‘GATS - Fact and Fiction’, at best a partial truth

by Chakravarthi Raghavan

Geneva, 20 Mar 2001 -- The World Trade Organization - the Director-General Mike Moore and senior officials - launched last week a campaign to promote liberalization of trade in services and counter the rising voices of criticism from many NGOs campaigning against the GATS talks and a new round.

The public relations offensive is  through a background note, ‘GATS - Fact and Fiction’, which has been widely distributed to the media and put on the WTO website to counter the campaign launched by a number of development-oriented NGOs of the North and the South against the GATS negotiations and approaches mooted by the industrialized world, as well as the new trade round and attempts to promote investment rules.

The ‘Fact and Fiction’ of the secretariat background note has been widely lapped up and propagated by the western financial media - in news columns, news analysis and editorial advocacy.

While some of the statements of the NGOs about the likely effects of further GATS liberalization may fall in the category of ‘exaggerations’, and some of mistaken conclusions, the secretariat note has some partial truths, but has omitted to mention others.

For example, among the benefits of GATS and its liberalization drives, the secretariat background note, says that opening domestic markets to foreign service suppliers increases competition and brings benefits by improving efficiency.

This is a well-understood concept in the neo-classical theory of free trade, which coupled with the argument that ‘liberalization benefits the liberalisers’, is often preached and pushed on developing countries in all contexts. If free trade and liberalization is good, why does not the US or the EU, and within the EU, the UK and its development cooperation minister Claire Short, push the EU to liberalize its agricultural and goods trades by removing all tariffs and tariff-quotas?

In promoting a unilateral liberalization concept,  the WTO secretariat even put forward the view, in a note to the CTS, on the issue of data on trade in services (see #SUNS #4808). However this concept involves some basic parameters and caveats  - that all economists and text-books mention at the outset and take as given.

Very recently, two free trade academics and advocates have chosen to mention it publicly.

In a seminar in the US (to celebrate the contributions of Robert Hudoc to trade theory), and in criticising the incorporation of TRIPS in the WTO, Prof. T.N.Srinivasan says: “The conventional argument in favour of unilateral liberalization of trade in small open economies in goods is that gains from liberalization outweigh losses, so that, in principle, a transfer scheme within each economy can be devised that will compensate the losers from liberalization.” Mr. Srinivasan went on to note that beneficiaries of TRIPS were in the rich developed countries and “only a few, if any, in poor countries” and this being the case, even if gains outweigh losses, international transfers would be needed to compensate losers.

Mr. Srinivasan postulated the general proposition about liberalizing trade in goods and explained  the implication of its extension to TRIPS, to argue against TRIPS.

However, in goods trade itself, thanks to the IMF and World Bank structural adjustment programmes (now renamed as poverty reduction strategies), the developing countries are prevented from compensating losers.

Mr. Srinivasan’s views on unilateral liberalization of trade in goods, though put forward in the TRIPS context, is equally if not more, applicable to the GATS and services context too - where in the absence of data, qualitative assessments by UNCTAD or trade experts like Mr.B.L.Das have brought out that the benefits of GATS have gone to the industrial world and the developing world has gained nothing - neither in the services trade, nor even in the Uruguay Round promise of more market access for them in agriculture, textiles etc.

At the London Ministerial Roundtable (19 March) on LDCs (where WTO head Mike Moore, UK Development Minister Claire Short and the EC have made clear that the forthcoming UN LDC meet and the ‘everything but arms’ offer is nothing more than an attempt to line up LDCs for the new WTO Round, with new issues)  Prof. Alan Winters has been cited by UNCTAD Secretary-General Rubens Ricupero as saying that he (Prof Winters) “does not know of any serious proposition in trade theory that suggests that there will not be losers.”

Mr. Ricupero then went on to say that: “In other words, the benefits from international trade and trade liberalization may not have a positive effect on some groups of the world’s population” and posed the question of how this distributional problem was to be handled. Ricupero also cited Winter’s own view as ‘sensible’, namely, continue to work on ‘complementary policies’ that ensure benefits continue and negative impacts minimized, “even if this means lowering the benefits to one group of society”.

The WTO/GATS ‘fact and fiction’ does not mention the propositions of Srinivasan or Winters, but presents the services liberalization as a case of everyone being winners, with no losers, suggesting that in terms of the statement of Winters, the WTO view is not a ‘serious preposition in trade theory’.

The WTO/GATS ‘fact and fiction’ also mentions, as a benefit of services liberalization, that there is evidence that it leads to lower prices and cites the ‘compelling evidence’ that costs of long-distance calls in Britain plummeted by the telecom liberalization.

However, there is equally compelling evidence in the UK, in the US, and many developing countries, that the cost of the basics in terms of cost of home connection (cost of instrument hire and local calls etc) have actually gone up in most markets, on the basis that the previous practice of the public sector telecom subsidising one type of service (local and home) by another (long distance and overseas).

