TWN Info Service on WTO and Trade Issues (Apr05/4)

6 April 2005

Disappointing results for South so far in GATS talks

The services negotiations in the WTO have so far not attained an overall balance of rights and obligations, the increase in developing countries' service exports has been small, and the initial offers by major trading partners has been disappointing for developing countries.

These assessments are in an UNCTAD secretariat paper "Trade in services and development implications" that was circulated at UNCTAD's Commission on Trade in Goods and Services and Commodities, which held on 16 March two panel discussions on services.

The UNCTAD secretariat paper gives a comprehensive treatment of services and development, covering trends in the global services economy, issues in infrastructure services, policy reform in the services sector, economic integration and services and the WTO services negotiations.

Below is a TWN report on the UNCTAD paper. It was published in the SUNS Bulletin on 17 March 2005.

With best wishes
Martin Khor


Disappointing results for South so far in GATS talks

Report by Martin Khor (TWN), Geneva, 16 March 2005 

The services negotiations in the WTO have so far not attained an overall balance of rights and obligations, the increase in developing countries' service exports has been small, and the initial offers by major trading partners has been disappointing for developing countries, according to an UNCTAD secretariat paper.

The paper, "Trade in services and development implications" was prepared for the Commission on Trade in Goods and Services and Commodities, which held on 16 March two panel discussions on services.

The UNCTAD secretariat paper gives a comprehensive treatment of services and development, covering trends in the global services economy, issues in infrastructure services, policy reform in the services sector, economic integration and services and the WTO services negotiations.

The paper says that the assessment of trade in services continues to be a main concern for developing countries, as lack of assessment and information is a main impediment to their more active participation in the services negotiations. Lack of assessment also prevents the elaboration of sound domestic services policies.

For now, only rough, partial or sector-specific assessment exists, said the UNCTAD secretariat paper, adding that thus far, the assessment has shown that an overall balance of rights and obligations has not been attained under the GATS; the increase in developing countries' world service exports has been small; and the objectives of Article IV have not been achieved (because of export barriers, supply constraints and lack of commercially meaningful commitments).

The paper said that the assessment also showed that benefits of privatization and liberalization are not automatic; that there is a need for policy flexibility and proper sequencing of liberalization; priority attention is needed to ensure access to essential services; and there is need for assistance for nascent service sectors and SMEs (small and medium sized enterprises) in developing countries.

In the perception of developing countries, a preliminary analysis of initial offers by the major trading partners reveals a number of things, said UNCTAD.

"Several offers seem to go back on previous commitments or lack real change in the level of commitment, despite modifications. This is done either by redefining the sector/sub-sector to which a commitment applies or by going from one partial commitment to another one.

"Initial offers often use new classifications (even with respect to sectors that are not officially part of the WTO classification list) that have received no multilateral approval and are still under discussion. This leads to uncertainty as to what exactly a country is offering.

"Also, offers seem to indicate that some countries are not abandoning any MFN exemptions, but rather introducing new ones. This can be cause for concern, as the impact of even the existing exemptions has not yet been assessed. Offers also appear to concentrate on certain industries, mostly bypassing certain sensitive sectors, for example, health, audiovisual or labour-intensive services, particularly those supplied through Mode 4 and at lower skill levels, where developing countries have their comparative advantage.

"Finally, certain offers refer to the notion of reciprocity. While the GATS request-offer process naturally builds upon bargaining and exchange processes, flexibility should be maintained for developing countries."

Given that development is at the heart of the Doha Work Programme, GATS negotiations should seek to ensure better prospects for developing countries in terms of a more balanced and equitable distribution of benefits from trade liberalization. Liberalization in Mode 4 and sectors of particular interest to developing countries will be the litmus test.

The UNCTAD secretariat paper also highlighted two recent WTO dispute settlement cases involving services that pointed to the difficulties facing developing and also developed countries in scheduling their services commitments and of anticipating the potential implications of such commitments.

