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TWN Info Service on WTO and Trade Issues (Sept05/2)

16 September 2005


DEVELOPED COUNTRIES LAUNCH JOINT OFFENSIVE TO OPEN UP DEVELOPING COUNTRIES' SERVICES THROUGH NEW METHODS

Developed countries have launched a joint offensive to introduce new methods of getting developing countries to commit themselves to liberalising their services sectors in the WTO, and to have these endorsed at the WTO's Ministerial conference in Hong Kong in December.

The offensive came at an informal meeting on 13 September of the WTO's Council for Trade in Services in Special Session, when members (including the European Union, Japan, Switzerland, Australia and Korea) presented six papers calling for additional ways to accelerate the pace of services liberalisation before the Hong Kong Ministerial. The US supported the proposals, indicating that it would also submit a paper later.

The proposals were coolly received by the developing countries, with many asking for clarification, and some criticising the proposals for attempting to change the nature of the services agreement and negotiating methods, and for removing the policy flexibilities now available to the countries to choose their pace and degree of liberalisation in the various sectors.

Under the new proposed mechanisms, known under the euphemism of "complementary methods for services negotiations", developing countries would have to commit to liberalise a significant number of sectors and to "deepen" the liberalisation by removing restrictions, under the General Agreement on Trade in Services (GATS).

Particularly targeted is liberalisation of "commercial presence", or Mode 3 of the GATS. The developing countries are asked to open up a minimum percentage of sub-sectors for participation of foreign service enterprises and providers. Some proposals called for developing countries to bind existing levels of actual liberalisation, and then go further by committing to liberalise even more deeply.

Under the proposals, developing countries would be obliged to commit in a lower percentage of sectors than developed countries. But since the developed countries have already made commitments in more sectors, the proposals are clearly targeted at the developing countries. Indeed, as one developing country diplomat pointed out, developed countries may have a "services round for free" since they have already liberalised, while developing countries would have to "pay" by increasing commitments in breath and depth.

The proposals go counter to the principles and structure of the GATS, which enable developing countries to select the degree to which they choose to make commitments in GATS, and in which sectors. The current "request and offer" system also means that countries can make requests to a member to open up in particular sectors, but the member has the option of choosing whether to make an offer in response to the requests, and if so what kind of offer.

The GATS rules and the request-offer negotiating method, have provided significant flexibility to the developing countries.

Below is a report on this offensive and the proposals put forward at the services meeting.

It was published in the South North Development Monitor (SUNS) of 15 September.

With best wishes
Martin Khor
TWN

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DEVELOPED COUNTRIES LAUNCH JOINT OFFENSIVE TO OPEN UP DEVELOPING COUNTRIES' SERVICES THROUGH NEW METHODS

By Martin Khor (TWN):  Geneva, 14 September 2005

Developed countries have launched a joint offensive to introduce new methods of getting developing countries to commit themselves to liberalising their services sectors in the WTO, and to have these endorsed at the WTO's Ministerial conference in Hong Kong in December.

The offensive came at an informal meeting on 13 September of the WTO's Council for Trade in Services in Special Session, when members (including the European Union, Japan, Switzerland, Australia and Korea) presented six papers calling for additional ways to accelerate the pace of services liberalisation before the Hong Kong Ministerial. The US supported the proposals, indicating that it would also submit a paper later.

The proposals were coolly received by the developing countries, with many asking for clarification, and some criticising the proposals for attempting to change the nature of the services agreement and negotiating methods, and for removing the policy flexibilities now available to the countries to choose their pace and degree of liberalisation in the various sectors.

Under the new proposed mechanisms, known under the euphemism of "complementary methods for services negotiations", developing countries would have to commit to liberalise a significant number of sectors and to "deepen" the liberalisation by removing restrictions, under the General Agreement on Trade in Services (GATS).

Particularly targeted is liberalisation of "commercial presence", or Mode 3 of the GATS. The developing countries are asked to open up a minimum percentage of sub-sectors for participation of foreign service enterprises and providers. Some proposals called for developing countries to bind existing levels of actual liberalisation, and then go further by committing to liberalise even more deeply.

Under the proposals, developing countries would be obliged to commit in a lower percentage of sectors than developed countries. But since the developed countries have already made commitments in more sectors, the proposals are clearly targeted at the developing countries. Indeed, as one developing country diplomat pointed out, developed countries may have a "services round for free" since they have already liberalised, while developing countries would have to "pay" by increasing commitments in breath and depth.

The proposals go counter to the principles and structure of the GATS, which enable developing countries to select the degree to which they choose to make commitments in GATS, and in which sectors. The current "request and offer" system also means that countries can make requests to a member to open up in particular sectors, but the member has the option of choosing whether to make an offer in response to the requests, and if so what kind of offer.

