Modern economies are increasingly dominated by services, which cover a broad range of industries, encompassing “network industries” such as electricity, natural gas, and telecommunications, other “intermediate services” such as transport, financial intermediation, distribution, construction, and business services, and “final demand services” such as education, health, recreation, environmental services, tourism ,and travel. Currently, 73% of GDP in high income countries originates in services, and even in low income countries services generate 46% of GDP.
Services and trade
Services have long been viewed as non-tradable. Technology changed this. Many services markets can now be contested internationally through cross-border trade (mode 1) and commercial presence (mode 3).1
Data on the magnitude of international service transactions are weak, and the primary source is the balance of payments which refers mainly to cross-border trade and consumption abroad (mode 2). Calculations reveal that services trade as defined by modes 1 and 2 in 2006 amounted to about 20% of world trade as measured by the balance of payments. Noting that the value of sales of services by affiliates of multinationals as reported by “foreign affiliate trade in services” (FATS) for a number of OECD members is about 50% greater than cross border exports of services, and considering a figure of $0.1 billion for trade in mode 4 (presence of natural persons), aggregate international transactions in services is estimated to amount to 29% of world trade in 2006 (Hoekman and Kostecki 2009).
Trade liberalisation means different things for services
Economic theory emphasises that countries can derive welfare gains from freer trade, and that the proposition applies to both goods and services. But the types and forms of liberalisation of services are quite different from those of liberalisation of merchandise trade. Barriers to the flow of goods typically arise as customs and non-tariff barriers, and hence for goods trade most discussion of liberalisation focuses on tariffs and on non-tariff barriers. On the other hand, barriers to trade in services are typically regulatory in nature, and outcomes of services liberalisation depend heavily on the regulatory environments.
Recent research indicates that barriers to services trade remain prevalent, and that service barriers in both high income and developing countries are higher than those for trade in goods. Policies are more liberal in OECD countries, Latin America and Eastern Europe, whereas most restrictive policies are observed in MENA and Asian countries. Overall pattern of policies across sectors is increasingly similar in developing and industrial countries. Whereas telecommunications and banking services are more competitive, transport and professional services remain bastions of protectionism (Gootiiz and Mattoo 2009).
Barriers to services trade lead to inefficiencies in service sectors and to high costs of services. Since the productivity and competitiveness of goods and services firms depend largely on access to low-cost and high-quality producer services such as transportation, distribution, telecommunications, and finance, and since they have powerful influence on economic growth, it is of utmost importance to increase the efficiency of service industries, which can largely be achieved through liberalisation.
In principle countries can choose to liberalise a service sector unilaterally and try to derive efficiency gains. Indeed, during the last two decades there has been significant unilateral liberalisation in services by different countries driven by the prospects of large welfare gains. Many countries have taken action to increase competition on service markets by liberalising foreign investment and privatising state-owned or controlled service providers. But unilateral liberalisation may be constrained by the fact that a country cannot on its own gain improved access to larger foreign markets. Second, a country may face difficulty increasing competition. Finally, a country may lack the expertise and resources to devise and implement the appropriate domestic regulatory policies.
Regional trade agreements
In recent years the number of regional trade agreements has increased significantly. Many provide for free trade in goods but also include some measures to facilitate trade in services. Such agreements could lead to gains from liberalisation of trade in services. But not much has been achieved in terms of actual liberalisation with the exception of the EU and a small number of agreements between high-income countries. Furthermore, there is caution on both sides in cases when one of the parties is a developing country and the other a developed country. In developed countries there is caution towards trade liberalisation mainly because of the associated greater liberalisation of the movement of individuals (mode 4 of GATS). On the other hand there is caution in the developing world towards liberalisation of the sector reflecting the concern that any future regional liberalisation of the sector will be largely one-sided in the results it will yield. Their belief is that in regional services liberalisation developed country service providers will gain significantly improved access to developing country service markets, but the converse will likely not happen.
