UNCTAD panel debates state of WTO services negotiations

Developing countries taking part in an UNCTAD meeting have reiterated that they are entitled to exercise flexibility when deciding on liberalisation commitments in the WTO's services agreement (GATS).

The developing countries' need and right of for policy space in determining their services strategy was stressed by the coordinators of the ACP Group and the LDC Group, as well as Brazil, the Philippines and other individual countries.

The discussion took place on Thursday (9 February) at the tenth session of the Commission on Trade and Services, and Commodities. The panel mainly comprised WTO services negotiators from developed and developing countries.

The ACP Group coordinator, Ambassador Baboo Servansing of Mauritius, stressed that the plurilateral negotiations mandated by the WTO's Hong Kong Ministerial must be on a voluntary basis, and no developing country should be asked to participate in negotiations in sectors in which they are not ready to do so.

Philippines negotiator J. V. Gonzage said that full flexibility of the request and offer system is the "heart and soul" of the GATS and this flexibility was a pre-condition for developing countries agreeing to the GATS being in the WTO in the first place. The current negotiations must be tempered with the need to respect developing countries' right to flexibilities.

The chair of the WTO's services negotiations Ambassador Fernando de Mateo of Mexico, responding to questions, said the plurilateral negotiations as mandated at Hong Kong are in "unchartered territory. We don't know how it will function." He described the plurilateral mode as a way to economise time and put together the requests of the demandeurs.

Brazilian negotiator, Audo Faleiro, also stressed that the plurilateral process had to be a voluntary process, not mandatory, and should not involve the whole membership. He said that a lot of time had been wasted before Hong Kong in having to deal with the controversial proposals to introduce multilateral numerical targets as a negotiating mode.

He added that there was a crisis of leadership in the services negotiations as the major developed countries were themselves having problems in not being able to make meaningful commitments (for example, audio-visuals in the case of the EU and Mode 4 in the case of the US).

European Commission official Carlos Verdejo, defining the flexibility issue, said many members had not locked in their autonomous liberalization. The GATS says developing countries can open fewer sectors but not close their doors. Developing countries should provide two thirds of what the developed countries provide, while LDCs and vulnerable economies are not expected to make commitments.

At the start of the panel, Fernando de Mateo said there was a need to strike a balance between liberalization and establishing regulatory systems so that services liberalization does not endanger macro-economic stability, and GATS allows the search for the optimal level.

He noted that paragraph 7 of the Hong Kong Declaration's Annex C on services dealt with plurilateral negotiations, which were criticized by NGOs and the experts. There was no agreement on the contents of this paragraph. It says negotiations can take place. It allows developing countries to defend their interests and also allows the negotiations to accelerate, giving economies of scale to both sides (those making and those receiving requests).

Hamid Mamdouh, Director of the WTO's Services Division, said the Hong Kong Declaration provides a delicate balance between higher liberalization and appropriate flexibility for every developing country, while the LDCs are not expected to undertake new commitments.

The Hong Kong text only provides a process, and much has to be decided in the negotiations themselves. The request-offer process requires political will at capitals. He added that on market access there will be no multilateral decisions on services until the end, when the final package has to be deemed acceptable to all.

On the plurilateral process, questions remain such as the number of groups and of participants in a group. He said the process would inject energy into the negotiations, allowing quicker progress. On domestic regulations, the Hong Kong Declaration had mandated formulating new disciplines, and a single text is needed, before the summer break.

Faleiro of Brazil said that the Doha negotiations had undergone many phases, from the age of innocence (Feb 2000 to Nov 2001), to the age of frustrated expectations (Doha, Nov 2001 to Cancun, Sept 2003), the age of extremes (from Cancun to the July 2004 package), to the age of crisis (July 2004 to July 2005 with no first approximations). Completing the series, there was the age of benchmarks (second semester 2005) and now the age of plurilaterals and of policy space (2006).

He said the second semester of 2005 was completely spent on discussing the complementary approach, with demandeurs attempting to alter the negotiations by inserting the "pernicious element" of mandatory benchmarks, and fortunately it was dropped from the services draft (Annex C).

At Hong Kong, he said, services almost became the scapegoat of the conference, with NGOs amplifying the legitimate concerns of developing countries, but in the end there was a balanced text which retained the GATS flexibilities.

He said it was up to members to set up the plurilateral process. It had to be maintained as a voluntary process, not mandatory and should not involve all members but mainly large developing countries and developed countries, and should focus on only some areas such as Mode 4 and some key sectors.

The real battle on policy space would be in domestic regulations, he said.
GATS is ambiguous enough to allow policy space. The mission would be to add precision and widen the set of parameters which policy makers can ensure can be met.

