that the WTO is not a secret conspiracy to rob them of their democratic rights.


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,D.C. : The World Bank.

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

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 Econbomy. November 1997. Washington, D.C.: 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, D.C.: 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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