Multilateral negotiations on services began during the Uruguay Round, which culminated in the signing of the GATS in 1995. Article XIX GATS required members to launch new negotiations on services no later than 2000, and periodically thereafter. Initial negotiations were launched in 2000, which later became part of Doha. Between 2000 and the end of 2005, WTO members pursued a bilateral approach to negotiations, submitting request to others and responding to requests with offers. But large asymmetries in interest across membership impeded progress. In 2006 WTO members launched an effort to complement the bilateral request offer process with a plurilateral or “collective” approach. This involved subsets of the WTO membership seeking to agree to a common “minimum” set of policy commitments for a given sector. But even with the new approach not much progress could be achieved until now.
Recent research indicates that the Uruguay Round commitments are on average 2.3 times more restrictive than current policies. Currently Doha offers improve GATS commitments, but at this stage the gap between offers and actual policy is still large. Doha offers are on average 1.9 times more restrictive than the actual policies (Gootiiz and Mattoo 2009). There is a reasonable prospect that offers will be improved.2
Why are services talks stuck in the Doha Round?
Why was there so little progress to liberalise trade in services through the WTO in Doha, although potential gains from trade liberalisation are considerably large? One explanation for the limited progress is that the standard mechanisms of reciprocity developed through GATT practice do not apply to services. In the case of goods trade WTO members have interests in improving access to export markets. But in the case of services there is lack of corporate interest by OECD firms in search of access to foreign markets. Since unilateral reforms have resulted in a boom in service exports, the service firms do not perceive market access to be their priority, and they must also be discounting the probability of policy reversals and thus the value of the WTO as a mechanism to lock in liberal policies.
The most important reason for lack of interest in multilateral services negotiations is the concern on the part of developing countries about possible market failures. Since the GATS is mainly concerned in the reduction of regulatory barriers to market access and discriminatory national treatment across all four modes of supply of services, there is no guarantee that liberalisation of services through the GATS will lead to welfare gains unless
- competition/contestability of markets is enhanced,
- effective regulation that will deal with market failures is insured, and
- equity objectives such as access to services for disadvantaged regions, communities or households are attained.
Hence, improved prudential and pro-competition regulation will be necessary to deliver the full benefits of liberalisation. Since these are challenging objectives, international efforts could be enhanced. One mechanism that could help is the development of “services knowledge platform” that would bring together sectoral regulators, trade officials, and stakeholders to assess current policies and identify beneficial reforms. The platforms could be assisted by external assistance from development partners as part of multilateral technical assistance initiatives (Hoekman and Mattoo 2011).
In addition, it is emphasised that in case of injury arising from liberalisation commitments undertaken by Members, a safety valve should be provided through safeguards. But such an approach, although feasible in the cases of mode 1 and mode 4, does not work for mode 2 and mode 3. Furthermore, sectors such as maritime transport, audiovisuals, and education are excluded from negotiations, and the more sectors are excluded from negotiations, fewer possibilities exist for possible trade-offs among Members. Finally, some developing members point out that they would be willing to bind the actual policies as long as an appropriate price would be paid to them.
The mode that is of great relevance to developing countries is mode 4, i.e. presence of natural persons. But almost all countries impose high barriers to mode 4. Research indicates that global gains would be over $150 billion if industrial countries were to allow temporary access to foreign service providers equal to just 3% of their labour force, and that potential gains could be shared equally by the industrial and developing countries (Winters et al. 2003). However, it is unlikely that much can be achieved on mode 4 access to high income countries unless a package is developed from a mercantilist perspective (Mattoo 2005). Such liberalisation could be developed by making it conditional on the fulfilment of specific conditions by source countries. One possibility is that host countries commit under the GATS to allow access to any source country that fulfils certain pre-specified conditions. Since developing countries want better mode 4 access and continued ability to use mode 1 to export services, while high income OECD countries want better access to developing countries through mode 3, a deal could benefit both sides.