The GATS rules (particularly its positive-list approach, in which a country commits to liberalise only in sectors that are listed by it, and restrictions to the liberalisation can also be listed) and the request-offer negotiating method, have provided significant flexibility to the developing countries.

Pressure has been building up in recent months by the developed countries to have the request-offer system "complemented" by other negotiating methods, known as multilateral and plurilateral approaches. Originally called the "benchmarking approach", and a "common baseline" approach, the current term used for changing the GATS negotiating modality is "complementary approaches."

By whatever name it is known, the proposed new multilateral and plurilateral methods, if accepted, would drastically change the GATS structure and architecture and its negotiating modality (which is now on a bilateral request-offer basis) and remove a large part of the flexibilities that developing countries presently have.

The ground for the joint offensive was prepared when the developed members complained that the services negotiations were in "crisis" due to what they said were poor offers made by developing countries. Many developing countries countered that poor offers were being made in Mode 4 (movement of natural persons) by developed countries.

Some developed countries, particularly the EU, then floated the concept of "benchmarking" and held some informal meetings to get response to its proposals for a multilateral approach to accelerate services liberalisation. The idea was resisted by several developing countries.

At the last Trade Negotiations Committee meeting on 21 July, the chair of the services negotiations, Ambassador Alejandro Jara of Chile, reported that the overall quality of initial and revised offers in services was "unsatisfactory." He said a considerable number of members recognised that the request-offer method alone is not producing results and many wanted to explore all negotiating methods available (including plurilateral and multilateral) while others expressed concern that these would undermine the negotiating flexibility granted by GATS and create or maintain imbalances. He also identified "complementary approaches" as an area that he would conduct consultations on.

[Amb. Jara was subsequently appointed a Deputy Director-General in the WTO, and will assume the post in October. He chaired the 13 September services meeting.]

These developments gave an opening for the pursuit of the "complementary approaches", which was the subject of the one-day informal meeting on services on 13 September. Six papers were presented on the subject, indicating that the proponents had worked on this offensive, and probably in conjunction with one another, during the summer break.

The EC's "non paper" on 'Complementary Methods for the Services Negotiations: Possible Elements', set a template for the proposals. Referring to the services chair's statement to the TNC that Members should explore all negotiating methods available, the EC paper proposes elements for putting into effect the plurilateral and multilateral methods for negotiations, which it says "fully respect the existing structure and principles of the GATS."

Under the multilateral approach ("commitments to be undertaken by all members"), the EC said this is to provide a "common baseline" of commitments for the services negotiations and thus bring these more in line with other areas such as agriculture. It would "ensure a set of commitments across a broad spectrum of sectors and sub-sectors and in all four modes of supply."

The EC proposed that Members will agree to take commitments in a minimum number of sub-sectors within the services sectoral classification list. In determining the sub-sectors, Members should give priority to those areas that are the most relevant from an economic development perspective and to sectors where the largest number of requests have been received.

Members will commit a minimum number of sub-sectors under a formula, with developed countries committing in X sub-sectors, developing countries in Y sub-sectors and LDCs encouraged to commit in a limited number of sub-sectors.

The number of sub-sectors can be reduced by a maximum of Z% if, for the corresponding number of sub-sectors, a Member has already taken commitments in line with the modal elements indicated below.

The EC also proposed that commitments in the list of sub-sectors chosen shall reflect the following modal elements. In Mode 1, Members will undertake to offer Mode 1 commitments in x% of the sub-sectors chosen, wherever this mode of supply is deemed technically feasible and without requiring commercial presence. In Mode 2, Members undertake to offer commitments in y% of the sub-sectors chosen.

In Mode 3, Members undertake to offer commitments in z% of sub-sectors chosen and not to introduce or to remove in those sub-sectors foreign ownership restrictions. Where restrictions are maintained, foreign ownership will be allowed up to at least 51%.

Under Mode 4, in z% of sub-sectors where commitments are offered further to this multilateral method, Members undertake, as the case may be, not to introduce or to remove economic needs tests for at least three of the following categories: Business Visitors (BV), Intra-corporate Transferees (ICTs), Contractual Service Suppliers (CSS) and Independent Professionals (IPs).

The EC also proposed the plurilateral approach where a higher level of commitments is made in a number of sub-sectors of interest to members in a critical mass of markets. They shall negotiate commitments that go beyond the multilateral approach with a view to securing agreement from a "critical mass" of countries to undertake such commitments.

Interested members should agree on a core set of commitments for the sub-sector concerned, for example, in the form of model schedules, that would have to be undertaken by all participants on the basis of a critical mass.

