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Introduction to the General Agreement on Trade in Services

David Hartridge

Hanoi, VietnamAugust 5-6, 2003

General Agreement on Trade in Services: Objectives

Expansion of services trade

Progressive liberalization through

successive rounds of negotiations

Transparency of rules and

regulations

Increasing participation of

developing countries

GATS Provides Policy Flexibility

GATS is commonly said to be the most development-friendly of WTO Agreements because of its great flexibility:

Freedom to decide the scope and pace of liberalisation, through national schedules and “bottom-up” scheduling

Freedom to regulate services, and introduce new regulations, to meet national policy objectives

Special flexibility for developing countries in scope and speed of liberalisation

Services Trade and Development: General Expectations

“The gains from liberalizing services may besubstantially greater than those from liberalizingtrade in goods, because current levels ofprotection are higher and because [there wouldbe] spillover benefits from the required movementof capital and labour.” (World Bank, 2001).

Infrastructural services such astelecommunications, finance and transport arecrucial determinants of overall economic efficiencyand growth.

Services Trade and Development Figures

Services have been the fastest growing segment of world trade between 1980 and 2000, at average annual rates of over 9 per cent (vs. 8.2 per cent for goods trade).

The share of developing countries in world services exports increased from 20 to 26 per cent (1990 –

2000).

Developing countries that liberalized telecommunications and financial services sectors grew about 1.5 per cent faster than others.

Share of Services in Production (GDP, 2000)

0%10%20%30%40%50%60%70%80%90%

100%

Services Industry Agriculture

Source: World Bank, World Development Report 2002

GATS: Comprehensive Scope and Coverage

Measures Affecting Trade in Services at All Government Levels

All Services Covered (except governmental services and air traffic rights)

Four Modes of Supply• Cross-border supply (e.g. international telephony)• Consumption abroad (e.g. international tourism)• Commercial presence (e.g. establishment of foreign bank)• Movement of natural persons (e.g. doctor working abroad)

The Economic Importance of individual Modes?

The share of individual modes in world servicestrade has been roughly estimated at:

40 per cent each for modes 1 and 3;

20 per cent for mode 2 (mainly tourism); less than 2 per cent for mode 4.

Mode 3 trade, mostly combined with foreign direct investment, has been the most dynamic component in recent years.

GATS: Sectoral Coverage

Business Services

Communication

Construction

Distribution

Education

Environmental Services

Health-Related Services

Financial Services

Tourism

Recreation, Culture & Sport

Transport

Other Services

Governmental Services Excluded

Excluded from coverage are “services provided in the exercise of governmental authority” which, in turn, are defined as services that are supplied “neither on a commercial basis, nor in competition with one or more service suppliers.” (Article I:3)

Typical examples:Police, fire protection, monetary policy operations, tax and customs administration, universal health and education systems, etc.

General Provisions Applying to All Services

Most-Favoured-Nation (MFN) Treatment (Art II): Treat services from all trading partners equally – no discrimination

Transparency (Art III): Publish relevant laws and regulations

Domestic regulation (Art VI): Administer laws reasonably, objectively and impartially

Monopolies (Art VIII): Do not allow abuse of monopoly position

Exceptions (Art XIV): Permit breach of rules for overriding needs, e.g. health, security, public morals

Special Rules (GATS Annexes)

Annex on Financial Services allows prudential measures to protect investors, depositors etc. and ensure integrity of banking system. Excludes from GATS key operations of governments – e.g. monetary, exchange rate, social security policy.

Annex on Telecommunications requires access to and use of public telecoms networks by suppliers of scheduled services on reasonable and non-discriminatory terms and conditions.

Air Transport Annex excludes traffic rights and all services directly related to them.

Most-Favoured-Nation (MFN) Treatment

“… each Member shall accord immediately andunconditionally to services and service suppliers

of anyother Member treatment no less favourable than

that itaccords to like services and service suppliers of

anyother country” (Article II:1)

Exemptions may be negotiated during accession for a period not exceeding ten years in principle.

Specific Commitments

The GATS requires each Member to submit a Schedule of Specific Commitments that lists the sectors in which it grants Market Access and National Treatment.