Finally, it should be noted that there is nothing in the GATS or WTO that encourages and assist countries in generating comprehensive information on applied policies in different services sectors. Trade Policy Reviews contain some, but in general it is inadequate information on trade barriers and statistical data on services.3 But a comprehensive database of services trade, investment policies, and improved statistics are essential for any meaningful policy discussion on services. Data on all applied policies, whether scheduled or not, could be collected by the WTO, and the WTO could make this publicly available together with improved statistics on services.
What needs to be done?
If the outcome of multilateral negotiations on services is to garner political support by developed as well as developing countries, a package to be negotiated among a critical mass of major players on services could be developed. These countries should move to greatly increase their binding coverage and also pre-commit to liberalisation by a certain date in the future, and the signatories should then extend the benefits to non-participants. The package to be negotiated could span the following elements:
- A pledge not to impose any new restrictions, especially on cross-border trade and investment, by inscribing binding language to this effect in the schedules of specific commitments in the GATS.
- Inscribing in each country’s specific commitments to implement reforms by a certain date in the future to liberalise trade in services, especially on foreign direct investment and in the air and maritime transport sectors;
- Establishing a credible mechanism for regulatory assistance to support liberalisation commitments by developing countries through “services knowledge platform”;
- Agreement to expand the scope for temporary movement of services suppliers, conditional on a set of source country obligations and transparent criteria relating to host country economic conditions; and
- Mandating the WTO Secretariat to collect and report data on all applied policies by different service sectors for all the participating countries (see Hoekman and Mattoo 2010 on this site).
Gootiiz, B and A Mattoo (2009), “Services in Doha: What is on the Table?”, Journal of World Trade, 43(5):1013-1030.
Hoekman, BM and A Mattoo (2010), “Services Trade Liberalisation and Regulatory Reform: Re-invigorating International Cooperation”, VoxEU.org, 24 December.
Hoekman, BM and A Mattoo (2011), “Services Trade Liberalisation and Regulatory Reform: Reinvigorating International Cooperation”, CEPR Discussion Paper 8181.
Hoekman, BM and MM Kostecki (2009), The Political Economy of the World Trading System: The WTO and Beyond, Oxford University Press.
Jara, A and M del C Dominguez (2006), “Liberalisation of Trade in Services and Trade Negotiations”, Journal of World Trade, 40:113-127.
Mattoo, A (2005), “Services in a Development Round: Three Goals and Three Proposals”, Journal of World Trade, 39:1223-38.
Winters, LA, TL Walmsley, ZK Wang, and R Grynberg (2003), “Liberalising Temporary Movement of Natural Persons: An Agenda for the Development Round”, World Economy, 26(8):1137-1161
1 The General Agreement on Trade in Services (GATS) distinguishes between four modes of supplying services trade: cross border supply (mode 1), consumption abroad (mode 2), commercial presence (mode 3), and presence of natural persons (mode 4). While mode 1 refers to services supplied from the territory of one member into the territory of another, mode 2 consists of services supplied in the territory of one member to the consumers of another. On the other hand mode 3 refers to services supplied through any type of business or professional establishment of one member in the territory of another (foreign direct investment, FDI), and mode 4 includes both independent service suppliers, and employees of the services supplier of another member (consultants).
2 In 2008, the chair of the Trade Negotiations Committee held a “signalling exercise” among ministers from 31 countries. The participating ministers indicated that they might significantly improve their services offers. According to the recently suggested comprehensive Mexican Proposal both developed and developing Members should undertake binding commitments of their applied levels of liberalisation based on their current regulatory regimes in the 119 subsectors, with the exemption of [x] number of subsectors for developing Members and [y] number of subsectors for developed Members, and the exemption for the former would be larger than for the latter.
3 It has been proposed that domestic regulations that apply to different commitments should be easily identifiable by making an electronic link between commitments and relevant domestic regulations, with regular updates (Jara and Dominguez 2006).