WTO Law on Trade in Services (I)

SHI JINGXIA, UIBE Law School03/02/2015

UIBE Law School, ILLM

I. Introduction• In the movie “The Imitation Game”, the signature

line: “Sometimes it is the people who no one imagines anything of who do the things that no one can imagine.”

• When people talked about trade before, they rarely talk about services.

• Yet services constitute the very important part of the world trade story, and are likely to be even more so in the future---especially if trade negotiations can effectively eliminate foreign barriers to services and services suppliers.

Modern economy is service economy• The increased importance of the service sector in developed

economies (>80% of GDP). The current list of Fortune 500 companies contains more services companies than before.

• Services constitute over 50% of GDP in low income countries, the importance of services in the economy continues to grow.

• Employment in services sector– Developed countries: 2/3 or more– Developing economies: increasing steadily– China: over 1/3

• Percentage of services trade in total trade– World 2013: 20% in BOP basis; 50% as measured in value-

added basis – Services in global value chain (GVC)– China: about 10% in BOP basis, much more in value-added

basis

• Beyond the impressive statistics is the role that services play in facilitating exports from the other sectors---manufacturing, agriculture, energy, etc. • The relative importance of service in a product

offering. Products today have a higher service component than in previous decades—servicification of manufacturing industry: for example: IBM, Huawei, etc.

• All other exports are dependent upon an array of services--- transportation and logistics, financing and insurance, advertising, computer-related services, telecommunications.

• Failing to realizing the full potential from services in energizing our economy because of many barriers and discrimination that services providers faced.

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Services industries in developing countries• Percentage of services of GDP is less than

developed countries

• Fourfold increase in trade over last two decades

• Important contributor to economic efficiency and development

• Labour intensive

• China: 44% of GDP, 9.8% of total trade (BOP), over 1/3 employment --huge potential for growth

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Services Industry in the U.S.

• Often 80% of GDP, even more than 90%• The U.S. is the world’s largest services market,

and was the world’s leading cross-border exporter and importer of services.

• The U.S. continued to remain highly competitive in the global services market, with U.S. exports and imports demonstrating a rapid increase.

The Importance of Services to U.S• The services sector is the world's largest employer, and

produces 70% of global gross domestic product (GDP). • In the U.S., services generate more than 75% of the

national economic output and provide 80% of private sector jobs.

• The U.S. consistently maintains a surplus of services trade; currently the surplus is over $200 billion.

• According to the USTR, if U.S. business services achieved the same export potential as U.S. manufactured goods, then U.S. exports as a whole could increase by $800 billion.

II. The World Trade Organization (1)

• 1947: GATT (General Agreement on Tariffs and Trade)

• 1995: WTO (World Trade Organization)

– trade in goods (GATT, etc.)

– Services (GATS)

– intellectual property (TRIPs)

– investment measures (TRIMs), etc.

- binding trade disputes (including service disputes) procedure (DSU)

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The World Trade Organization (2)

• Currently 160 members (3/4 developing countries)

• Ministerial Conference (every 2 years, 9th, at Bali, Indonesia, November 2014)

• WTO General Council (monthly)

- oversees day to day operations (GC)

- directs the dispute settlement system (DSB, 490 cases by the end of Feb. 2015)

- In charge of the trade policy review mechanism (TPRB)

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WTO (3): seen from the functions

• To serve as a forum for trade negotiations

- Multilateral trade agreements (MLAs)

• To conduct Members’ Trade Policy Review

• To settle trade disputes based upon an agreed legal framework, including services disputes arising under GATS

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Now please reflect on: What is services? How are services different from goods?The traditional view on services Services = intangible = non-tradable? Services = government monopolies? Services = rich countries’ playfield? Services = unsuited for GATT-type

disciplines?

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What are Constraints & Concerns on services liberalization? • Domestic opposition?• Lack of expertise and resources? • Unable to effectively improve access for

domestic exporters?• Cannot fully address anti-competitive

practices of foreign firms?• Inadequate stability or international

credibility?

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The Challenges during the Uruguay Round on GATS Negotiations

Sectoral coverage? All services?

Types of transactions? Role of Most-Favoured-Nation (MFN) principle? Permissible policy instruments? Need for GATT-type trade remedies and regulatory disciplines?

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Application of trade theory to Services• Trade in services, in general, display the same

characteristics as trade in goods• The theory of comparative advantage does apply

to services trade• Given high levels of regulation (protection) in

service sectors, economic factors alone cannot explain the pattern of trade in services

• The removal or reduction of barriers to trade in services would contribute to major increases in global welfare

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III. What is GATS?

