Developing Country Trade in Services

The Framework Agreement

The General Agreement on Trade in Services (GATS) is the first multilateral agreement on trade that has as its objective the progressive liberalization of trade in services. It will provide for more open markets in services, as the GATT has done for trade in goods.

The Agreement covers trade in all services sectors and the supply of services in all forms or modes of supply

• Cross-border supply of a service to a consumer located in the Member's territory;
• Consumption abroad by a resident of a Member who purchases a service in the territory of another Member;
• Commercial presence, meaning the supply of a service within the Member's territory through a commercial presence established there by a foreign supplier;
• Presence of natural persons, meaning the entry and temporary stay of foreign individuals in the Member's territory in order to supply a service.

The GATS has two components:

1. The Framework agreement containing 29 Articles and a number of Annexes, Ministerial Decisions etc.,
2. The schedules of commitments undertaken by each Member government to bind the existing degree of openness or remove existing restrictions.

Although the coverage of service sectors by the GATS is universal, the liberalization commitments follow a positive list approach. Each participant lists in its schedule the conditions of market access and national treatment for foreign service suppliers in the sectors and modes of supply for which it has undertaken a commitment.

Schedules of Commitments

The results of market access negotiations on services are contained in 95 schedules of specific commitments. The European Union submitted a common schedule on behalf of its - then 12 - member states.

The level of market openness for a service activity provided by any commitment depends on

• the existing regulatory regime
• whether there are any market access limitations, and
• national treatment by the importing country.

The majority of the schedules contain bindings of the existing level of access while others also contain liberalization commitments.

The binding of services commitments means that foreign service suppliers -and domestic customers of foreign service suppliers - are given an assurance that conditions of entry and operation in the market will not be changed to their disadvantage.

The GATS explicitly provides for successive rounds of negotiation in the future with a view to achieving a progressively higher degree of liberalization.

Commitments by Sector

Assessment

It is not possible to provide quantitative measures of commitments to liberalize services trade in the same way as for goods. Because there is no international nomenclature for traded-services that covers the different modes of supply, there is no comprehensive set of data that could provide reliable estimates of imports of particular services under the different modes of supply.

Further, there is no equivalent measure of customs duties in services. Limitations on foreign services and service suppliers, where they exist, typically take the form of regulations relating to the supply of services. The effect of such measures, or of their removal, cannot be easily assessed, if at all.

It is possible, however, to draw some conclusions from the extent and character of the scheduled commitments. A review of the schedules (Hoekman, 1995) shows

• high-income countries accepted commitments covering less than half (45 per cent ) of their service sectors
• low and middle income countries scheduled only about 12 per cent .

Furthermore, high-income countries scheduled only 25 per cent of services covered by the agreement without any limiting exceptions to national treatment or market access obligations. Developing countries scheduled only 7 per cent of possible services without any limitations on their offers.

The GATS will have important potential benefits for developing countries because it creates a framework of rules for services trade where none existed before.

Unlike the more forceful framework of merchandise trade rules in the GATT - where rules such as MFN and national treatment are universally applied - the GATS does not strongly constrain governments' policy choices except in the case of sectors entered in their GATS schedules.

Work undertaken by WTO Secretariat staff suggests that future liberalization in services sector would need to take into account the causes and effects of the global economic and financial crisis. Their analysis noted, however, that since the interests of WTO Members in liberalizing services trade under the GATS lie in the long term, short-term concerns should not unduly override the longer-term benefits from liberalization.

Impact on Developing Country Interests

Almost all WTO members have made commitments on the movement of natural persons, even if these are frequently circumscribed by the requirement of intra-corporate transferee status.

Developed country commitments generally cover the cross-border supply of labour-intensive services such as computer-related services, professional and construction services.

Most developing countries have committed themselves to bind or liberalize tourism and travel services, including, for example, the liberalization of foreign investment restrictions for hotel and resort operators. These commitments are likely to improve the supply capacity of this key sector, which provides the major source of foreign exchange earnings in a number of island developing countries and least-developed countries.

