Disappointing results for South so far in GATS talks

Report by Martin Khor (TWN), Geneva, 16 March 2005

The services negotiations in the WTO have so far not attained an overall balance of rights and obligations, the increase in developing countries' service exports has been small, and the initial offers by major trading partners has been disappointing for developing countries, according to an UNCTAD secretariat paper.

The paper, 'Trade in services and development implications' was prepared for theCommission on Trade in Goods and Services and Commodities, which held on 16March two panel discussions on services.

The UNCTAD secretariat paper gives a comprehensive treatment of services anddevelopment, covering trends in the global services economy, issues in infrastructureservices, policy reform in the services sector, economic integration and services andthe WTO services negotiations.

The paper says that the assessment of trade in services continues to be a main concernfor developing countries, as lack of assessment and information is a main impedimentto their more active participation in the services negotiations. Lack of assessment alsoprevents the elaboration of sound domestic services policies.

For now, only rough, partial or sector-specific assessment exists, said the UNCTADsecretariat paper, adding that thus far, the assessment has shown that an overallbalance of rights and obligations has not been attained under the GATS; the increasein developing countries' world service exports has been small; and the objectives ofArticle IV have not been achieved (because of export barriers, supply constraints andlack of commercially meaningful commitments).

The paper said that the assessment also showed that benefits of privatization andliberalization are not automatic; that there is a need for policy flexibility and propersequencing of liberalization; priority attention is needed to ensure access to essentialservices; and there is need for assistance for nascent service sectors and SMEs (smalland medium sized enterprises) in developing countries.

In the perception of developing countries, a preliminary analysis of initial offers bythe major trading partners reveals a number of things, said UNCTAD.

'Several offers seem to go back on previous commitments or lack real change in thelevel of commitment, despite modifications. This is done either by redefining thesector/sub-sector to which a commitment applies or by going from one partialcommitment to another one.

'Initial offers often use new classifications (even with respect to sectors that are notofficially part of the WTO classification list) that have received no multilateralapproval and are still under discussion. This leads to uncertainty as to what exactlya country is offering.

'Also, offers seem to indicate that some countries are not abandoning any MFNexemptions, but rather introducing new ones. This can be cause for concern, as theimpact of even the existing exemptions has not yet been assessed. Offers also appearto concentrate on certain industries, mostly bypassing certain sensitive sectors, forexample, health, audiovisual or labour-intensive services, particularly those suppliedthrough Mode 4 and at lower skill levels, where developing countries have theircomparative advantage.

'Finally, certain offers refer to the notion of reciprocity. While the GATSrequest-offer process naturally builds upon bargaining and exchange processes,flexibility should be maintained for developing countries.'

Given that development is at the heart of the Doha Work Programme, GATSnegotiations should seek to ensure better prospects for developing countries in termsof a more balanced and equitable distribution of benefits from trade liberalization.Liberalization in Mode 4 and sectors of particular interest to developing countries willbe the litmus test.

The UNCTAD secretariat paper also highlighted two recent WTO dispute settlementcases involving services that pointed to the difficulties facing developing and alsodeveloped countries in scheduling their services commitments and of anticipating thepotential implications of such commitments.

The first was the Telmex dispute, which is about whether Mexico's laws andregulations for the supply of public telecom services are consistent with itscommitments under the GATS.

The main issues are whether provision by Telmex (a major supplier) ofinterconnection to US basic telecom suppliers is based on cost-oriented andreasonable rates, terms and conditions; whether Telmex is engaging inanti-competitive practices; and whether Mexico has failed to ensure that US basictelecom suppliers have access to, and use of, public telecom networks and services.

The Panel ruled that in determining whether interconnection costs are reasonable,only the actual costs of interconnection are to be taken into account (excludinginfrastructure construction and maintenance costs), that Mexico had not takenappropriate measures to prevent Telmex from engaging in anti-competitive practices,and that Mexico had an obligation to provide access to and use of private circuits.

While the Panel emphasized that its findings in no way prevent Mexico from pursuingdevelopment objectives, this case nonetheless points to the difficulty in formulatingcommitments in a manner that truly safeguards development options, the paper said.

The second case relates to cross-border gambling services. Here, the United Statesclaimed - unsuccessfully - that it had intended to exclude Internet gambling from itscommitments. The ruling also provides an interpretation of the general exceptionsclause of the GATS (Article XIV), indicating that, in invoking Article XIV, Membershave an obligation to consult with the other party or parties to find a leasttrade-restrictive measure.

It also exposes the systemic difficulty for smaller countries to oblige their tradingpartners (particularly major players) to comply with rulings against them, saidUNCTAD.

Both the Telmex and the Gambling case highlight the difficulty of foreseeing thepotential implications of scheduled commitments (even for countries withconsiderable experience in the negotiation of international trade agreements) and theneed to carefully schedule the intended commitments, added the UNCTAD secretariatpaper. They flag the risk that panels and the Appellate Body may interpret schedulesof specific commitments in a manner different from what the scheduling country hadintended.

The UNCTAD secretariat paper also deals with aspects of the ongoing GATSnegotiations on rules, including emergency safeguard measures, subsidies,government procurement and domestic regulation.