The EC said the request-offer approach will continue as currently conducted although in an intensified way. The Hong Kong Ministerial should set a date for further improved offers and a date for final schedules.

The Japan non-paper has the same principles as the EC paper, but elaborates further on the specific sectors to be liberalised and the extent of liberalisation to be committed.

It said a substantive package on services can be done through adopting plurilateral and multilateral approaches complementing the current request-offer negotiations, thereby setting liberalization targets and commitments to be reflected in revised offers to be submitted next year. Such targets for liberalization should be created by articulating achieved levels of commitments, and not by specifying levels of improvements from the existing level.

Japan proposed two modalities, a quantitative approach (specifying a minimum level of commitments for all Members) and a qualitative approach (with targets for liberalization on certain sectors of interests for all Members except LDCs).

Under the quantitative approach, targets will be established for each mode of supply, where Members will agree to make commitments on a specific percentage of sub-sectors. Members having already achieved the targets are not required to make additional improvements.

Flexibilities will be given to all Members by designating the sub-sectors they desire to make commitments. Developing country and LDC Members can provide less ambitious targets than that developed countries.

Japan also proposed concrete targets. Under Mode 1 and 2, members would agree to a minimum percentage of sub-sectors which commit the current level of regimes. The targets are 50% for developed countries, 30% for developing countries and 20% for LDCs.

Under Mode 3, the target is that a minimum percentage of sub-sectors would be allowed more than 50% of foreign equity participation. Targets are 60% for developed countries, 40% for developing countries and 20% for LDCs.

Under Mode 4, Members aim to agree on a minimum number of horizontal commitments among the following four categories; "Business Visitors," "Intra-corporate Transferees," "Independent Professionals" and "Contractual Service Suppliers." Targets are 4 categories for developed countries, 3 categories for developing countries and 2 categories for LDCs.

Under the qualitative approach, liberalization targets will be established for sectors in which Members have interests. Targets, or negotiating objectives, for each sector will be discussed in each sector and will be decided through negotiations. Members who have already achieved those targets are not required to make additional commitments within this approach.

Japan added that sectors and liberalization targets for each sector will be specified in future discussions. It attaches importance to the following targets.

* Computer Related Services: Full commitments in modes 1 to 3 on the entire range of computer and related services.

* Telecommunications Services: The following eight items are the negotiating targets and Members should achieve five items: Making commitments in full range of commercially meaningful sub-sectors; Eliminating exclusive licenses to specific supplier and other form of restrictions which limit competition in modes 1 and 3; Eliminating requirement for service suppliers to supply their services through the networks of specified suppliers in modes 1 and 3; Eliminating foreign equity limitation in mode 3; Eliminating nationality/residency restrictions in mode 3; Making commitments of non-facilities based (resale based) service supply in mode 3; Making commitments of all of the provisions of the Reference Paper; Eliminating MFN exemptions for telecommunications services.

* Construction and Related Engineering Services: Eliminating foreign equity limitations in mode 3; Eliminating restrictions on types of legal entity in mode 3; Eliminating discriminatory procedures or requirements.

* Financial Services: Making commitments on all sub-sectors; Making commitments in modes 1 and 2 in accordance with the Understanding on Commitments in Financial Services; Eliminating foreign equity limitations in mode 3; Eliminating limitations on types of legal entity in mode 3; Eliminating limitations on the total numbers of service suppliers in mode 3; According national treatment to foreign service suppliers.

* Distribution Services: Making commitments in modes 1 to 3 of all sub-sectors; Allowing excluded products because of national policy objectives.

* Maritime Transport Services: Making commitments in accordance with the Maritime Model Schedule.

* Audiovisual Services: Making commitments in modes 1 to 3 of all sub-sectors excluding radio and television services and radio and television transmission services.

Switzerland presented a paper proposing a methodology to translate Members' commitments into quantified indexes in the framework of GATS. The methodology allows comparison of entire schedules of commitments undertaken by Members. The methodology is formula-based.

The methodology encompasses 146 services sub-sectors. For each sector, there are 4 modes of supply and 2 categories of limitation: market access (MA) and national treatment (NT). Therefore, a commitment in one of the 146 specific group or sub-sector consists of 8 entries. As a result, a total of 1168 entries exist for each Member. To each entry corresponds a numerical "score" according to the formula.

Each Member's specific commitments are entered into an Excel sheet according to a formula, which attempts to track barriers to trade for every limitation inscribed in the schedule.

The formula allows to calculate indexes for all services sub-sectors and groups following a single approach. Eight numerical "scores" (corresponding to 8 entries) are assigned to each Member's commitment according to the formula. If no commitment is undertaken for a given group or sub-sector, all 8 entries are assigned a value of 0.

The coverage is defined between 0 and 100, where 0 means no commitment is undertaken and 100 is the full sub-sectoral coverage.