Table 2: Share of Value-Added in Financial Service (In per cent of GDP)

COUNTRY	1970	1980	1985	1990	1995
Industrialized Countries:
Canada	2.2	1.8	2.0	2.8	2.5
France	3.7	4.4	4.3	3.5	3.2
Germany	3.2	4.5	5.5	4.8	5.5
Japan	4.3	4.5	5.5	4.8	5.2
Switzerland	--	--	10.4	10.3	13.3
United States	4.0	4.8	5.5	6.6	6.6
Developing Countries:
Colombia	--	--	--	2.9	2.9
Ghana	5.5	--	8.7	9.2	--
Hong Kong (China)	--	6.9	6.1	6.6	9.4
Mauritius	--	--	--	4.4	5.2
Singapore	--	5.0	--	--	12.0
Sri Lanka	--	--	--	4.6	6.8
Thailand	--	--	--	4.0	7.8

Source: OECD, Services: Statistics on Value Added and Employment, 1997; WTO, Opening Markets in Financial Services and the Role of the GATS, 1997.

In addition, a number of developing countries have taken the opportunity provided by the GATS to schedule commitments, thereby binding their own domestic reform process.

Improvements in the quality of services in developing countries, as a result of liberalization and increased competition, will contribute to

• improved efficiency,
• consumer welfare, and
• growth.

A 1997 survey of protection and trade in services by World Bank staff (Hoekman and Primo Braga), showed that the service intensity of production can be as significant as the share of services in GDP.

Services share of GDP is

• about 70 per cent in high-income OECD countries and
• as little as 26 per cent in some low-income economies.

An analysis of input-output tables for 26 countries at varying levels of economic development by Park and Chan (1989) revealed that the relative importance of producer (or business) services, particularly in the manufacturing sector, increases with per capita income.

The relative importance of producer services in high income countries was three times higher on average than for low income countries. Conversely, the relative importance of distribution -- retail and wholesale trade -- tended to be greater in developing countries than in developed ones.

These findings are supported by a more recent analysis of the role of services in the structure of production and trade of 15 countries by Francois and Reinert (1996). The study concluded that as per capita income rises, the share of services in total trade increases. For high income countries, services (both externally and internally sourced) account for 60 to 80 per cent of all exports. This compares to about 20 per cent for low income economies.

World trade in commercial services by selected region, 1991-97 (Annual per cent age change in value)

		Exports	Imports
Latin America
	1992	10.1	11.9
	1993	5.8	11.7
	1994	16.6	8.0
	1995	7.3	4.5
	1996	5.2	7.3
	1997	9.1	17.8
Africa
	1992	13.5	8.7
	1993	0.7	5.3
	1994	2.8	2.7
	1995	10.5	10.3
	1996	7.5	0.5
	1997	3.4	7.8
Asia
	1992	14.2	13.1
	1993	13.3	8.5
	1994	17.6	15.5
	1995	18.1	20.7
	1996	9.0	6.7
	1997	4.7	2.1
World
	1992	11.8	11.0
	1993	1.4	1.8
	1994	9.7	8.6
	1995	14.9	15.7
	1996	6.5	5.3
	1997	3.4	2.3

Source: WTO Annual Report 1998

 

Other studies, for example Brown, Deardorff, Fox and Stern (1996), concluded that welfare gains arising from industrial tariff cuts under the Uruguay Round could have been three times higher if services barriers had also been cut by 25 per cent .

Producer services in particular perform a critical role in the development and growth prospects of any nation. Losses in agricultural output because of poor transport and storage infrastructure and the effect of inadequate communication networks on the costs of conducting business are common examples. For manufacturing enterprises, access to global transport and communication networks is necessary for international competitiveness.

Experience demonstrates that restrictions on services trade and investment is costly and that liberalization can bring great efficiency and welfare gains.

Foreign direct investment in intermediation services, especially financial services, can make a strong contribution to economic growth. According to Hoekman and Primo Braga (1997), such investment is likely to produce benefits through

• transfer of technology,
• the introduction of new products,
• price reductions, and
• quality improvements.

Intersectoral linkages will usually be significant, given that finance and insurance are important to developing and maintaining a competitive export sector.

As countries progressively reduce tariff and other barriers to trade, effective rates of protection may become negative for manufacturing industries. Protection on goods could be reduced to zero but competitiveness will be hampered by higher input prices if services markets remain protected. For largely this reason, liberalization and deregulation of services markets is becoming an important policy reform issue.

Pressures to increase access to export markets were a factor underlying trade in services being included in the Uruguay Round.

Potential economic gains from unilateral or autonomous liberalization are also significant.