1. Definitions

2. Classification

3. Services international supply modalities

 

4. Obstacles in the International Trade of Services

5. The General Agreement on Trade of Services (GATS)

A Survey on Services Trade Agreements.

1. Definitions

There is some difficulty in prescribing a conceptual definition of services. The emphasis is normally put on the physical intangibility of services as compared with goods. The easiest to remember is the humorous one given by The Economist in 1987 as "any thing sold in trade that can not be dropped on your foot". The identification of a service is normally focused on the compliance with it's been intangible, invisible and so instantaneous that it can not be accumulated. The efforts of identification have to overcome some tangible elements in the presentation of a service - like a diskette that contains a software programme- or in the access to the service -like a telephone in a call.

 

Other descriptions emphasise the effect - output - of a service. According to T.P. Hill the fundamental element would be "the change on the condition of a person or of a good affected". But, there are some services that are precisely devoted to prevent change - like security services - or where the very provision regards the change in the condition as a remote undesirable possibility - like insurance policies.

 

An empirical approach defines services as every economic activity that is not included in the Primary Sector (Agriculture) or in the Secondary Sector (Industrial Goods). The Services would be the Tertiary Sector. This boundary is shady because the increasing participation of services in the productive activities the other two sectors.

 

The activities that are considered as services have been listed in two official classifications of productive activities. The International Standard Industrial Classification, which is used in the United Nations System of National Accounts and the Central Product Classification, which used in the World Trade Organisation.

 

Other classifications are based on groups that have some sheared element. Schemes may be based on:

Technological content.

1. Knowledge based, with high human capital content (health care, education, advertising, professional, insurance, etc.)

2. Tertiary services, with lower human capital content: retail, shipping, distribution, travel, personal services, franchising, etc.

Function.

1. Distributive Services: transportation, storage, wholesales, retail, etc.

2. Producer Services banking, insurance, accounting, engineering, real state, etc.

3. Social Services: health, education, religion, postal, water, electricity, etc.

4. Personal Services: hotel, restaurants, repair, domestic, entertainment, etc.

Moment of Use

1. Intermediate: services that are rendered during production.

2. Final services: services that are performed after the product is made

Degree of Competition

1. Market oriented: normally privately own services, but there are some areas in which public companies may compete in a market e.g., social security, and mail.

2. Non-Market oriented: normally public services under a monopoly. They are mainly public property, but there are cases of private ownership e.g., privately own telecommunications monopolies.

Trade in services is different from trade on goods not only in the fact that no tariffs are levied on them, but also in the ways of supply. To be traded internationally, services still require an exporter, an importer and a transaction across national borders; but while the supply of goods is physical, services remain invisible and intangible as they are performed. Regardless of those common traits, the way services are supplied is not homogeneous. There are cases in which the physical presence of a service supplier may be irrelevant - either in the import or export country - like on any Internet transaction. There are cases - tourism or education - where it is the consumer that crosses the border. All the modalities of supply were scrutinised during the discussions on the General Agreement on Trade in Services (GATS) - at the Uruguay Round - and it was agreed that there were four different modes of supply.

Mode 1. Cross- Border Supply.

When the service is performed from the territory of one country into the territory of another, e.g. transport, telephone calls, television, etc.

 

Mode 2. Consumption Abroad

When the consumer moves to a foreign country to be supplied the service, e.g., medical check-ups, tourism, courses, etc.

 

Mode 3. Commercial Presence

When the permanent use of local infrastructure and some kind of local investment is required in order to supply the service, e. g. banking branches, marketing, fast food franchises, etc.

 

Mode 4. Presence of Natural Persons.

When the temporary presence of a physical person in the import market is required to perform the service, e.g., consultants, academics, specialists, fashion models and actors, etc.

 

4. Obstacles in the International Trade of Services.

The restrictions on the free flow of services are all regulatory: laws, regulations, norms, procedures, etc. The research for a legal national framework is based on the extent covered by each set of rules. It starts with a basic distinction: horizontal legislation and specific legislation. Horizontal is the legislation intended for general application to all activities within a country, e.g., Constitution, Civil Code, Labour Law, etc. Specific is the legislation that is intended for a particular area of activity, e.g., Aeronautical services law, Superior Education Law, Banking Activities regulation, etc.

There is also a list based on the type of regulatory obstacles that have impeded international liberalisation of trade in services. The obstacles have been grouped in four categories, according with the internationally recognised principles of fair trade that they go against.

