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    General Agreement on Trade in Services

     

     
     
    Opportunities for Developing Countries
    © International Trade Centre, International Trade Forum - Issue 1/2001 
     

    One of the most promising areas in trade for developing countries is services, with new negotiations underway from March 2000. This article, based on the ITC publication, Business Guide to the General Agreement on Trade in Services, provides an overview of this emerging, fast-growing area. International trade rules in this area are still relatively new, and the opportunity to shape them exists. The article also highlights niche areas for developing and transition economies.

    Until 1995, no multilateral agreement existed for trade in services. This was largely due to a lack of knowledge about services trade itself.

    A late start 

    Economists generally viewed services as not tradeable or - even worse - as non-productive economic activities unworthy of policy focus. Academic experts concentrated on employment patterns in services or on services as supports to manufacturing, ignoring the direct contributions services industries made to domestic production and foreign exchange earnings. Government export development planners tended to target goods, so government agencies were largely unfamiliar with the activities of their own services exporters. National statistical agencies did not collect detailed trade statistics on services.

    Services - especially transportation, travel and international finance - have been an important part of the trade environment for a long time. But most trade policy-makers assumed either that the services trade flows were too small to be of importance, that virtually all traded services originated in developed countries, or that focusing on liberalizing the goods trade would automatically result in expanded trade in services.

    With no trade agreements to provide clarity about ground rules, services enterprises were left to expand internationally by being adaptable and learning to manage despite unpredictable and often blatantly discriminatory regulatory environments.

    Beginning in the late 1970s, private-sector groups in the United Kingdom (British Invisibles) and the United States of America (the Coalition of Service Industries) started lobbying their governments for a more level playing field in accessing foreign markets. Those early initiatives by services firms ultimately resulted in the inclusion of international services transactions in the Uruguay Round.

    Recognizing service exporters 

    A barrier to multilateral discussions was the lack of clarity about how services could be traded. For trade in goods, the concept is relatively straightforward: producers stay in one country and the goods travel across a border to another country.

    For services, the situation is more complex: in many cases, the supplier and the customer are in the same location, as is the case for tourism. This means that there are four possibilities for movement: the service moves across the border; the customer moves across the border to receive the service; the producer moves across the border to provide the service through a commercial establishment; or the producer moves across the border only temporarily to provide the service. As a result, the GATS Agreement has defined four "modes of supply" for the services trade (see box).

    One of the peculiarities of the services trade is that many service exporters are not aware that they are in fact exporting! This is particularly true for consumption abroad (mode two). Services firms often earn foreign exchange by supplying services to local foreign companies, business persons temporarily in the market or the local offices of international agencies, without considering such activities as exports. Accurate trade statistics are difficult to gather when exporters do not recognize or report their own export activities. Statistical agencies are therefore finding that they must first educate services firms about what constitutes an export.

    Trade in services is growing 

    Services account for at least 20% of recorded world trade as well as the majority of domestic activities in most economies. Some analysts believe that services will reach 50% of world trade by the year 2020. Trade in the category "other services" (which includes all but transportation and tourism) has been growing at over 9% a year since 1995.

    The world market for services was valued at more than US$ 3 trillion in 1998, according to the OECD and the WTO.

    Interestingly, developing countries have been gaining a growing share of trade in services (see table). These countries' fastest growth has been in exports of "other services", which have increased at an average annual rate of 14.3% (see table). Such exports include professional services and new services supported by information technologies, which were unknown a few years ago, such as web site design, web site management and electronic commerce.

    Gains for the business community 

    As with the General Agreement on Tariffs and Trade (GATT 1994) that covers trade in goods, GATS intends to increase trade in services through increased transparency and predictability. The assumption is that by supporting informed choices by exporters and increasing international competition in services provision, GATS will encourage the improvement of services quality, price competitiveness and innovation in services delivery. In contrast to GATT 1947, GATS incorporates not only specific commitments to prevent further trade restrictions but also the requirement to engage in ongoing rounds of negotiations for progressive liberalization.

    GATS is still a young agreement. In the first round of commitments, the primary gain consisted of commitments not to increase protectionism (standstill commitments), rather than major advances in trade liberalization. The strength and coverage of commitments vary substantially among members. There were, however, some major strides in rolling back nationality requirements and relinquishing the right to grant market access on a reciprocal (rather than MFN) basis.

    A major gain for the business community has been a new focus on policies and regulations that can distort the services trade. For the first time, there is a coordinated mechanism to obtain information about domestic regulatory environments and how they can limit market access or national treatment. Through the liberalization commitments made, enterprises will have improved access not only to export markets but also to more competitive imported services inputs. Developing and transition economies have more potential to benefit from technology transfer and training from foreign firms establishing a commercial presence in their territories.

