The Multilateral Trading System Basic Elements

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THE GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)
- Parts I to III -
Trade in Services Division WTO
2

• TRADE IN SERVICES
• ECONOMIC IMPORTANCE
• BASIC CONCEPTS

3
Services in the Multilateral System Since 1995
YEAR ROUND PARTICIPANTS 1947 Geneva
23 1949 Annecy
13 1951 Torquay 38 1956 Geneva
26 1960/61 Dillon Round
26 1964/67 Kennedy Round
62 1973/79 Tokyo Round
102 1986/93 Uruguay Round 123
(Creation of GATS) why?
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Services General perception

• NOT TRADABLE AND NOT STORABLE
• Simultaneity of production and consumption
• Role of local establishment
• STRONG GOVERNMENT INVOLVEMENT
• Natural monopolies, public service obligations,
  etc.
• Infrastructural importance (transport, telecom,
  etc.)
• Role of non-economic objectives (social,
  cultural, safety)
• INTANGIBLE
• Quality criteria for services providers rather
  than for products
• NO TARIFFS
• Access conditions determined by regulation,
  quotas etc.

5
but

• Certain services - international transport and
  communication -
• have been traded for centuries
• Services are supplied in conjunction with goods
  (finance,
• insurance, marketing, etc.)
• Services have become tradable as a result of
• technical progress (e-banking,
  tele-medicine, distance learning)
• government retrenchment
• market liberalization and regulatory reform

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Services Economic importance

• Share in Production and Employment
• Between less than 30 and over 70 per cent,
• depending on resource structure and level of
• development of an economy
• Share in Total World Trade
• Some 20 percent (BOP-basis), but more rapid
• expansion than merchandise trade

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Chart I Share of services in production (GDP,
2000)
1999 data. Source World Bank, World
Development Report 2002, Washington D.C.
8
Chart II World exports of goods and services
(1980 - 2000)
9
Chart IV Services exports by economic groups,
1990-2000 (Average annual change)
1990
1995
Developing
Developing
20
countries
countries
25
80
75
Developed
Developed
Developing
2000
countries
Developed
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Services trade and development Expectations
The gains from liberalizing services may be
substantially greater than those from
liberalizing trade in goods, because current
levels of protection are higher and because
there would be spillover benefits from the
required movement of capital and labour. (World
Bank, 2001). Infrastructural services such as
telecommunications, finance and transport are
crucial determinants of overall economic
efficiency and growth.
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Services trade and development Some estimates

• Lack of competition in maritime transport
  (cargo
• reservation, restrictions on port services,
  collective
• rate setting, etc.) can increase freight
  rates up to
• 25 on certain routes.
• Countries that fully liberalized investment in
• telecom and financial services grew about
  1.5
• faster over the past decade than others.
• Services liberalization in developing countries
  
• could provide as much as US6 trillion in
  additional
• income between 2005 and 2015.
• Source World Bank, 2001.

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Services trade and development Necessary
conditions

• Appropriate sequencing of reforms
• (re-)regulation/liberalization/privatization
  
• Contestable markets (effective competition) to
• prevent private rent-seeking
• Effective regulation, including prudential
  rules,
• to protect consumers and the public interest
• Note The Preamble of GATS expressly recognizes
  the right of
• Members to regulate and to introduce
  new regulations
• to meet national policy objectives.

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GENERAL AGREEMENT ON TRADE IN
SERVICES MAIN FEATURES
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GATS Objectives

• Expansion of services trade
• Progressive liberalization through
  successive rounds of negotiations as a means
  of promoting growth and development
• Transparency of rules and regulations
• Increasing participation of developing
  countries

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GATS Structure

• Framework Articles (I - XXIX)
• Annexes covering certain sector- or
  policy-related issues
• Schedules of Specific Commitments
• (one Schedule for each WTO Member)

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GATS Scope, coverage, definition

• MEASURES AFFECTING TRADE IN SERVICES AT ALL
  GOVERNMENT LEVELS
• ALL SERVICES (except governmental services and
  air traffic rights)
• FOUR MODES OF SUPPLY
• Cross-border supply
• Consumption abroad
• Commercial presence
• Movement of natural persons

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GATS Sectoral coverage

• Business Services
• Communication
• Construction
• Distribution
• Education
• Environmental Services

• Health Related Services
• Financial Services
• Tourism
• Recreation, Culture, Sports
• Transport
• Other Services

