Services negotiations: the age of Crisis?

Developed countries pressure for revised offers and the establishment of benchmarks of in services negotiations

From February 7- to 25 a three-week cluster of services negotiations
took place at the WTO. This negotiation cluster has been the last formal cluster before the deadline for the submission of revised or new offers in May 2005. The main message from the Chair of the Services Negotiating Committee Chilean Ambassador Jara and the WTO Secretariat, is that there is a crisis in the services negotiations.

During the services negotiating session in December 2004, the demandeurs for services liberalization - mainly developed countries plus a few developing countries such as India - issued a call to accelerate the negotiations. The Chair of the services negotiating committee and the WTO Secretariat backed this up by stating publicly that services negotiations are lagging behind and are in crisis. At the same time there has been no move on issues of concern to developing countries - in particular in agriculture. Also Non-Agricultural Market Access (NAMA) negotiations are not particularly moving fast. Thus the artificial creation of crisis can only be assessed as an effort to increase pressure on developing countries to table first or revised offers. When it is still very unclear what developing countries might gain in agriculture, why should they now move quickly in services negotiations - an area, in which most of them have a lot to lose and little to gain?

MEGA SERVICES NEGOTIATION CLUSTER - UNTRANSPARENT, UNBALANCED PROCESS WITH HEAVY PRESENCE OF THE CORPORATE LOBBY

During the three-week cluster of services negotiations, a range of activities took place including several multilateral meetings debating issues around domestic regulation, government procurement, subsidies and safeguard measures. There were also a large number of bilateral meetings between members to discuss requests and existing offers. As in the past, some WTO members such as the EC and U.S. with particular interests in far reaching market access commitments, booked rooms for corporate groups to lobby WTO Members, particularly developing country Members.
During this cluster, some 40 representatives from Financial Corporations - Banks, Insurance groups, Pension funds among others - lobbied developing countries on the benefits of liberalizing their financial services sectors under GATS. For smaller developing country delegations, this often involved one delegate meeting a large numbers of persons pressuring them to liberalize their services sector.

Countries negotiate market access commitments on a bilateral level, despite the fact that commitments are ultimately multilateral and thus offered to all WTO members. This certainly raises the question about why market access negotiations are not held multilaterally. If they were, it would allow developing countries to form alliances and strengthen their negotiating power. To date, resisting the pressure of developed countries and their lobbies, is difficult because developing countries negotiate individually. Very often, one developing country negotiator has to sit down opposite a large team of developed country negotiators. The resulting power imbalance in the process does not allow for a fair and balanced agreement and should be changed.

Services negotiations are among those negotiations at the WTO which are the MOST untransparent, secretive and undemocratic. Several developing country negotiators in Geneva say, that if they would have known during the Uruguay Round what the GATS agreement was about, they would never have agreed to it. The democratization of these negotiations in particular by including stakeholders back home is necessary to avoid new services liberalization commitments with unwanted negative consequences.

NEW AND REVISED OFFERS - WHAT TO EXPECT

Indonesia and Uganda have announced during the last services cluster that they will table their initial offers. To date only the EC and Japan have tabled revised requests in writing, the rest of the demandeurs presented revised requests orally. The U.S. has already indicated that it will not table a better offer in Mode 4 (the temporary movement of natural persons). Given the unemployment rates in many other developed countries such as the EC which are on the rise, it is difficult to believe that these countries will table better offers in Mode 4 - in particular in the area of low skilled labour. 45 Members are still expected to make offers, without counting LDCs which definitely should be exempted.

CONTINOUS ATTEMPTS TO CHANGE THE NEGOTIATION PROCESS IN SERVICES: FROM FLEXIBILITY TO BENCHMARKS

Part of the developed country strategy to move services negotiations forward is to change the negotiation process in services. To date, the GATS allows WTO members to freely choose whether they wish to commit their services sector or not. Until now, the proponents of the GATS stressed this flexibility, in many way to dilute concerns among others of NGOs. However, since services accounts for two thirds of the economy of developed countries and their economies continue to face problems, they wish to secure new markets for their services industries to boost growth. The quantity and quality of offers tabled so far do not promise for this to happen. This is one of the reasons why major trading partners are now pushing for the establishment of so called benchmarks - a minimum level of commitments which any WTO member would have to make within this round - in order secure an outcome of these negotiations.