He added that if there is no movement in agriculture, he did not foresee progress in services. Another critical issue was the crisis of leadership as the demandeurs in GATS are not willing to play a leadership role.

Faleiro said that the EC spent a good part of 2005 on the cultural diversity convention of UNESCO, and asked to reduce its commitment in this area. "It is hard for the EU to convince us to be flexible in finance and other sectors when it cannot be flexible in audio-visuals," he said. Another problem was the renegotiation by the EU of its commitments under Article 21 to take account of 13 of its members.

As for the US, said Faleiro, it had not added anything in Mode 4 so far and had thus lost legitimacy in driving the negotiations. Also, the EU and US do not seem to be able to work together, for example, in coming up with the plurilateral requests so far.

Verdeso of the EC said that numerical targets (which it had unsuccessfully proposed before Hong Kong) was compatible with GATS Article 19. On the relation between services liberalization and development, he said you can choose to create growth through autarky or openness, and experience shows that openness succeeds. Liberalization creates a win-win situation, and commitments in Mode 3 can only lead to investment, growth and employment.

The round should provide for new market opportunities but many members were not even locking in their autonomous liberalisation. He accepted that developing countries should contribute less and interpreted this to be that developing counties provide two thirds of what developed countries provide.

He said the EU had made a very good offer on Mode 4 but reminded that the GATS mandate is not for free labour movement but only for movement of service suppliers on a temporary basis.

United States negotiator Alicia Greenidge said much of the meat in the Mateo text emerged from the core group on services that India had initiated and which the US was invited to co-chair. She said the plurilateral approach is meant to seek higher ambition among groups, and not to replace the bilateral process, nor was it intended to be a multilateral approach.

On domestic regulations, she said some countries were not sure how to address this, for example, should there be disciplines across the board (in all sectors, whether or not countries commit in them), when domestically there may not be disciplines in some sectors, and yet the regime is called domestic regulations. What is it that can be agreed to that will not infringe the right to regulate?

On Mode 4, she said each member has its sensitivity and in Mode 4 many factors make it difficult for our negotiators. She said she could not say anything to assure anyone what the US can do in Mode 4.

Speaking for the ACP Group, Amb. Servansing said the 79 ACP countries accounted for only 1.9% of global services export in 2004. Although Mauritius is a services-based economy, yet its services imports are 50% higher than exports and there is a sustained trade deficit in services.

Most ACP countries have supply constraints and the preconditions for successful liberalization include measures to build supply capacity. The Round should respond to these development concerns and not only focus on liberalization. The principles in GATS Articles 4 and 19 remain key to the development outcomes.

Until now, he said, there had been no commercially meaningful offers to the ACP countries to fulfill the development promise in services, i. e. to increase the participation of ACP countries in sectors and modes of their interest. Rule making had to be development-friendly, and technical assistance is needed to address the supply constraint.

On negotiating methods, the ACP Group will not accept attempts at quantitative targets, as this would be a profound departure from GATS and the services guidelines. Also, the WTO should step cautiously on the plurilateral approach. He said "we must avoid the outcome of the post Uruguay Round sectoral agreements which were in the interests of developed countries, but there was no action in areas of interest to developing countries."

Referring to paragraph 7b of Annex C, on the plurilateral approach, which stated that members receiving requests "shall consider such requests", Servansing said developing countries have flexibility on the sectors for which they can consider requests. Plurilateral negotiations must be on a voluntary basis and no developing country must be asked to participate in sectors for which they are not ready.

He stated that paragraph 1 of Annex C (on objectives for the various modes) was on a best-endeavour basis. He added that an assessment of trade in services must be completed, to assess whether liberalization has led to growth and development. The needs of small service suppliers must be looked at. On domestic regulations, developing countries require flexibility in implementing disciplines as well as preservation of the right to regulate.

J. V. Gonzage of the Philippines said the development dimension had two pillars in GATS. The first was GATS article 4, increasing the participation of developing countries in services trade. In this regard, Mode 1 (cross border trade) was important for developing countries, yet many developed countries keep their sectors unbound for Mode 1. Also, there was little progress in Mode 4.

The second pillar was GATS Article 19, which contained not only progressive liberalization but also that the process should promote the interests of all with overall balance of rights and obligations. Full flexibility of the request-offer system is important, as it was a precondition by developing countries for accepting the establishment of GATS.

The negotiations on market access must be tempered with the need to respect developing countries' flexibilities. "At the end of the day, it cannot be imposed by a few on the many," said Gonzage. The balancing act was evident pre-Hong Kong and the tension will re-emerge this year. The UNCTAD papers had said trade liberalization will not guarantee growth and there are preconditions that include regulatory frameworks in place.