On possible emergency safeguard measures (ESM), the paper said that this has beenidentified as an area of prime developmental importance, although there is a lack ofconsensus on the desirability and feasibility of such measures.

The ASEAN Members' draft ESM agreement, which was the main impetus fordiscussions, had an annex containing the main difficult areas, such as the possibilityof applying safeguard measures to established foreign suppliers (Mode 3), thedefinition of domestic industry, the impact of a safeguard measure on nationaltreatment and most-favoured-nation (MFN) treatment, and acquired rights.

The UNCTAD secretariat paper said that there are several grounds on which to justifyESM in services. The nature of services trade renders it prone to unforeseendevelopments, and a safety belt could assist countries in their liberalization efforts. It could also help address adjustment costs.

Safeguard measures are an important political tool that can make the difference forGovernments in terms of appeasing the potential 'losers' of liberalization and reform,while disciplining Governments to restructure within a particular window of time.There nonetheless remain concerns to be addressed.

On subsidies, UNCTAD said that these can have a detrimental effect on internationaltrade, in particular exports of developing countries. Many Governments subsidizetheir services sectors including through export support to their services suppliers. InAustralia, between 1997 and 2002, assistance to services exporters amounted to $1.35billion. This assistance was granted to almost every services sector through directfinancial assistance, funding to institutions and tax expenditures available toexporters.

According to the UNCTAD secretariat paper, negotiations on subsidies disciplinesmust pay attention to the special concerns of developing countries, e.g. subsidiesaimed at building competitiveness in priority service sectors and meeting social anddevelopment objectives and the priority removal of trade-distorting subsidies ofdeveloped countries.

On government procurement, the paper clarified that GATS MFN, market access andnational treatment obligations do not apply to government procurement (GP) bygovernmental agencies for governmental purposes and not with a view to commercialresale or with a view to use in the supply of services for commercial sale.

A major stumbling block in the present negotiations in GATS is the lack of clarity onthe mandate and particularly on whether market access issues are covered. A recentEC communication proposes a framework for services GP - basically providing forcommitments on GP to be taken within the framework of schedules of specificcommitments, listed in a fifth column on limitations on GP.

Developing countries are hesitant to open up their markets for GP to internationaltendering because they fear that foreign suppliers will crowd out local firms and thelatter will at the same time be unable to gain access to foreign GP markets becauseof lack of competitiveness and the complexity of the tendering process, saidUNCTAD.

Concerns have also been raised on the implications of transparency disciplines onmarket access and developing countries' use of GP as a tool to pursue social anddevelopment objectives. However, in light of the potential beneficial effects ofcompetition, more analysis is needed on costs and benefits of these different options.

On domestic regulation, the UNCTAD paper clarified that Article VI.4 of the GATSmandates the development of necessary disciplines to ensure that measures relatingto qualification requirements and procedures, technical standards and licensingrequirements and procedures do not constitute unnecessary barriers to trade inservices.

When pursuing this mandate, there is a need to establish a balance between preservingthe right to regulate and ensuring that legitimate measures are not applied in anarbitrary manner or as a disguised barrier to trade. The right to regulate is of particularimportance for developing countries, as many of them do not yet have an optimalregulatory and institutional framework in place.

Recent contributions address measures relating to administrative procedures forobtaining visas or entry permits, experiences with disciplines on technical standardsand regulations, issues related to transparency and the relationship between futureVI.4 disciplines and market access and national treatment. Qualification requirementsand recognition issues have also figured prominently, said the paper.

Another aspect is possible disciplines on transparency, where some view the conceptas going beyond publishing information on measures pertaining to services trade, toinclude also prior notification and comment procedures.

Such an expanded concept of transparency may create administrative burdens andcosts for developing countries, which are concerned about any undue influence thatforeign companies and Governments could exert on their domestic regulatoryprocesses. Careful consideration of such a broadened notion of transparency isneeded, urged UNCTAD.

Necessity is seen as a concept to strike a balance between the right to regulate and therequirement not to unduly restrict trade, said the UNCTAD secretariat paper. Thus,developing countries need to ensure that any possible future disciplines do notprejudge their flexibility to undertake regulatory and institutional reform and theirability to meet public policy objectives.

Technical standards, including standards at the international level, are also beingdiscussed. Any work on international standards would have to bear in mind theparticular difficulties of developing countries in participating effectively ininternational standard-setting bodies and processes.

The UNCTAD paper concluded that specific consideration may need to be given to:developing countries' need for flexibility and ways to implement it (e.g. regarding theconcepts of transparency, less trade restrictiveness, or national policy objective); thecreation of S&D obligations and ways to ensure their effectiveness (e.g. regardingtechnical assistance in the context of regulatory reform, and ways to facilitatedeveloping countries' effective participation in international standardizing bodies);and the overall context of any future disciplines. Ultimately, to maximizedevelopmental gains, future disciplines on domestic regulation should facilitateexports of developing countries, particularly through movement of natural persons.