A first attempt to specify and push for this, is a communication on the Liberalization of Financial Services (see links to documents below) which was tabled among others by the EC, Switzerland, Australia, Japan, the U.S., Canada, Singapore, Norway but also Oman, Panama, Bahrain and Tawain. In this document, the proponents - besides praising the benefits of financial services liberalization for economic growth, stability and development - propose so called "Liberalization Targets for Doha Negotiations".

They propose the following benchmarks:

• To use the agreed definitions in the GATS Annex on Financial Services for scheduling commitments
• To ensure commitments for all sectors in particular in Mode 3 (commercial presence). This includes the right to establish new and acquire existing companies... and to ensure appropriate commitments in cross border supply (mode 1 and 2)
• To remove for the mentioned modes of services delivery, discrimination between domestic and foreign suppliers regarding the application of laws and regulations (national treatment) and to remove non-discriminatory limitations such as monopolies, numerical quotas or economic needs tests and mandatory cessions.

This basically means, that developing countries should remove any kind of barrier that currently allows them to regulate the establishment of banks, securities, insurance companies, asset management, pension funds and financial advisory services. In the view of the proponents, any restriction is considered bad for growth and development, as they impede competition and consequently raise the cost of financial services. The World Development Report 2005 of the World Bank, "Finance for Growth" is quoted to give proof for this theoretical consideration.

However past experiences hardly support this position. On the contrary, increased competition, for example in the banking sector by allowing the establishment of foreign banks in a country, has often lead to "cherry picking". Foreign banks are primarily interested in clients with low risks and high profits, essentially the rich (High Net Worth Individuals in banking language) and large (often transnational) companies. The consequence is that local banks loose these clients and are left with higher risk clients, such as small entrepreneurs or less wealthy individuals. While these higher risk groups are often in greater need of credit, the fact that they lose their low risk clients means they are less able to offer credits to the higher risk clients. The banking sector consequently loses its vital function in providing credit for economic activity of small and medium-sized enterprises. A fully liberalized banking sector does therefore not guarantee pro-poor growth.

The tabled communication also needs to be analysed in relation to possible impacts for social security systems, which are still publicly organized in many developed countries.

MOMENTUM BUILDING UP IN DOMESTIC REGULATION

Domestic Regulation together with Government Procurement, Subsidies and Safeguard Measures are discussed and negotiated multilaterally within the services negotiations. These are all important areas as they set the rules for the scope of market access commitments. Making market access commitments without knowing and defining these rules beforehand, can be quite fatal. A commitment can turn out to be quite useless, in case these rules limit the commitment made or make them more far-reaching than intended.

According to Geneva delegates, only in the area of domestic regulation momentum has built up. In the last few months, various countries and groups of countries have tabled proposals for domestic regulation. This area is key to the GATS negotiations as it outlines the scope of policy space to regulate a services sector once it is commited under the GATS.

Developed countries seek to protect via these negotiations rights of services investors which are based in their countries (e.g. banks, insurances, water companies, retailers etc). Regulations negotiated in this ares shall ensure that future legislation in a sector liberalized under the GATS cannot hurt investor rights. The North American Free Trade Area (NAFTA) gives a flavor of what countries committing services sectors can expect. Several national or regional laws put in place by authorities to protect either its population or the environment after NAFTA came into place were challenged as burdensome and thus trade restrictive.

The so-called "necessity test" (the criteria for necessity, the list of legitimate measures etc.) which is also negotiated within domestic regulation, is crucial in this context. In general there seems to be an emerging consensus that a necessity test is needed. Whether it is developed or developing countries, each of them sees this instrument as a crucial one to be able to ensure that given market access is not diluted by national or local laws.

Recently tabled proposals are linked below.