Market Access

1. Limitations in the number of providers

2. Limitations on the total value of actives or transactions

3. Limitations on the total number of service operations

4. Limitations on the total number of persons that can be employed

5. Measures that restrict or prescribe specific types of juridical persons or joint-ventures

6. Limitations on the participation of foreign capital

7. Other measures that affect market access.

National Treatment

1. Discriminatory Taxes

2. Discriminatory incentives or subsidies

3. Official procurement policies

4. Local content requirements

5. Nationality or residence requirements

6. Other measures affecting national treatment

Most Favoured Nation Treatment (MFNT)

1. Integration agreements

2. Reciprocity requirements

3. Bilateral agreements

4. Other Measures that affect MFNT

Domestic Regulations

1. Licence concession procedures

2. Technical Rules

3. Qualification requirements

4. Other discriminatory internal regulations

The measures restricting the international trade of services can be found in the most unexpected regulations, e. g., professional associations' statutes or municipal decisions. Most countries lack a compilation of them and it is deemed to be incomplete even among those that do. The lack of awareness reaches the extent of flagrant conflicts of laws. A constitutional rule against monopolies may be ignored in a regulatory law that confers it on a particular sector, e.g., telecommunications. UNCTAD has developed a software programme by the name of Measures Affecting Services Trade - MAST - that is been filled with the pertinent data, researched in collaboration with local teams.

5. The General Agreement on Trade of Services (GATS)

The increasing importance of services in the international trade gave impulse to the negotiation of an agreement that was carried in parallel with those of the Uruguay Round of the GATT. The principles and objectives of both agreements are very similar.

1. improving trade and investment conditions through multilaterally agreed disciplines

2. stabilising trade relations through policy bindings on an MFN basis

3. achieving progressive liberalisation through subsequent rounds of negotiations

4. Establishing an overall balance of rights and obligations between all members of the multilateral trading system.

GATS is a more comprehending agreement than GATT, because it will eventually have an impact on the wider range of domestic policies and regulations not related to merchandise. The agreement is subscribed on the basis of individual member commitments to it. Each member presented a list of the services that it was offering to trade under the rules of GATS, in what is called the "positive list" approach.

The principles of Fair Trade applied - given place for some differences - are the same as those in GATT: Most-Favoured-Nation (MFN) treatment, National Treatment and Transparency. There are some additional features that deal with the special character of the obstacles, like those arising from domestic regulations, qualification recognition or entry visas, etc.

The MFN treatment guarantees that any liberalisation by a member will be granted to all WTO members, without discrimination; but temporary exemptions have been allowed. They apply to the preferential agreements in services that had been signed among trading partners, either regionally or bilaterally, before the existence of GATS. Members also maintain the right to continue discriminating in favour of some countries in the service activities listed as not consolidated. The present exemptions were to be reviewed after five years (in 2000), and should expire in 10 years (2005).

The principle of giving the same treatment to foreign and to national products applies also to services, but in a more flexible way. In goods (GATT) no discrimination is allowed. In GATS, again, it applies only when a country has made a specific commitment in that particular service.

Obstacles to trade in services are mainly legal regulations, so transparency is of outmost importance. The information concerning all the rules must be available to service suppliers. The GATS is adamant in the compliance with the publication of all pertinent regulations. Some problem arises from the incoherent juxtaposition of the legal web related to the vast area covered by services that has not been codified as such. The agreement requires governments to set up enquiry points where information will be made available to foreign services operators. There is also a requirement of notification over any regulatory changes that may occur.

Domestic regulations are very efficient means to curtail operation of foreign competition, e.g., a local (technical) rule reserving a radio frequency for a particular use affect the operations of a foreign telecommunications company; license requirements for an advertising campaign may discourage a foreign marketing operator.

For that reason the agreement requires governments to regulate services reasonably, objectively and impartially and to provide national legal mechanisms for overturning decisions.

The GATS promotes the expansion of bilateral or regional qualification recognition agreements to other members, e. g., certification of service suppliers or recognition of academic credentials. All recognition agreements must to be notified to the WTO. Qualification recognition should not discriminate against other members and be used as an obstacle to trade, but there are few firm commitments and many reserves.

In the GATT there are no provisions for investment and the liberalization is negotiated separately under the TRIMs. In the GATS provisions for investment are included in the agreement. There is guarantee of transfer payments ("current transactions") to the foreign providers and of income or dividends from direct investments. The only limitation is balance-of-payments difficulties, which are deemed to be temporary.

Members' specific commitments are listed by sectors where they appear with a performance schedule. The listings are useful to confirm the reach of liberalisation by area and the space granted in each to foreign operators, e. g., market access granted, restrictions on national or MFN treatment.

The commitments listed are consolidated ("bound") and can not be modified without a re-negotiation, a process that will require some compensation. Normally, the request of compensation will be to further the opening of other services to international competition.

The GATS aspires to be an instrument for development. Article IV specifies that developing countries should receive co-operation in:

1. Strengthening their domestic services capacity, efficiency and competitiveness through access to technology on a commercial basis;

2. Improve their access to distribution channels and information networks;

3. Be granted market access in the sectors and modes of supply where they have export possibilities.

The developing countries are also entitled - through Art. XIX - to more flexibility in regard to the degree of openness and to request conditions that may further their development, e. g., transfer of technological know-how, investment, etc.

The GATS incorporates a commitment (Art. XIX) to continue the general process of liberalization through new negotiations. This provision is called a "Built-in Agenda".

The next negotiation round is due to begin on January 2000. There will be a previous assessment of service trade by the WTO Council for Trade in Services to establish guidelines and procedures. The agreement also provides the issues to be negotiated: domestic regulation (Article VI), emergency safeguards (Article X), government procurement (Article XIII), and subsidies (Article XV).