In the financial services sector, where there has been ‘liberalization’ and ‘deregulation’ of banking and other services in the US and Europe, the costs of retail banking services have gone up after liberalization and competition for every type of activity involved - keeping money in the bank, depositing and collecting cheques, making transfers etc, as also service costs for small investors and borrowers too. The costs of borrowing for small and medium trades and businesses have generally gone up, and there is also the experience that loans are less easily available in local communities (where the banks have branches).

And the Wall Street Journal last week has brought out in a report that as a result of mergers, and the shortage of banks that have resulted, “credit lines are shrivelling” for a range of big corporations - Coca-Cola, Levi Strauss, Masco Corporation etc.

Another ‘fact’ in the WTO background note is of faster innovation by liberalizing service markets and the encouragement to FDI and the technology transfer involved, including in the new skills and technologies associated with the spillover, and domestic employees learning new skills.

A recent seminar at the WTO on technology transfer, and even the official WTO/World Bank study of the survey of literature admitted that there is no conclusive evidence, and merely the view that TNCs prefer FDI as the preferred mode of technology transfer (as opposed to various others, which the study admitted had not been studied at all).

This idea of building domestic skills through liberalization of financial services and by ‘commercial presence’ has been pushed on the developing world - partly through IMF/World Bank unilateral liberalization policies and via the WTO.

In Africa, and in many Asian countries too, the US financial service suppliers (banks, investment advisors and other financial service providers) have written into the domestic contracts of service of their employees a common US practice, that has been legitimised by US courts - under which to protect the employer’s “commercial secrecy and confidentiality”, an employee quitting a job can’t join a domestic or rival firm for a fixed period of time - thus ensuring there is no ‘spillover’ of skills.

And a recent delegation of  the coalition of service industries, who came to Geneva and met Third World delegations, mentioned as an issue of high concern to them, the problem of developing-country senior employees in developing countries leaving and setting up rival firms or joining rival firms or even of expatriate nationals of these countries (working in the US or Europe) going back to their countries and setting up rival operations. The services industries wanted rules written in the new round to protect investors against these practices!

The WTO ‘fact and fiction’ also makes the point that under GATS, countries are not ‘compelled’ to liberalize and that they are bound by GATS disciplines only in sectors and sub-sectors that they have agreed to liberalize, and that the “WTO is not after your water”, and that public services maintained or supplied by a government need not be opened to foreign competition.

However, this is a partial truth, and a fragile basis to attack the NGOs.

As for the ‘fiction’ part of the background note, the charges and complaints about the ‘misunderstandings and scares’ being spread by NGOs (like the UK-based World Development Movement, which is singled out for mention), while some NGO statements have exaggerations to grab headlines, the WTO document is misleading too when the entire fact of the WTO negotiations are taken into account and weighed against its claims about countries liberalizing only to the extent they want to, and that there is no compulsion in the WTO/GATS.

As far as developing countries are concerned, the first element or fact in this is  the role of the IMF and the World Bank and how they have been operating, in tandem with the WTO, in forcing open developing-country markets to foreign service suppliers, and forcing the privatization of several formerly government supplied services and infrastructural projects and schemes.

These have required many countries to privatize water and even sanitation and other services and charge so-called ‘user fees’ to bring in revenue,  as well as open the field up for private suppliers to provide the  service, whether in competition or as a complement to the public service. In providing such service, the private corporations and enterprises would not necessarily charge rates or fees that bring them profits.

In terms of GATS Art. 1.3.c such a service would no longer qualify as a “service supplied in the exercise of government authority”, and thus would be brought under GATS.

Even if the current crop of GATS officials give ‘authoritative’ views to the contrary, a future set of officials could provide a different interpretation in guiding panels and the Appellate Body.

For example, the original GATT Art. III was never intended by its framers (the London meetings before the Havana talks) to have the kind of meaning of assuring ‘competitivity’ for foreigners in domestic markets, that the current interpretations have done and are being constantly expanded by rulings.

Also, while in theory, countries are not compelled to liberalize, and developing countries are free to liberalize fewer sectors and apply limitations, the post-Marrakesh financial services talks showed how much pressure can be, and in fact, is applied by the two majors - the US and the EC.

The then Director-General, Mr.Renato Ruggiero acknowledged and thanked the IMF and the World Bank for their help in getting the financial services talks and agreement to a successful conclusion - the reference was to the pressures applied by these institutions on some developing-country governments. And when Malaysia held out in December 1997, the WTO head and the chair of the talks, prolonged the talks to enable the US to apply bilateral pressure on Malaysia at the capital, and on its ambassador in Geneva at the WTO building itself.

There are some ‘facts’ in the WTO background note that cannot be challenged for what is said, but for what is not said or omitted. And the credibility of international organizations get eroded, and not furthered, when they promote their ideological views with messianic fervour. -SUNS4859

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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