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GATS Definition of services trade
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The economic importance of individual modes?
The share of individual modes in world services
trade has been roughly estimated at - over 25
per cent for mode 1 - less than 15 per cent for
mode 2 (mainly tourism) - close to 60 per cent
for mode 3 - less than 1 per cent for mode
4. Mode 3 trade, mostly combined with foreign
direct investment, has been the most dynamic
component in recent years (source Guy Karsenty,
WTO).
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GENERAL AGREEMENT ON TRADE IN
SERVICES APPLICATION TO SECTORS AND MODES
21
GATS Relevance for individual sectors

• Three Scenarios
• I. Not covered (A) Governmental
• services and (B) air traffic rights
• II. Application of unconditional
• disciplines All other services
• III. Full application (conditional and
• unconditional disciplines) Services
• covered by Specific Commitments

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Scenario I A. Governmental Services

• 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 I3)

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What are Governmental Services?

• Typical examples
• Police, fire protection, infrastructural
  services (roads, etc.), monetary policy
  operations, customs administration,
• and any other public service (health,
  education, etc.) meeting the relevant criteria.

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Scenario I B. Air Transport Services

• Excluded from coverage are measures affecting
  traffic rights and services directly related
  to the exercise of traffic rights. However, the
  GATS applies to
• (a) aircraft repair and maintenance
• (b) selling and marketing of air services
• (c) computer reservation systems.

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Scenario II General (unconditional) obligations
apply

• Most-Favoured-Nation Treatment
• Transparency obligations
• Some other good governance provisions
  (availability of legal remedies, etc.)
• Note There is no obligation to open markets!

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Most-Favoured-Nation (MFN) Treatment

• each Member shall accord immediately and
  unconditionally to services and service suppliers
  of any other Member treatment no less favourable
  than that it accords to like services and service
  suppliers of any other country (Article II1)
• Exemptions could have been sought at the date
  of entry of GATS for periods not exceeding ten
  years in principle.

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Recommendation
? Monitor compliance with MFN obligation across
all ministries/agencies that regulate services
(finance, justice, construction, labour,
transport, communication, education, health, )
and access to services markets.
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Permissible departures from MFN - Relevant GATS
provisions

• Annex on Article II Exemptions
• Economic Integration (Article V)
• Elimination of barriers relating to
  National Treatment (Art. XVII)
• Recognition (Article VII)
• Elimination of regulation-related
  restrictions (licenses, certificates, etc.)
• Other
• - Labour Markets Integration Agreements
  (Article Vbis)
• - General Exceptions (Art. XIV)
• - Prudential carve-out in financial
  services.

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Food for thought!?!

• What are the main differences between
• MFN exemptions and Integration Agreements under
  Article V?
• Integration Agreements under Article V and
  Recognition Measures under Article VII?

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Scenario III Sector is subject to 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.
• General obligations (conditional and
  unconditional) apply in addition.

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Conditional Obligations

• Transparency (Art. III)
• Domestic Regulation (Art. VI)
• Monopolies (Art. VIII)
• Payments and Transfers (Art. XI)
• Article contains unconditional and conditional
  obligations

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Schedules of Specific Commitments Structure
Schedules specify the extent of liberalization a
Member guarantees in designated sectors.
General layout
33
Market Access and National Treatment Main
elements

• MARKET ACCESS (Article XVI)
• Absence of quota-type and similar
  restrictions
• NATIONAL TREATMENT (Article XVII)
• Non-discrimination with regard to all
  measures
• affecting the supply of a service

Any limitations must be inscribed in Schedules
under the relevant modes(s).
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Two variants of non-discrimination

• Among trading partners
• ? MFN treatment of all other WTO Members in
  all sectors (Scenario II)
• Between national suppliers and trading partners
  as a group
• ? National Treatment of all other WTO
  Members in scheduled sectors
• (Scenario III)

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How can national policy interests be protected
under GATS (Scenario III)?

• Market Access (MA) and National Treatment (NT)
  obligations are incurred only
• in scheduled sectors and
• to the extent that no limitations have
• been inscribed.

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Meaning of limitations?