The first was the Telmex dispute, which is about whether Mexico's laws and regulations for the supply of public telecom services are consistent with its commitments under the GATS.

The main issues are whether provision by Telmex (a major supplier) of interconnection to US basic telecom suppliers is based on cost-oriented and reasonable rates, terms and conditions; whether Telmex is engaging in anti-competitive practices; and whether Mexico has failed to ensure that US basic telecom suppliers have access to, and use of, public telecom networks and services.

The Panel ruled that in determining whether interconnection costs are reasonable, only the actual costs of interconnection are to be taken into account (excluding infrastructure construction and maintenance costs), that Mexico had not taken appropriate measures to prevent Telmex from engaging in anti-competitive practices, and that Mexico had an obligation to provide access to and use of private circuits.

While the Panel emphasized that its findings in no way prevent Mexico from pursuing development objectives, this case nonetheless points to the difficulty in formulating commitments in a manner that truly safeguards development options, the paper said.

The second case relates to cross-border gambling services. Here, the United States claimed - unsuccessfully - that it had intended to exclude Internet gambling from its commitments. The ruling also provides an interpretation of the general exceptions clause of the GATS (Article XIV), indicating that, in invoking Article XIV, Members have an obligation to consult with the other party or parties to find a least trade-restrictive measure.

It also exposes the systemic difficulty for smaller countries to oblige their trading partners (particularly major players) to comply with rulings against them, said UNCTAD.

Both the Telmex and the Gambling case highlight the difficulty of foreseeing the potential implications of scheduled commitments (even for countries with considerable experience in the negotiation of international trade agreements) and the need to carefully schedule the intended commitments, added the UNCTAD secretariat paper. They flag the risk that panels and the Appellate Body may interpret schedules of specific commitments in a manner different from what the scheduling country had intended.

The UNCTAD secretariat paper also deals with aspects of the ongoing GATS negotiations on rules, including emergency safeguard measures, subsidies, government procurement and domestic regulation.

On possible emergency safeguard measures (ESM), the paper said that this has been identified as an area of prime developmental importance, although there is a lack of consensus on the desirability and feasibility of such measures.

The ASEAN Members' draft ESM agreement, which was the main impetus for discussions, had an annex containing the main difficult areas, such as the possibility of applying safeguard measures to established foreign suppliers (Mode 3), the definition of domestic industry, the impact of a safeguard measure on national treatment and most-favoured-nation (MFN) treatment, and acquired rights.

The UNCTAD secretariat paper said that there are several grounds on which to justify ESM in services. The nature of services trade renders it prone to unforeseen developments, and a safety belt could assist countries in their liberalization efforts. It could also help address adjustment costs.

Safeguard measures are an important political tool that can make the difference for Governments in terms of appeasing the potential "losers" of liberalization and reform, while disciplining Governments to restructure within a particular window of time. There nonetheless remain concerns to be addressed.

On subsidies, UNCTAD said that these can have a detrimental effect on international trade, in particular exports of developing countries. Many Governments subsidize their services sectors including through export support to their services suppliers. In Australia, between 1997 and 2002, assistance to services exporters amounted to $1.35 billion. This assistance was granted to almost every services sector through direct financial assistance, funding to institutions and tax expenditures available to exporters.

According to the UNCTAD secretariat paper, negotiations on subsidies disciplines must pay attention to the special concerns of developing countries, e. g. subsidies aimed at building competitiveness in priority service sectors and meeting social and development objectives and the priority removal of trade-distorting subsidies of developed countries.

On government procurement, the paper clarified that GATS MFN, market access and national treatment obligations do not apply to government procurement (GP) by governmental agencies for governmental purposes and not with a view to commercial resale or with a view to use in the supply of services for commercial sale.

A major stumbling block in the present negotiations in GATS is the lack of clarity on the mandate and particularly on whether market access issues are covered. A recent EC communication proposes a framework for services GP - basically providing for commitments on GP to be taken within the framework of schedules of specific commitments, listed in a fifth column on limitations on GP.

