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Module 9

Negotiations on Trade in Services: Manual and Simulations

 

Introduction

International trade negotiations in services like other trade negotiations are pursued on the proposition that the removal of barriers to trade can expand economic opportunities and improve economic efficiency, and thus increase economic growth. As is the case with respect of other trade negotiations, trade negotiations in services are based on requests for cuts in foreign trade barriers that hamper exports in exchange for offers to cut domestic trade barriers that restrict imports. While cuts in a country's own trade barriers are as likely to benefit the home economy as the cuts made by other countries, such cuts are viewed as costs in political terms because they are likely to have an adverse effect on the domestic industries that will face increased imports.

While trade negotiators in services thus follow the usual mercantilist logic of trade negotiations in general, it can blind countries to the significant economic benefits that can flow from domestic regulatory reforms in services negotiated in the context of a trade agreement. The economic benefit that can flow from the liberalization of business services are likely to be particularly significant because business services constitute an increasing proportion of the cost of producing many manufactured goods and other services, and a reduction of these costs ill therefore significantly enhance the productivity of national producers. The mercantilist logic underlying trade negotiations in general can thus serve as a trap in the case of services, which countries should seek to avoid.

Barriers to trade negotiations in services are generally embedded in domestic regulations. Since services are invisible, governments cannot directly control trade in services at the point they cross the border. Instead, they seek to control trade in services through the regulation of the consumption of services by domestic residents or the production of services by locally established foreign suppliers. In addition, governments can seek to regulate the entry of foreigners who have the intention of producing a service, and the exit of nationals who have the intention of consuming services abroad. The focus of trade negotiations in services is thus not on tariffs and quotas, as is the case for trade negotiations in goods, but on domestic regulations that limit the consumption or production of foreign services, or the movement of services producers or consumers across the border.

Domestic regulations can restrain foreign imports either by discriminating against foreign suppliers or by restricting both foreign and domestic suppliers more than is necessary to accomplish the desired domestic regulatory objective. Trade negotiations in services cover both types of regulatory restraints. Negotiations aimed at the elimination of discriminatory provisions are called negotiations on national treatment, since national treatment requires the nondiscriminatory application of rules and regulations to both foreign and domestic suppliers. Negotiations aimed at the reduction or elimination of regulations that place quantitative constraints on both domestic and foreign producers on a nondiscriminatory basis are called market access negotiations. This is somewhat peculiar terminology in a traditional trade context, since it makes sense only if one views the targeted provisions as restricting access to the domestic market by any enterprise, foreign or domestic. The effect of liberalizing such market access barriers, of course, is to increase potential competition by both domestic and foreign enterprises.

The General Agreement on Trade in Services (GATS) provides a set of ground rules for the negotiations on trade in services. The GATS establishes a broad definition of trade that encompasses not only the cross-border sale of services, but also the sale of services by locally established foreign enterprises, the sale of services by individual services providers who have gained temporary entry into the country for the express purpose of producing a service locally, and the purchase of services abroad by residents. The GATS refers to these four methods of engaging in trade in services as the four modes of supply - cross border movement of the service, local establishment by foreign enterprises producing services, foreign consumption, and temporary entry by services providers. The provisions of the GATS apply to all regulations that impact on trade under the four modes. In addition to establishing some general rules that apply to all regulations that impede trade in services, the GATS provides for the negotiation of national commitments on the application of national treatment and market access disciplines to specific services, by mode of supply. 

Since trade negotiations in services revolve around domestic regulations, trade negotiators in services have to work closely with the domestic ministries and departments responsible for developing and administering the regulations involved. Trade negotiations in services thus tend to be much more complex than trade negotiations in goods focused on tariffs and quotas. Since trade ministries or departments usually have direct responsibility for setting and administering tariffs and quotas, they can implement negotiated reductions without the cooperation of other ministries. In contrast, hey cannot directly implement any negotiated changes in services regulations. 

The ministries or departments responsible for the regulations covered by trade negotiations have a natural tendency to resist the liberalization of regulations within their responsibility through trade negotiations, not only because they are likely to face political pressure from domestic industries that benefit from restraints on competition, but also because they will view the negotiations as interference in their bureaucratic turf. Consultations and negotiations with domestic regulatory agencies is thus an important part of negotiating trade agreements in services. Trade negotiators will need to mobilize analytical studies showing the economic benefits of liberalizing the regulations, and seek political support from industries that will benefit from a reduction in input costs, the expansion of export opportunities, or the removal of restraints on domestic competition. 

Negotiators focusing on trade in services lack the kind of detailed quantitative data available to support negotiations on trade in goods. You cannot see a service crossing the border. Governments are therefore not able to measure the flow of services across the border in the same way that they can measure the flow of individual goods across the border. Instead, governments have to compile data on trade in services by periodically asking exporters and importers of services to fill out questionnaires. Since filling out the forms is relatively costly for market participants, only a limited number of exporters and importers are surveyed, and the published data are based on projections based on these sample surveys. Data on trade in services consequently lack the kind of accuracy and detail available for trade in goods. Data is generally available only for broad industry categories and for relatively long time intervals. The shortcomings of the trade data is compounded by the difficulty of making a quantitative assessment of the degree of protection provided by regulatory measures. Negotiators in services thus lack the kind of detailed data that would enable them to estimate the impact of negotiated reductions in particular barriers on exports and imports of specific services. 

Since detailed data on services trade is generally lacking, and the protective effect of restrictive regulatory measures is difficult to assess, trade negotiators in services must dependent on qualitative assessments provided by potential exporters or importers of the services involved. This makes consultations with the affected industries particularly important with respect to negotiations on trade in services.

 

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