    Overall, the business community gains greater predictability and legal certainty within the trading environment. The commitments help to ensure that there will be no arbitrary regulatory intervention by governments. Even if limitations and restrictions continue to exist, at least they have been identified and can be anticipated. And once members have made commitments on specific services, they cannot withdraw these commitments without compensating other members.

    Niche areas for developing and transition economies 

    Developing and transition economies can expect to compete effectively in all of the services sectors covered by GATS. (GATS covers all commercially traded services in any services sector, except those supplied in the exercise of governmental authority. The services are included whether or not they are supplied commercially or in the presence or absence of domestic competition.) For purposes of discussion and scheduling, the WTO secretariat has divided services into 12 areas (see box on p. 28).

    Among the current niche opportunities in services:

    • Quality professional services at lower cost, such as architecture, consulting engineering, legal research and market research.

    • Professional specialities linked to emerging concerns. Examples include sustainable design and forensic accounting, and intelligence gathering techniques and accountancy skills that help assist lawyers.

    • Technical assistance to other developing economies linked to experience with commonly used low- and medium-technology production processes, such as industrial engineering or industrial design.

    • Services that leverage cultural or linguistic strength, such as multilingual offshore call-centre services.

    • Back-office operations with higher value-added than basic data entry. Examples include not only the more traditional data capture and processing, but also electronic publishing, web site design and management, customer call centres, medical records' management, hotel reservations, credit card authorizations, remote secretarial services, technical on-line support, indexing and abstracting services, research and technical writing, and technical transcription. Manufacturers are increasingly contracting out product design, logistics management, research and development, and customer services support.

    Only two areas do not have good potential for investment: sectors constrained by requirements for large hard-currency reserves, such as financial services, insurance or reinsurance; and sectors controlled through cartel agreements, such as transportation routes.

    íbyWhat governments and technical assistance agencies can do

    • Develop world-class telecommunications infrastructure, so firms can obtain cost-efficient access to the Internet and international telecommunications.

    • Help firms adapt to an environment of electronic commerce.

    • Create opportunities to continuously upgrade skills and keep abreast of technical and professional advances.

    • Provide assistance to meet and exceed international quality standards for services.

    • Facilitate business travel to the widest range of foreign markets, unimpeded by visa restrictions.

    • Encourage a sophisticated array of financing support specifically related to exporting services, especially for export development.

    • Ensure access to appropriately skilled staff.

    National competitiveness strategies 

    Both governments and industry associations should be conscious of how they can work together to develop national competitiveness strategies to boost ser-vices exports. Four types of national competitiveness strategies, outlined below, illustrate competitive strengths in the ser-vices sector among developing and transition economies.

    Competing on cost. Barbados was one of the first countries to attract back-office data processing operations. They attracted operations for American Airlines through a company which now employs over 1,100 persons and has data-entry contracts with two dozen other major United States companies. Barbados has diversified into cost-competitive data capture and administrative support services, such as processing credit card applications; direct mail-order processing; insurance-claims processing; litigation support services; medical transcription; typesetting and other pre-press publishing activities; processing of warranty cards and claims; and computer-aided design.

    Other countries with lower labour costs and a skilled work force, such as China and Viet Nam, are now challenging Barbados for market share.

    Marketing specialized expertise. With the privatization of pension fund management in Chile, Chilean financial services firms have become highly sophisticated and successful. They are now exporting pension fund management services to other Latin American countries. Similarly, Ugandan engineers are successfully exporting their expertise in water utilities' management to neighbouring countries. In a slightly different approach, China has developed a successful strategy for soliciting technical assistance from developed countries and then repackaging that expertise for export to other developing economies.

    Marketing excess capacity. Cuba has positioned itself to attract "health tourists". Making use of extra capacity in its health-care facilities and the fact that its health-care professionals can provide quality care at very reasonable rates, Cuba has a strategy for attracting tourists for vacation plus low-cost medical treatment (such as physical check-ups or elective medical procedures).

    Repositioning a service industry. One of the most impressive success stories is the repositioning of India's software industry. An industry with virtually no international presence in the 1980s, India's software industry now claims an estimated 12% of the global market for customized software. India's software exports have grown from under US$ 5 million in 1980 to over US$ 700 million in 1996, and are estimated to have reached US$ 1 billion in 1998. Over the past ten years, growth in export earnings has averaged 54% a year, compared with 33% for growth in domestic software sales. Over 600 firms are involved in various types of data capture and software customization services. This phenomenal success is due to the availability of a large pool of university-trained, technically qualified programmers and analysts, as well as careful adherence to international quality standards.