Developing countries are hesitant to open up their markets for GP to international tendering because they fear that foreign suppliers will crowd out local firms and the latter will at the same time be unable to gain access to foreign GP markets because of lack of competitiveness and the complexity of the tendering process, said UNCTAD.

Concerns have also been raised on the implications of transparency disciplines on market access and developing countries' use of GP as a tool to pursue social and development objectives. However, in light of the potential beneficial effects of competition, more analysis is needed on costs and benefits of these different options.

On domestic regulation, the UNCTAD paper clarified that Article VI. 4 of the GATS mandates the development of necessary disciplines to ensure that measures relating to qualification requirements and procedures, technical standards and licensing requirements and procedures do not constitute unnecessary barriers to trade in services.

When pursuing this mandate, there is a need to establish a balance between preserving the right to regulate and ensuring that legitimate measures are not applied in an arbitrary manner or as a disguised barrier to trade. The right to regulate is of particular importance for developing countries, as many of them do not yet have an optimal regulatory and institutional framework in place.

Recent contributions address measures relating to administrative procedures for obtaining visas or entry permits, experiences with disciplines on technical standards and regulations, issues related to transparency and the relationship between future VI. 4 disciplines and market access and national treatment. Qualification requirements and recognition issues have also figured prominently, said the paper.

Another aspect is possible disciplines on transparency, where some view the concept as going beyond publishing information on measures pertaining to services trade, to include also prior notification and comment procedures.

Such an expanded concept of transparency may create administrative burdens and costs for developing countries, which are concerned about any undue influence that foreign companies and Governments could exert on their domestic regulatory processes. Careful consideration of such a broadened notion of transparency is needed, urged UNCTAD.

Necessity is seen as a concept to strike a balance between the right to regulate and the requirement not to unduly restrict trade, said the UNCTAD secretariat paper. Thus, developing countries need to ensure that any possible future disciplines do not prejudge their flexibility to undertake regulatory and institutional reform and their ability to meet public policy objectives.

Technical standards, including standards at the international level, are also being discussed. Any work on international standards would have to bear in mind the particular difficulties of developing countries in participating effectively in international standard-setting bodies and processes.

The UNCTAD paper concluded that specific consideration may need to be given to: developing countries' need for flexibility and ways to implement it (e. g. regarding the concepts of transparency, less trade restrictiveness, or national policy objective); the creation of S&D obligations and ways to ensure their effectiveness (e. g. regarding technical assistance in the context of regulatory reform, and ways to facilitate developing countries' effective participation in international standardizing bodies); and the overall context of any future disciplines. Ultimately, to maximize developmental gains, future disciplines on domestic regulation should facilitate exports of developing countries, particularly through movement of natural persons.

The UNCTAD secretariat paper also comments on the growth of regional trade agreements (RTAs) covering services trade. While some RTAs in part mirror the GATS (e. g. domestic regulation or recognition issues), others go beyond it (e. g. a priori transparency, GATS plus) or fall short of it (e. g. excluding the local level from the coverage).

Multiple negotiating processes have resulted in a complex and overlapping network of rules with different obligations. This creates challenges for developing countries, the paper said, adding that North-South RTAs, for example, might frequently entail liberalization that is deeper and faster than the one achieved at the multilateral or regional (South-South) level. This may put particular pressure on developing countries' domestic regulatory frameworks.

Also, imbalances in negotiating strength and capacities may create pressures and result in far-reaching obligations that may not reflect a developing country's development priorities. With respect to rule making, several RTAs include provisions for prior comment on proposed changes to services regulations on either a "best endeavour" or an obligatory basis, an aspect that goes beyond the GATS.

RTA negotiations following a negative list approach, which automatically includes new services, may result in developing countries binding their market opening at a stage that is more liberal than their multilateral GATS commitments. This may happen without them having a comprehensive understanding of the potential implications thereof, said the paper.