• General Agreement on Trade in Services concluded in 1994, Marrakesh, Morocco

• Implemented as of January 1995 as an integral part of WTO single undertaking (package)

• 160 member countries by the end of Feb. 2015• All sectors (except governmental services and air

traffic rights)• Positive list approach• four modes of supply

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Key principles of GATS (1)

• Non discrimination

- Most Favored Nation Treatment (MFN): applies to all countries that signed GATS

- National Treatment (NT): applies only to those sectors for which commitments are made

Compare: non-discrimination principle in GATT

• Market access (6 quantitative limitations)

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Key principles of GATS (2)

• Transparency: all regulations accessible and open to public

• Temporary exemption: to MFN and NT i.e., on short-term economic crises

• Lock-in effect: once a commitment is made, it is difficult to withdraw it

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GATS: Main Features

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IV. 1st Observation on GATS

THE GATS IS FAR WIDER IN COVERAGE THAN CONVENTIONAL TRADE AGREEMENTS ....

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MEASURES AFFECTING TRADE IN SERVICES AT ALL GOVERNMENT LEVELS

ALL SERVICES (except governmental services and measures affecting air traffic rights)

FOUR MODES OF SUPPLY- Cross-border supply- Consumption abroad- Commercial presence- Presence of natural persons

APPLICATION TO SERVICES AND SERVICE SUPPLIERS

GATS: Scope, coverage, and definitions

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Scope of GATS

• 160 members

• Any sector in any service (about 160 ) except:

- Services supplied in the exercise of governmental authority (fire, police, …)

- Air traffic rights

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GATS: Coverage• Infrastructure services,

capital intensive, scale economies– Communication– Transport

• Traditionally “liberal” services

– Distribution– Tourism

• Other

– Environmental services– Recreation, Culture, Sport– Professional– Construction

• Strong institutional & regulatory difference between jurisdictions

– Financial services– Business services– Health services– Education

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MODEMODE MEANINGMEANING EXAMPLEEXAMPLE

Mode 1Mode 1Cross-border Cross-border tradetrade

Trade takes place from the Trade takes place from the territory of country A into that territory of country A into that of Bof B

- Telehealth- Telehealth- Passing of - Passing of information by means information by means of fax or emailof fax or email

Mode 2Mode 2Consumption Consumption abroadabroad

Services consumed by Services consumed by nationals of country A in nationals of country A in territory of country Bterritory of country B

- Tourism- Tourism- Consumers who - Consumers who cross borders to cross borders to obtain medical obtain medical treatmenttreatment

Mode 3Mode 3Commercial Commercial presencepresence

A service supplier of country A service supplier of country A crosses the border to A crosses the border to establish and provide a establish and provide a service in country Bservice in country B

- Establishment of a - Establishment of a private hospital by a private hospital by a European company in European company in EcuadorEcuador

Mode 4Mode 4Movement of Movement of natural personsnatural persons

Temporary movement from Temporary movement from country A to B to supply a country A to B to supply a serviceservice

- Doctors moving to - Doctors moving to another country to another country to temporarily provide temporarily provide their servicestheir services

Modes of tradeModes of trade

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... with interesting ramifications

Test question: What modes are involved? (The patient and the nurse are foreigners, the hospital is foreign-owned, and ‘SURGERY.COM’ is based abroad.)

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V. 2nd Observation on GATS

... BUT THE GATS IS EXTREMELY FLEXIBLE IN APPLICATION

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GATS: Obligations

• General (GATS Art. 2-15)– MFN treatment– Transparency, etc.

• Specific (GATS Art. 16-18)– Market access– National treatment– Additional commitments

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Most-favoured-nation treatment

Favour one, favour all Immediately and unconditionally to all

services/providers in all members Regardless of specific commitments Limited exceptions available for up to 10 years (Article II exemption)

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Exceptions from MFNAnnex on Article II

Free movement of people (no permanent employment/citizenship

Air transport (traffic rights regulated by other bilateral agreements)

Financial services (investor protection, insurance, central banks)

Maritime transportTV communications (no discrimination to foreign

suppliers)

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Exceptions from MFN, cont’dArt V: economic integration exception(compare: GATT Article XXIV)

e.g., trading blocks (FTAs) can create other agreements between their members

• Substantial sectoral coverage• No increase in barriers to other Member States

Art XIV (general exception): alike in GATT (Article XX)Public policy, morality, security, health, etc..

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Relevance for individual sectors

Three possible Scenarios:

I. Not covered: Governmental services and large segments of air traffic rights

II. Covered - but no access obligations

III. Access obligations(“Specific Commitments”)

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Scenario I: Status of Governmental Services

Excluded from coverage are ‘services provided in the exercise of governmental authority’ which, in turn, are defined as services that are supplied ‘neither on a commercial basis, nor in competition with one or more service suppliers’. (Article I:3) on a commercial basis

in competition with

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Scenario II:

What minimum obligations are incurred in sectors falling under GATS (‘unconditional obligations”)?