Korea, in its paper, said the current bilateral request-offer method alone is not producing satisfactory results. Out of the 160 sub-sectors, the coverage in the offers is on average about 65% for developed members and 30% for developing members.

It proposed that members make binding commitments in particular sub-sectors that have already been liberalized as the first step, while maintaining the possibility of achieving higher commitment in future rounds. It is also necessary that commitments go beyond the status quo.

It proposed that members commit x percent of their uncommitted sub-sectors at the existing level of market opening (status quo) for each mode. The magnitude of x will reflect the collective level of ambition for the services negotiations.

The specific sub-sectors to be included in the x percent should be determined through the bilateral request-offer process. Further, to attain 'deepening' liberalization in infrastructure services, Korea recognizes the constructive role of each informal group organizing voluntarily during the negotiations.

It asked the informal groups to develop possible minimum target levels (qualitative benchmarks) for liberalization or model schedules for individual sectors or modes for commitments beyond the current level of liberalization and make them available to a wider audience. A critical mass should be attained for their adoption.

In its paper, the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu said that on the multilateral approach, it supported the Korean proposal, and stressed the need to have the greatest possible liberalization for Mode 4.

It proposed that Members should offer commitments in "X" percent of the infrastructure sub-sectors. These target sectors should be agreed multilaterally. Once agreed, Members may construct the list of commitments to make up their "X " percent obligations by choosing from the sub-sectors of these agreed target sectors, and commitments should be offered in Modes 1, 2, and 3. Nevertheless, the commitments offered should reflect at least the existing level of market access.

It said many limitations have been attached to Mode 4 commitments, significantly reducing the ability of the commitments to facilitate the movement of natural persons. One such feature is the bias of the schedules in favour of higher skilled service suppliers. The majority of the scheduled entries concern executives, managers and specialists, focusing explicitly on Intra-Corporate Transferees (ICT , more than 50%) and, as such, their value is determined by Mode 3 commitments.

The coverage of Mode 4 categories de-linked from commercial presence is extremely low as the existing commitments have been mainly based on the perceived need to facilitate investment through Mode 3. The current Mode 4 commitments are thus unbalanced. There is not even a rough balance of commitments between Modes 3 and 4, and the greater concentration of commitments under Mode 3 compared with Mode 4 has resulted in a lack of equality in the level of obligation Members are prepared to assume.

It proposed that the pattern of Mode 4 commitments should now gradually move its focus away from information technology and must now be de-linked from Mode 3. Commitments for Business Visitors (BVs), Contractual Services Suppliers (CSSs) and Independent Professionals (IPs) should be offered in at least "Z" per cent of committed sectors.

Australia in its paper proposed that Ministers in Hong Kong establish a clear goal for achieving improved offers on market access in services by the end of the Doha Round. For example, the target might be that all members agree to increase the coverage of their market access commitments by a measurable number. Members could agree to make commitments on at least X sub-sectors, and it would be mandatory to meet the target.

It suggested that the scheduling of offers be guided by model schedules and checklists for scheduling, and also proposed setting up a means of assessing the improvements achieved, to determine if the goals set in Hong Kong have been met.

During the meeting, several developing countries, including Brazil, Argentina, Kenya, Malaysia and Egypt expressed serious reservations with the proposals submitted.

They pointed out that these so-called "complementary approaches" are fundamentally incompatible with the existing principle of progressive liberalization which is to guide the negotiations in trade in services. The principle of progressive liberalization which allows members the flexibility and right to determine the extent of market access commitments in the negotiations is codified in the "Guidelines and Procedures for the negotiations on Trade in Services" and the actual agreement on trade in services.

For instance, the Japanese and European proposals on having qualitative targets to determine the extent to which all member countries will have to undertake, would mean that developing countries will be forced to commit service sectors they are not ready to do so, Kenya pointed out.

It added that in many developing countries, many service sectors do not as yet have the appropriate pre-conditions for liberalization. The setting of qualitative targets would therefore take away the flexibilities enshrined in the GATS framework and push countries towards premature liberalization.

Argentina and Brazil also highlighted problems with the proposals that set quantitative targets, such as that members have to commit a certain percentage of their sub-sectors.

They pointed out that this would mean effectively a "round for free in services" for the developed countries as they had committed more sectors under the Uruguay Round, compared to the developing countries.

This approach if adopted would mean that developing countries would be the ones making more commitments in the current negotiations. This would subvert the whole rationale of the Doha Development Agenda, said Brazil. Other developing countries such as India and Mexico also raised serious concerns that the proposals imply developing countries making more commitments than developed countries.

Note: Goh Chien Yen of TWN contributed inputs to the report.

 


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