Economic implications of deeper commitments may be even more far-reaching if they are negotiated between a developed country and a South-South regional grouping, with the former only slowly realizing its own integration process. Such circumstances could impede South-South trade, which may be overtaken by North-South imports.

Thus, whether, how and with whom services liberalization should be pursued in a regional context remain crucial decisions that need to be taken carefully and on the basis of a regional group's specific economic, social and developmental circumstances, said the UNCTAD secretariat paper.

On policy reforms in the services sector, UNCTAD said that developing countries' main challenge is how to strengthen domestic supply capacity and reconcile trade, development, social and equity considerations. Liberalization of trade in services has become a concern for many stakeholders, particularly when reform reaches into areas previously considered the public sector domain.

The choice of policies ranges from preserving the role of the Government in public goods to full privatization and liberalization of a sector. All these may be viable depending on the prevailing economic and social conditions in a country and in the international markets. At the same time, commitments under bilateral, regional, and multilateral trade negotiations on services limit certain policy options. In making such commitments, developing countries need clarity and an assurance that these are the best development options.

The experience of developing countries reveals that, for positive outcomes to result, liberalization must proceed at a speed that is not too rapid for local actors, the regulatory framework and social safety net must be adequate, and there must be a competitive business environment and suitable accompanying policies to ensure that economies enhance their capacity to integrate beneficially into the world economy, said the paper.

The importance of sequencing reforms is well established in theory, but the specific content of this sequencing is less clear, and having a number of benchmarks on how to proceed would facilitate decision-making. It should be recognized that there is no "one size fits all" policy framework, either across services sectors or across countries. The challenge is to elucidate what policy framework should be used for what sectors and under what national and international conditions services' contribution to economic growth and sustainable development will be enhanced.

The UNCTAD secretariat paper provides case studies from China and Thailand to show problems arising from domestic reforms.

China's assessment of reforms in its banking sector is that increasing participation of foreign banks improved the financial system and provided more advanced services to consumers. However, domestic banks are losing market shares with the shift of high-end consumers and capable executives to foreign banks.

In the distribution sector, Chinese SMEs found it difficult to develop their business in the face of competition from big foreign competitors (e. g. China's biggest retailer had a sales volume of less than 1% of that of the biggest retailer from the United States).

After China's accession to the WTO, 28 new foreign-invested retail chain stores have been established. Though customers may enjoy better services and cheaper merchandise, many small local retailing stores collapsed. The challenge is now how to deal with such situations, since these firms are crucial to employment and economic dynamics. China's conclusion is that liberalizing gradually is key, the UNCTAD paper said.

Thailand has gradually liberalized its retail trade since the late 1980s. Starting from

1997, and as a reaction to the financial crisis, FDI in retail services increased remarkably. This brought benefits and costs. Some retailers offered cheaper products and more varieties, improved their distribution networks and inventory control, and generated employment.

But the closing down of many small traditional shops (several thousands a year) and the disappearance of traditional middlemen led to a negative reaction in a large segment of the population. In response, the Government undertook regulatory action to prevent further negative ramifications, especially for small, traditional retailers.

Examining issues in infrastructure services, the UNCTAD paper said that the function of providing essential services has traditionally fallen within the public domain, with the last decades seeing a trend towards opening up essential service sectors to foreign or domestic competition. Privatization and liberalization have produced mixed results, either increasing prices for the poor or entailing other adjustment costs (e. g. loss of employment).

Liberalization and privatization have to be accompanied by appropriate regulatory measures and have to be carefully managed, and mixed experiences are considered the result of regulatory failures. If the transition process had been adequately managed and regulated, it would in theory have been possible to reap the benefits of liberalization and privatization in full. However, said the paper, even for countries with strong regulatory frameworks, there is no guarantee of success in privatization processes as the United Kingdom (railway) and California (energy) cases show.