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Unconditional obligations

• Most-Favoured-Nation (MFN) Treatment

• Transparency requirements

• Some other “good governance” provisions (availability of legal remedies, opportunity for consultations, etc.)

Note: There is no obligation to open markets.

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Scenario III:

What are the implications of “Specific Commitments”?

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Specific Commitments – Three basic concepts

• Market Access• National Treatment• Additional Commitments

Plus: Unconditional and Conditional Obligations

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Market Access and National Treatment: Main elements

MARKET ACCESS (Article XVI) Absence of quota-type and similar restrictions

NATIONAL TREATMENT (Article XVII) Non-discrimination with regard to all measures affecting the supply of a service

Any limitations must be inscribed in Schedules under the relevant mode(s).

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Market Access restrictions

Not allowed unless specified in a Member’s Schedule of Commitments.the number of service suppliersthe value of service transactions or assetsthe number of operations or quantity of outputthe number of persons that may be employed in

supplying a servicethe type of legal entity or joint venture the participation of foreign capital

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Schedules of Specific Commitments: General Structure

Sector Limitations onMarket Access(four modes of

supply)

Limitationson NationalTreatment

(four modesof supply)

AdditionalCommitments

(Optional)

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How Schedules of Commitments are structured

Modes of supply: 1) Cross-border supply 2) Consumption abroad 3) Commercial presence 4) Presence of natural persons

Sector or subsector

Limitations on market access

Limitations on national treatment

Additional commitments

Medical and Dental Services (CPC 9312)

1) Unbound 2) None 3) The number of new

foreign doctors registered each year may be limited depending on the total supply of doctors

4) Unbound except as indicated in the horizontal section

1) None 2) None 3) None 4) Unbound

*Unbound due to lack of technical feasibility

NOTE: “unbound” = no commitment (full policy discretion)

“none” = no limitation (full commitment)

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Specific Commitments – Where? How? When?

• Selection of sectors• Inscription of limitations

(i) Less than status quo?(ii) Status quo?(iii) More liberal?

- With immediate effect?- Pre-commitment?

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Must GATS obligations (and commitments) be respected at all costs? No. Members may intervene for overriding health and other policy reasons (Article XIV, ‘prudential carve-out’ in financial services), because of security concerns (Article XIVbis) or to protect the Balance of Payments (Article XII). Also, they may want to re-negotiate commitments (Article XXI) or seek a waiver (Article XIX:3 of WTO Agreement).

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Ongoing negotiations on Services

• To extend the number and extent of commitments made

• To remove existing limitations on current commitments

• To bind commitments so that they cannot be reversed

• GATS 2000 (since January 2000)

• Trade in Services Agreement (TiSA)

– pluralateral (23)

-- dominated by the U.S., EU, & Australia

• The services negotiations in the framework of TPP, TTIP, etc.

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Four built-in GATS negotiating mandates

• Domestic Regulation (Article VI:4)• Emergency Safeguards (Article X)• Government Procurement Article XIII)• Subsidies (Article XV)

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GATS and domestic regulation

• “GATS does not remove a government´s right to regulate services in its country”

• But: Government regulation of a service should be “not more burdensome than necessary to ensure the quality of the service” (possibility of necessity test)

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TiSA Negotiation• GATS was established in 1995. Since then, the world has evolved

dramatically from the result of technological advances, changing business practices, and deeper global integration.

• The Trade in Services Agreement (TiSA) is the most promising opportunity in two decades to improve and expand trade in services.

• Initiated by the United States and Australia, the TiSA is currently being negotiated in Geneva, Switzerland with 50 participants that represent 70% of the world's trade in services: critical mass?

• As of Feb. 2015, participants in the TiSA include Australia, Canada, Chile, Chinese Taipei (Taiwan), Colombia, Costa Rica, the European Union*, Hong Kong, Iceland, Israel, Japan, Liechtenstein, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Republic of Korea, Switzerland, Turkey, and the U.S..

• The world has changed radically in recent years as a result of technological advances, global data flows, innovative business practices, and the widespread use of the Internet by everyone.

• Thus the rules governing trade in services must be brought into line with the realities of today’s digitally-connected world. In the absence of such an agreement, countries are imposing all sorts of restrictions on service suppliers.

• The TiSA can establish new market access commitments and universal rules that reflect 21st century trade.

• The problem: – secret and closed negotiation– future multilateralization, the relationship with GATS, etc.– China’s application to join the negotiation has not been approved.

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THE ENDTHANK YOU!

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