He made three points arising from this perspective. Firstly, on domestic regulations, there must be the right balance between the right to regulate and the need for disciplines. Secondly, technology transfer is a precondition to promote growth. Third, there is need for an emergency safeguard mechanism. The challenge is for the GATS negotiations to look beyond the politics of trade liberalization and bring in social considerations.

Ambassador Love Mtsea, who chaired the panel, also spoke on behalf of the LDC Group. He expressed appreciation to UNCTAD for its work on services assessment, which the LDCs had benefited from.

He noted that the Hong Kong Declaration acknowledges that LDCS are not obliged to undertake liberalization commitments as their economies are not yet ready for opening. Though this is appreciated, he said, the LDCs do not support complementary approaches in the negotiations.

While appreciating the mandate for members to implement the LDC services modalities, Amb. Mtesa said caution is in order as the pro-LDC objectives remain to be realized, and the language in the text is only on a best-endeavour basis.

As discussant, the Third World Network noted the UNCTAD paper's conclusion that liberalization in services does not automatically lead to growth, that preconditions are needed, and its case studies showed that developing countries face several problems arising from liberalization in various sectors.

It said there are historical, economic and legal factors that support caution in GATS commitments by developing countries. Historically, the developing countries were reluctant to have services in the trading system and agreed only on condition that the development flexibilities are integral in GATS. Thus, the WTO members must accept and retain these flexibilities and not try to dilute them through new negotiating approaches.

From the economic and social aspects, it was important for developing countries to retain control of their services strategy and local control of key sectors, such as social services (to enable public access to social services); important and vulnerable sectors (such as finance, where loss of control can cause systemic crisis); and security-sensitive sectors (such as telecom, water, and power).

Also, in respect of Mode 3 (commercial presence), the services are usually non-tradable and an excessive influx of foreign enterprises can cause significant outflow of investment income without this being offset by foreign exchange earnings, thus leading to negative effects on the balance of payments.

From the legal aspect, the GATS and services guidelines allow developing countries to liberalise in sectors, to the extent and at a pace which they consider appropriate. This should not be diluted.

TWN said that the real gap is in the different supply capacities of developed and developing countries. Reciprocal market opening would lead to the stronger parties gaining, while the weaker ones did not have the capacity to benefit, and thus there is justification for developing countries to have flexibilities to open up when preconditions are met and they are ready to do so.

It said the EU representative's definition of "lesser commitments" by developing countries as their undertaking two thirds the commitments of developed countries is being unrealistic, such as like asking a child that is still learning to swim, to swim 70 metres when the adult swimmer is asked to swim 100 metres.

TWN said the real crisis in the negotiations is the attempt by some developed countries to erode the development dimensions of the GATS and services guidelines. It was ironic that new modalities were sought to be introduced in services, when the services modalities (i. e. the guidelines) had already been concluded in 2001, long before those for agriculture and NAMA, and they should not have been re-opened.

It added that the outcome of the Hong Kong negotiations and the Annex C text meant the plurilateral method to be a voluntary one, where developing countries that are requested can choose whether or not to attend meetings or otherwise participate. The process should also not be institutionalized, but should be kept among the members concerned.

Sri Lanka asked what is the political will that is needed for meaningful liberalization in Mode 4, adding that Mode 4 should be treated as a trade and development issue, not a security issue. Referring to the EU representative's comparison between autarky and openness as an approach to services, Sri Lanka said that it wanted greater openness in Mode 4 but there appears to be autarky from developed countries in Mode 4 categories (which it said should include unskilled categories of labour, as openness in these would benefit both providers and recipients).

Ethiopia questioned whether paragraph 1 of Annex C in the Hong Kong Declaration contradicted the flexibilities in GATS that allow developing countries to make commitments commensurate only with their development, as para 1 specifies commitments in Modes 1, 2 and 3. Does it go against the GATS framework and if so is the GATS structure intact? it asked.

On domestic regulations, it said that striking a development-oriented balance is crucial due to the developing countries' weak capacity to regulate. The exemption for LDCs in market access commitments is welcome. Ethiopia hoped it also applies to countries in the process of accession.

Antigua and Barbuda said it had ambitions in services, but this is in terms not of liberalization but high growth of living standards. The end product of the negotiations should be development, and not liberalization at any cost. It added that ownership is important and "we must have control over our economy." It was not possible to ask for liberalisation without regulation. Many developing countries were also not ready to discuss market access in government procurement.