    The case of the Indian software industry is also worth noting for the number of well-paid, stimulating jobs it has created. Many developing and transition economies face a brain drain. Jobs in the services sectors are generally skilled or highly skilled and so are attractive to precisely the types of professional workers that often emigrate abroad.

    What industry associations can do 

    Services associations in developing and transition economies can play an important role in helping their governments understand the role of services exporting in national economies. They should keep in mind that many member states are challenged to keep abreast of all WTO issues, especially if they have only small delegations in Geneva. In addition, trade in services poses particular problems because of the lack of readily available trade statistics and background analyses.

    There are at least four ways in which industry associations in developing and transition economies can work with their governments to influence liberalization in the services trade:

    Raise awareness of the contribution of services exports to the economy.

    Despite all the discussions over the past 14 years since the start of the Uruguay Round, it is still common for trade officials to be unaware of the contribution of the services trade to their own economies. Publishing success stories in the services export trade, urging services industry associations to collect and circulate information on the export activities of their members, and preparing briefing papers for officials responsible for trade issues can help ensure that those officials remain well informed on trade in services.

    Help ensure that a schedule is complete and as liberal as possible. Some developing and transition economies have been far-reaching and aggressively liberal in their scheduling; however, many have not. Two-thirds of the developing and transition economies that are WTO members have made commitments in only half of the major sectors. Private-sector enterprises can help improve their country's liberalization process by making sure that:

    • All sectors are scheduled, even if there are a number of limitations.

    • All limitations stated in schedules are really necessary and desired by the private sector.

    • All domestic regulations at both federal and subfederal levels that affect trade have been identified and scheduled.

    Recommend technical assistance options for government officials if they are not already being used. Key intergovernmental agencies are providing extensive technical assistance to developing and transition economies. Below are types of technical assistance that can be

    requested:

    • Training of trade policy officials (and also of immigration and finance officials) in services trade policy.

    • Improving services trade statistics.

    • Gaining increased access for services firms in developing and transition economies to projects funded by international financial institutions.

    • Upgrading telecommunications infrastructure, including Internet access.

    • Establishing and maintaining trade enquiry points, including the development of a comprehensive inventory of federal and subfederal domestic regulations affecting trade in services.

    Lobby for a strong position in the current round of negotiations on services. Services enterprises can provide input into trade policy planning, for example:

    • Develop a joint private-public sector initiative to assess the impact (positive or negative) to date of the liberalization of trade in services.

    • Ensure that a well-informed national position is in place.

    • Engage immigration officials in a pragmatic discussion of temporary business travel issues in order to stimulate bilateral negotiations on visa-related issues and clarify priorities.

    • Identify priority subsectors where the private sector wants improved market access, along with a short list of the most attractive markets (keeping in mind the developed countries' commitment to addressing the needs of the priority sectors of developing and transition economies).

    • Promote among government officials the benefits that services firms gain from trade liberalization.

    For More Information: Internet Sources on GATS 

    European Commission's INFO-POINT

    on World Trade in Services
    http://gats-info.eu.int/

    GATS: Basic telecommunications
    http://www.wto.org/wto/services/tel.htm

    GATS: Dispute settlement cases
    http://www.wto.org/wto/dispute.bulletin.htm

    GATS: Financial services
    http://www.wto.org/wto/services/financia.htm

    GATS: Legal text
    http://www.wto.org/wto/legal/finalact.htm

    GATS: Schedules of commitments and MFN exemptions by country
    http://gats-info.eu.int/gats-info/gatscomm.pl

    International Trade Centre
    http://www.intracen.org/servicexport

    International Trade Law Monitor
    http://ra.irv.uit.no/trade_law/itlp.html

    OECD Trade Directorate
    http://www.oecd.org/ech

    U.S. Trade Representative
    http://www.ustr.gov/

    U.S. International Trade Commissioner
    http://www.usitc.gov

    World Bank Group
    http://www/worldbank.org

    World Bank-WTO Trade and Development Centre
    http://www.itd.org/

    WTO: Government procurement
    http://www.wto.org/wto/ddf/ep/public.html

    WTO: Intellectual property rights
    http://www.wto.org/intellec/intellec.htm

    WTO: Legal texts
    http://www.wto.org/wto/legal/finalact.htm

    WTO: List of members
    http://www.wto.org/wto/about/organsn6.htm

    WTO: Notices of proposed procurement and contract award
    http://www.wto.org/wto/govt/pronote.htm


    Dorothy Riddle is an ITC consultant on trade in services. E-mail: driddle@compuserve.com



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