The UNCTAD secretariat paper also comments on the growth of regional tradeagreements (RTAs) covering services trade. While some RTAs in part mirror theGATS (e.g. domestic regulation or recognition issues), others go beyond it (e.g. apriori transparency, GATS plus) or fall short of it (e.g. excluding the local level fromthe coverage).

Multiple negotiating processes have resulted in a complex and overlapping networkof rules with different obligations. This creates challenges for developing countries,the paper said, adding that North-South RTAs, for example, might frequently entailliberalization that is deeper and faster than the one achieved at the multilateral orregional (South-South) level. This may put particular pressure on developingcountries' domestic regulatory frameworks.

Also, imbalances in negotiating strength and capacities may create pressures andresult in far-reaching obligations that may not reflect a developing country'sdevelopment priorities. With respect to rule making, several RTAs include provisionsfor prior comment on proposed changes to services regulations on either a 'bestendeavour' or an obligatory basis, an aspect that goes beyond the GATS.

RTA negotiations following a negative list approach, which automatically includesnew services, may result in developing countries binding their market opening at astage that is more liberal than their multilateral GATS commitments. This mayhappen without them having a comprehensive understanding of the potentialimplications thereof, said the paper.

Economic implications of deeper commitments may be even more far-reaching if theyare negotiated between a developed country and a South-South regional grouping,with the former only slowly realizing its own integration process. Such circumstancescould impede South-South trade, which may be overtaken by North-South imports.

Thus, whether, how and with whom services liberalization should be pursued in aregional context remain crucial decisions that need to be taken carefully and on thebasis of a regional group's specific economic, social and developmentalcircumstances, said the UNCTAD secretariat paper.

On policy reforms in the services sector, UNCTAD said that developing countries'main challenge is how to strengthen domestic supply capacity and reconcile trade,development, social and equity considerations. Liberalization of trade in services hasbecome a concern for many stakeholders, particularly when reform reaches into areaspreviously considered the public sector domain.

The choice of policies ranges from preserving the role of the Government in publicgoods to full privatization and liberalization of a sector. All these may be viabledepending on the prevailing economic and social conditions in a country and in theinternational markets. At the same time, commitments under bilateral, regional, andmultilateral trade negotiations on services limit certain policy options. In making suchcommitments, developing countries need clarity and an assurance that these are thebest development options.

The experience of developing countries reveals that, for positive outcomes to result,liberalization must proceed at a speed that is not too rapid for local actors, theregulatory framework and social safety net must be adequate, and there must be acompetitive business environment and suitable accompanying policies to ensure thateconomies enhance their capacity to integrate beneficially into the world economy,said the paper.

The importance of sequencing reforms is well established in theory, but the specificcontent of this sequencing is less clear, and having a number of benchmarks on howto proceed would facilitate decision-making. It should be recognized that there is no'one size fits all' policy framework, either across services sectors or across countries.The challenge is to elucidate what policy framework should be used for what sectorsand under what national and international conditions services' contribution toeconomic growth and sustainable development will be enhanced.

The UNCTAD secretariat paper provides case studies from China and Thailand toshow problems arising from domestic reforms.

China's assessment of reforms in its banking sector is that increasing participation offoreign banks improved the financial system and provided more advanced servicesto consumers. However, domestic banks are losing market shares with the shift ofhigh-end consumers and capable executives to foreign banks.

In the distribution sector, Chinese SMEs found it difficult to develop their businessin the face of competition from big foreign competitors (e.g. China's biggest retailerhad a sales volume of less than 1% of that of the biggest retailer from the UnitedStates).

After China's accession to the WTO, 28 new foreign-invested retail chain stores havebeen established. Though customers may enjoy better services and cheapermerchandise, many small local retailing stores collapsed. The challenge is now howto deal with such situations, since these firms are crucial to employment andeconomic dynamics. China's conclusion is that liberalizing gradually is key, theUNCTAD paper said.

Thailand has gradually liberalized its retail trade since the late 1980s. Starting from1997, and as a reaction to the financial crisis, FDI in retail services increasedremarkably. This brought benefits and costs. Some retailers offered cheaper productsand more varieties, improved their distribution networks and inventory control, andgenerated employment.

But the closing down of many small traditional shops (several thousands a year) andthe disappearance of traditional middlemen led to a negative reaction in a largesegment of the population. In response, the Government undertook regulatory actionto prevent further negative ramifications, especially for small, traditional retailers.

Examining issues in infrastructure services, the UNCTAD paper said that the functionof providing essential services has traditionally fallen within the public domain, withthe last decades seeing a trend towards opening up essential service sectors to foreignor domestic competition. Privatization and liberalization have produced mixedresults, either increasing prices for the poor or entailing other adjustment costs (e.g.loss of employment).

Liberalization and privatization have to be accompanied by appropriate regulatorymeasures and have to be carefully managed, and mixed experiences are consideredthe result of regulatory failures. If the transition process had been adequately managedand regulated, it would in theory have been possible to reap the benefits ofliberalization and privatization in full. However, said the paper, even for countrieswith strong regulatory frameworks, there is no guarantee of success in privatizationprocesses as the United Kingdom (railway) and California (energy) cases show.