There is huge variation in the coverage of Members’ schedules. New Members usually havewide coverage (more liberal than many current Members) due to accession negotiations.

Market Access Commitments

Article XVI forbids the following types of market-access limitations unless scheduled (no other limitations are possible under this Article):

Number of suppliers Value of service transactions Number of operations or quantity of output Number of natural persons Type of legal entity Foreign equity participation

National Treatment and Additional Commitments

Article XVII - Obligation to treat foreign services and service suppliers no less favourably than your own like services and suppliers in scheduled sectors.

Any kind of limitation in favour of nationals can be maintained if it is listed in the schedule.

Article XVIII - Additional commitments go beyond market access and national treatment – e.g. the reference paper on telecommunications services.

Meaning of “Limitations”

Scheduling a service does not mean it must be fully liberalized in all modes. Commitments can be made in one, two, three or four modes.

And commitments can be limited:

“unbound” = no commitment in that mode “none” = no limitation (full commitment) Specific limitations can be scheduled.

How to Prepare a Schedule: Two Steps

STEP 1: Select sectors and sub-sectors for inclusion

Relevant considerations [underlying objectives]: e.g., attract foreign investment [employment], foster competition [efficiency], broaden product choice [consumer welfare], etc.

STEP 2: Consider need for limitations or modal exclusions

Relevant considerations [type of limitation]: e.g., prevent market congestion [quantitative access restrictions], promote technology transfer [joint venture requirements], prevent market disruption [phase-in commitments], etc.

How Schedules of Commitments are Structured: India/Health

Modes of supply: 1) Cross-border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons

Sector or subsector

Limitations on market access

Limitations on national treatment

Additional commitments

8. HEALTH RELATED AND SOCIAL SERVICES A. Hospital Services (CPC 9311)

1) Unbound 2) Unbound 3) Only through

incorporation with a foreign equity ceiling of 51 per cent

4) Unbound except as

indicated in the horizontal section

1) Unbound 2) Unbound 3) None 4) Unbound except as

indicated in the horizontal section

Must Commitments Be Respected at All Costs?

NO.

The GATS allows Members to renegotiatetheir commitments against compensation(Article XXI), override them for health andother public policy reasons (Article XIV) orsecurity concerns (Article XIVbis), andintroduce restrictions to protect the Balance ofPayments (Article XII).

Relationship Between Commitments and Actual Market Conditions:

Commitments guarantee minimum levels of market access and National Treatment.

Many Members in fact permit higher levels of market access than those scheduled - but must observe the MFN principle in doing so.

Commitments may be upgraded at any time to reflect improved market-access conditions.

Measures/Policies Not Affected by Commitments

Non-discriminatory domestic regulation (standards, licensing requirements, etc.)

Government procurement

Private commercial actions, which are beyond the scope of GATS. There is no private recourse to dispute settlement under the WTO.

Domestic Regulation

Existing Obligation: In committed sectors, all measures affecting trade must be administered in a reasonable, objective and impartial manner (Article VI:1).

Negotiating Mandate: Further disciplines to ensure that standards, licensing requirements, etc. are:

based on objective and transparent criteria; not more burdensome than necessary to ensure quality; and not in themselves a restriction on the supply of a service

(licensing procedures).

« Built-in Agenda » Negotiations After the Uruguay Round

Domestic Regulation (Article VI:4)

Emergency Safeguard Measures (Article X)

Government Procurement (Article XIII)

Subsidies (Article X)

These negotiations are still under way

The New Services Round

Article XIX of GATS – Basic Mandate: Successive rounds of negotiations, starting January 2000, with a view

to achieving a progressively higher level of liberalization

Due respect for national policy objectives and levels of development

Flexibility for developing countries to liberalize fewer sectors and types of transactions

Article IV:1: Facilitate increasing participation of developing countries in world trade

Annex on Article II Exemptions: Negotiation of existing MFN Exemptions

The Timetable

Submission of initial requests by 30 June 2002

Submission of initial offers by 31 March 2003

Conclusion not later than 1 January 2005(Doha Ministerial Declaration)

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Introduction to the General Agreement on Trade in Services

David Hartridge

Hanoi, VietnamAugust 5-6, 2003