• Scheduling of a sector does not imply that
  trade (i.e. MA and NT) must be liberalized for
  all modes. Rather, commitments may vary within a
  spectrum between
• unbound no commitment
• none no limitation (full commitment)

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How Schedules of Commitments are structured
Case A.
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GENERAL AGREEMENT ON TRADE IN
SERVICES SCHEDULING OF
COMMITMENTS
39
Preparing a schedule Two steps

• Select sectors and sub-sectors for inclusion
• Relevant considerations underlying
  objectives
• Attract foreign investment employment,
• foster competition efficiency, broaden
  product
• choice and improve quality consumer
  welfare, etc.
• Consider need for modal exclusions or
  limitations
• Relevant considerations type of
  limitation
• Promote know how transfer joint venture
• requirements (mode 3), protect domestic
  employment
• quantitative limitations (modes 1,2,4),
  subsidies,
• prevent market disruption phase-in
  commitments, etc.

40
Recommendation
? Consider possibility of phasing-in commitments
if current market conditions are fragile or
appropriate domestic regulation (prudential
rules, licensing procedures, etc.) does not yet
exist.
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Six Types of Market Access Limitations (Article
XVI2)

• (a) Number of service suppliers (e.g. new
• entries subject to economic needs)
• (b) Value of transactions or assets (e.g.
• assets of foreign banks limited to
• x percent of total bank assets)
• (c) Total number of operations or quantity
• of output (e.g. restrictions on
• broadcasting time for foreign films)

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Six Types of Market Access Limitations (bis)

• (d) Total number of natural persons (e.g.
• no more than x foreigners per outlet)
• (e) Type of legal entity or joint venture
• (e.g. foreign presence only via
• subsidiaries)
• (f) Foreign capital participation (e.g.
• foreign equity limited to 49 percent)
• _______________________________________
• Or requirement of economic needs test.
• See also S/L/92, para. 12

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Open definition of National Treatment (Article
XVII)

• (1) Treatment shall be no less favourable than
  accorded to own like services and services
  suppliers.
• (2) either formally identical or formally
  different treatment
• (3) relevant benchmark no modification of the
  conditions of competition in favour of own like
  services or service suppliers.

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Typical National Treatment Limitations

• Discriminatory subsidies and other fiscal
  measures
• Nationality and residency requirements (? mode 3)
• Discriminatory licensing/registration/qualificatio
  n/
• training requirements
• Technology transfer requirements
• Local content provisions
• Prohibitions on land/property ownership
• Limitations on insurance portability, education
  grants
• Language requirements
• See also S/L/92, Attachment 1

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Recommendation
?Limitations should cover only measures falling
under Articles XVI2 and XVII ?Avoid overlap
with Articles VI (Domestic Regulation), XI
(Payments and Transfers), XIV (General
Exceptions) and relevant Annexes (e.g. prudential
carve-out in financial services)
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Overlap between Market Access and National
Treatment

• Article XX2
• Relevant measures (e.g. joint venture
  requirements, discriminatory quotas) shall be
  inscribed in the column relating to Article XVI
  (MA). This provides a condition and
  qualification to Article XVII (NT) as well.
• See also S/L/92, para. 18

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How Schedules of Commitments are structured
Case B.
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Role of Horizontal Commitments
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Recommendation

• ? Avoid confusion between Horizontal (applying to
  all scheduled sectors) and Sectoral Commitments
• ? Specify limitations as precisely as possible
• ? Try to make use of CPC-numbers
• ? No general references to domestic
• laws and regulations
• ? No unspecified Economic Needs Tests

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Recommendation

• Before devising new commitments
• ? Verify whether a service is actually tradeable
  under a particular mode
• ? Try to avoid uncertainties related, for
  example, to the distinction between modes 1 and 2
• See Scheduling Guidelines (S/L/92), Attachment 2

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Role of Additional Commitments (Article XVIII)

• Scheduling of measures not falling under
• Articles XVI or XVII. Such measures
• may relate to qualifications, standards,
• licenses,competition disciplines, etc.
• See also S/CSC/W/34

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How Schedules of Commitments are structured
Case C.
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Food for thought!?!

• Current examples of Additional Commitments under
  Article XVIII?
• What other measures/policy projects may be
  scheduled under this Article?

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Must commitments be respected at all costs?
No. The GATS allows Members to renegotiate their
commitments against compensation (Article XXI),
ignore them for health and other public policy
reasons (Article XIV, prudential carve-out in
financial services) or security concerns (Article
XIVbis), and introduce restrictions to protect
the Balance of Payments (Article XII).
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Food for thought!?!

• In what circumstances may Members want to
  apply measures under
• Article XII (Balance of Payments)
• Article XIV (General Exceptions)
• Article XIV bis (Security Exceptions)?