Since GATS became effective (January 1995) two additional agreements have been reached: Telecommunications and Financial services. On presence of natural persons some additional commitments were made in June 1996. The Working Party on professional services finalised in July 1998 a set of guidelines for the accountancy sector. On Electronic Commerce an agreement was reached, in principle, over not imposing custom duties, but is still negotiated. The negotiations on maritime and air transport got nowhere.

It is widely expected that the next round of GATS will put the emphasis on the following issues

1. MFN exemptions (Art. VI). A galling issue because, trough "grandfathering" or other, it conducts to discrimination on Market Access and National Treatment.

2. Safeguard mechanism (Art. X). There is no consensus even on its feasibility. It could be a useful instrument to relieve fears about the transition risks to further liberalisation but, if not disciplined, it could prove a source of protectionist abuse.

3. Subsidies (Art. XV). The present issue is the discrimination in national treatment on the use of subsidies

4. Government procurement (Art. XIII). Important because governments are big clients, but there is political reluctance to assume firm commitments. It should promote transparency on government tenders and best use of public funds.

5. Competition related issues (Arts. VIII and IX). Efforts to expand the competitive principles embodied in the Telecom Reference Paper to other network-type areas.

Services as an economic activity have been largely ignored until relatively recent studies. The first concept about the economic importance of services placed them as a type of activity that grew after reaching industrial development. There was the image of a post-industrial society based mainly on services.

 

Deeper studies about the role of services in economic growth have shown that services are not a result of development, but one of its pre-conditions. Besides the need for a public infrastructure of services (roads, ports) as a precondition for sustained economic growth, there is a growing demand for intermediate specialised services as production becomes more technologically sophisticated. The required specialisation reinforces a tendency to out-source some services and it allows for economics of scale and multi-unit services firms that increase competitiveness as well as the share of services in the general economic output. "The efficient supply of services is increasingly perceived as a critical input in the development process".

 

Services are the fastest growing sector in all developed economies. It is also the main employer. In the United States it amounts to 68% of GDP and 72% of employment.

 

In developing countries it oscillates -in official numbers- around 50% of GDP and 55% of employment; but there are several hints that it may be much larger.

 

One is the extent of the informal sector, which is mainly composed of services and that some economists -like De Soto, on Peru- put at pair with the formal economy. Another big question is the accuracy of their reflection in national statistics, since services remain somehow evasive for traditional statistical techniques or old methods of national accounting. One amount that is particularly fleeting is the actual percentage that can be attributed to services in the value of goods.

Services are the fastest growing component of international transactions. Trade in services expanded at an annual rate of 8 %, between 1980 and 1997. During the same period, trade in merchandise increased at about 6%. The shares of services in world trade aroused from 16% to 23% over the same period. Since 1990 Developing Countries have increased their rate of growth in services exports, reaching the levels that can be seen in the pertinent table.

It must be acknowledged that international trade data is based on national statistics, so there is also a tendency to understate the importance of trade in services. World services trade represented some US$ 2490 billion in 1996.

An analysis of the evolution in services trade composition is also interesting. It allows a comparison between services growth areas and types of economies.

The predominance in trade of services has shifted from travel and transport in the 1980's, to that of communications, computer, and information services in the 1990's. It is important to remark that the mayor increase in the later has been in low-income countries

Before the Uruguay Round services were overlooked in regional integration or free trade agreements. The first to incorporate provisions for trade in services were the European Union and between Australia and New Zealand. Services are now been incorporated in the older and are included since the start of negotiations on new. The current situation can be expressed succinctly as follows.

Since 1992 the three main means to liberalise services are applied in the area of the E. U.: freedom in international cross-border services trade, the right of establishment, and the free movement of natural persons.

The agreement is applied since 1994. Chapter XII liberalises "cross-border trade in services" except for financial and telecommunication, services covered in other chapters. The approach is that of a "Negative List", were the areas not committed are listed and the rest is open, instead of specifying the commitments as in the GATS "positive list".

The MERCOSUR Framework on Services was introduced late into the agreement. It is effective since December 1997. The approach is similar to the GATS and adopts the structure, the general obligations and the gradual approach through the negotiation of specific commitments by area.

The decision to incorporate services into this 30 years old economic integration agreement was taken on June 11, 1998. It aims at a common market for services among member countries: Bolivia, Colombia, Ecuador, Peru and Venezuela. Air transport and government procurements are still excluded.

There is an agreement under the name of "sub-programme 7.5" to promote the development of services within the Community and for measures to facilitate trade.

An agreement on trade of services was reached on 1988. It eliminates all measures affecting trade in services between Australia and New Zealand, with exceptions specified in a negative list, also a first use.

The Bogor Declaration of 1994 proclaimed the intention to achieve free trade among APEC countries, including services. An agenda was agreed at the Osaka APEC meeting in 1995. Elimination of measures affecting services trade should be completed by year 2010 in case of developed economies end 2020 for the rest.

Umberto Mazzei