SERVICES NEGOTIATIONS - PROCESS FROM NOW UNTIL THE JULY GENERAL COUNCIL MEETING

According to Geneva based sources the mini-Ministerial in Kenya, which takes place from 2 to 4 March in Mombasa, will be used to increase the pressure on services negotiations. With the current dynamic of creating a public image of a crisis in services negotiations, the proponents of accelerated services negotiations in particular developed countries will try again to blame the slow progress on developing countries - when in reality it is the EC and the U.S. who do not want to move in areas where they have defensive interests.

Before the May 2005 deadline for first or revised offers and the next services negotiation cluster (from June 20 to July 3), several informal meetings will take place. In March an "energy week" is scheduled. At the end of March an informal discussion on domestic regulation will take place. From 27-28 April, a Workshop on Cross border Supply will be held. During the services cluster in June/July a special session shall be held on Least Developed Countries.

For the June services cluster, developing countries expect a first proposal for the "Modalisation" of services negotiation, i.e. a more specific proposal for benchmarks. The demandeurs of services liberalization will use the next months to find some kind of formula or benchmarks to set parameters. It is to be expected that the scheduled mini-Ministerial Meetings (May in Paris, next to the OECD meeting, June in Korea, next to the APEC meeting and July in China) will also be used to maintain or increase the pressure and to discuss such "services modalities". With a few exceptions, all developing countries are against the development of such modalities. It will completely change the nature of the GATS and force developing countries to liberalize services further.

JULY APPROXIMATION

The July General Council meeting (27 to 29 of July), will be a first important step towards the Hong Kong Ministerial Meeting. Currently services negotiators indicate that as a result of this General Council a July approximation should come out. For services this would mean a draft document on domestic regulation. The proponents of a change of the negotiation mode in services will aim for an agreement in July to set benchmarks for services negotiation.

CALL FOR ACTION

Civil society groups need to gear up with their work on services liberalization. In the event that developing countries are pressured into commitments and into establishing benchmarks, much of the needed policy space for development will be lost. Key areas in which developed countries will push for commitments on existing autonomous liberalization or further WTO liberalization are among others in financial services, telecommunication, energy, distribution services, environmental services (in particular water distribution) and to some extent essential services such as health and education. Developed countries are also pressuring developing countries to make commitments under the GATS in sectors which are already autonomously liberalization (mostly due to pressure from the World Bank and IMF). While this might sound logic at first sight, such a decision implies to lock in liberalization policies into a legally binding system with no real point of return. Taking back liberalization commitments in the future would imply to compensate trading partners, either by liberalizing other sectors or pay compensation.

Furthermore, given the fact that GATS is the hidden agenda for the Singapore issues, in particular investment, and that market access commitments lead to serious loss of policy space, it is highly problematic that to date almost no WTO Member has discussed tabled or possible requests and offers back home with the large number of affected stakeholders.

In large part, developing countries have little to gain from services liberalization and consequently should carefully assess the "cost" of losing policy space versus the potential "gains". In its essence, GATS is an investment agreement. After successfully preventing negotiations about an investment agreement within the Doha Round, developing countries need to think twice, before allowing such an agreement in through the backdoor.

Documents accessible as of Monday on www.tradeobervatory.org

Joint Statement on Liberalization of Financial Services (US, EC et al)
http://www.tradeobservatory.org/library.cfm?refid=60486
Statement of Switerzland on Educational Services
http://www.tradeobservatory.org/library.cfm?refid=60485
Domestic Regulation - Communication from Brazil et al, Communication from US
http://www.tradeobservatory.org/library.cfm?refid=60487
http://www.tradeobservatory.org/library.cfm?refid=60488

Alexandra Strickner
Institute for Agriculture and Trade Policy (IATP)
Geneva Office
15, rue des Savoises
1205 Geneva
Switzerland
Tel: +41 22 789 0724
Fax: + 41 22 789 0733

www.iatp.org <http://www.iatp.org/>
www.tradeobservatory.org <http://www.tradeobservatory.org/>