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GENERAL AGREEMENT ON TRADE IN
SERVICES SCOPE FOR AUTONOMOUS POLICY MAKING
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Back to Basics

• Three possible Scenarios
• I. Sector is not covered by GATS
• II. All other services certain horizontal
• (unconditional) disciplines
• III. Sector is subject to Specific
• Commitments MA and NT obligations
• and additional disciplines

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Relationship between Specific Commitments and
actual market conditions

• Commitments guarantee minimum levels of Market
  Access and National Treatment
• Members remain free to offer better conditions
  (subject to MFN principle)
• Commitments may be upgraded at any time to
  reflect the improved conditions

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Relationship between MFN exemptions and
Commitments

• Inadmissible Reciprocity conditions and other
  discriminatory provisions which would reduce the
  scope of a commitment
• Possible More generous treatment of specified
  trading partners than provided for under
  scheduled limitations
• Precondition Properly defined MFN exemption

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MFN Exemption - Case A. reciprocity
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MFN Exemption - Case B. preferential
62
Measures/policies not affected by Specific
Commitments

• Non-discriminatory domestic regulation
  (standards, licensing requirements, etc.)
• Government procurement
• Non-discriminatory subsidies
• Export-related measures (subsidies, restrictions,
  etc.)
• Private commercial actions
• Beyond the scope of GATS

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Food for thought!?!

• Why might countries want to restrict their own
  exports of education, health and similar
  services under modes 2 or 4?
• What measures are potentially relevant?

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Domestic Regulation (Article VI)

• In scheduled sectors Reasonable, objective
  and
• impartial administration of measures (Art.
  VI1)
• Standstill in committed sectors (Art. VI5)
• No new regulation that
• (i) would be unnecessarily burdensome,
• (ii) could not have been expected, and
• (iii) would nullify or impair a commitment.
• Other obligations
• Negotiations on necessary disciplines (Art.
  VI4)

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Emergency Safeguard Measures
There shall be multilateral negotiations on the
question of emergency safeguard measures The
results of such negotiations shall enter into
effect not later than three years from the date
of entry into force of the WTO Agreement. Service
s Negotiating Guidelines ESM negotiations shall
be completed by 15 March 2004.
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Food for thought!?!

• In what respect would safeguard measures differ
  from measures under
• Article XXI (Modification of Schedules)
• Article XII (Balance of Payments)
• Article XIV (General Exceptions)?

67
Government Procurement

• MFN, Market Access and National Treatment
  provisions do not apply to the procurement of
  services for governmental purposes.
• However, Article XIII provides for
  negotiations (no deadline).

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Subsidies

• Subsidies, like all other measures affecting
  trade in services, are subject to relevant GATS
  provisions such as MFN and, in scheduled sectors,
  National Treatment.
• Article XV recognizes that subsidies may
  (nevertheless) have trade-distortive effects in
  certain circumstances and mandates negotiations
  on necessary multilateral disciplines (no
  deadline).

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To be kept in mind Annexes to the GATS

• Elaborating on individual provisions
• Article II (MFN exemptions)
• Movement of Natural Persons
• On sectors
• Air Transport
• Telecommunications
• Financial Services
• On negotiations
• Basic telecommunications
• Second Annex on Financial Services
• Maritime Transport

70
Annex on Movement of Natural Persons Main
Features

• Exemption for access restrictions to the
  employment market and for measures governing
  citizenship, residence or permanent employment
• Visa requirements per se are not in contravention
  of Specific Commitments

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Annex on Air Transport Main features

• Application of GATS limited to three ancillary
  services (see above)
• Periodic review with a view to considering
  further application of the Agreement to the air
  transport sector
• Problem(?) uncertainties about current
  coverage (ground-handling, catering, etc.)

72
Annex on Telecommunications Main features

• All scheduled services must be granted reasonable
  and non-discriminatory access to public telecom
• Suppliers rights
• use of terminal and other equipment
• interconnection with public network
• use of own operating protocols
• Regulatory disciplines
• Regulators rights (technical standards,
  approval requirements etc.)

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Annex on Financial Services Main features

• Delineation of governmental services (monetary
  policy, statutory social security, etc.)
• Prudential carve-out (measures to ensure
  integrity and stability of the financial system)
• Recognition
• Definitions

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Summary assessment What has been achieved in
services to date?

• The GATS provides a reliable and predictable
  framework for world services trade
• The focus of the Uruguay Round was on rule-making
  rather than on actual liberalization
• Many commitments have been overtaken since by
  (autonomous) liberalization measures

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