TWN Info Service on WTO and Trade Issues (Oct05/17)

20 October 2005

Below please find a paper by Mr Bhagirath Lal Das analysing the recent proposals on "benchmarking" and complementary approaches in the WTO services negotiations.

Mr. Das was formerly Ambassador of India to the GATT and formerly Director of teh Trade and Manufactures Division of UNCTAD.

He is author of several books on the WTO.

We hope this is useful to you.

With best wishes
Martin Khor

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ROCKING THE WTO BOAT ONCE AGAIN

By Bhagirath Lal Das

10 October 2005

Introduction

Some developed countries have started rocking the WTO boat once again. European Commission (EC, Japan and Switzerland) have given proposals for drastically changing the format of WTO services negotiations that can have reverberations beyond this area and may even threaten the smooth passage of the Hong Kong Ministerial Conference in December this year. It appears to be a well coordinated exercise and may result in diverting the attention from important areas like agriculture. These proposals appear to be inconsistent with the provisions of the WTO services agreement (General Agreement on Trade in Services, GATS) and seek to bind down the developing countries to commitments constraining their flexibility in development policies. They are of no advantage to the developing countries in any way, not even to those that perceive opportunities in their service sector export. The following analysis attempts to explain the implications of these proposals given in the services negotiation in the WTO in September 2005. But first it will be relevant to give some background.

Echoes of the past 

            It is like repeating the disturbing trends set in the first WTO Ministerial Conference in Singapore in 1996 when some developed countries introduced new subjects for negotiations in the WTO, viz., investment, competition, government procurement and trade facilitation (later collectively known as Singapore issues). The first subject was clearly outside the scope of the WTO and yet some developed countries, particularly the EU, went on persisting with it for eight years. The developing countries were utterly dismayed and opposed it resolutely. But the proponents were not deterred; they pursued it with vigour, often asserting that any move on their side in other areas was conditional on developing countries agreeing to the proposal for negotiation on new subjects. It created a crisis in the WTO, threatening its stability and finally resulted in the Cancun collapse. Persistent opposition by a large number of the developing countries and intense opinion building efforts of some civil society groups (both of the developing countries and developed countries) motivated the developed countries concerned to drop these subjects from the Doha negotiations.

            Once again, the developed countries have started similar game by presenting these totally new proposals in the ongoing services negotiation. Quite understandably, the proposals have been opposed strongly by a number of the developing countries. This move of the developed countries has shaken the WTO system violently once again as the Singapore issues had done from 1996 to 2004. The anguish of the developing countries appears fully rational in the background of the history of services negotiation in the GATT/WTO system right from 1982 onward.

            The major developed countries had tried to introduce the subject of service negotiation in the WTO in the GATT Ministerial Meeting of 1982. As a result of stiff opposition from the developing countries there was a simple decision that countries would conduct national studies of service sector and exchange information through institutions including the GATT. Then, at the time of launching the Uruguay Round in Punta del Este in 1986, the developed countries again built up strong pressure for starting negotiation in this area. They succeeded in their effort at that time and later in 1995 in having an agreement on obligations in this area, but it was all within a framework permitting considerable flexibility to the developing countries. In fact the developing countries agreed to the GATS mainly because of the incorporation of these flexibilities. The subject of further negotiation in services sector came up for consideration again in 2000-01 and the major developed countries made a strong bid for altering the basic architecture of negotiation which would have eroded the flexibility of the developing countries. They failed in their attempt because of a concerted effort of the developing countries. Now they have come up again with similar proposals that have naturally evoked similar opposition from the developing countries.

Diversionary effect

            It may not be merely a coincidence that EU and Japan which were the ardent supporters of the Singapore issues are also the proponents of the main substantive proposals given now in the services area. Switzerland and Korea have joined hands with them with supportive proposals. It is difficult to ignore the striking coincidence that all these proponents have one feature in common: they all have deep interest in avoiding pressure on them for eliminating/reducing their agricultural protection. Now their proposals will keep the developing countries busy in defense in the services sector with limited time and energy for important matters like agriculture. It is very likely that the focus and attention of the developing countries in the WTO will be diverted away from agriculture, as it happened while the Singapore issues remained on the table.

Coordinated action 

            Though the proposals have been tabled separately, it does not need much imagination to conclude that there has been close coordination among the proponents. The EC (on behalf of the EU) has given a general framework for minimum commitments without specifying the levels. Japan has complemented and “filled in the blanks” by specifying the percentages in this framework and naming priority sectors. Switzerland has supplemented by proposing a formula for quantitative assessment of commitments by an elaborate system of indexing. On the margin is also Korea’s proposal for binding the current levels of liberalisation. Clearly the proposals are harmonised in approach and complementary in details. There is hardly any doubt that there has been a well coordinated preparation.

Main proposals 

            EC’s proposal forms the primary base on which other proposals are built up. It calls for binding commitments in a minimum number of sub-sectors, calculated in terms of a percentage (different for the developed countries and developing countries) of the total number mentioned in a basic classification document. A country will have the freedom to select the sub-sectors to conform to the minimum number. Out of these sub-sectors, certain percentages (again different for the developed and developing countries) will be covered by commitments on the four modes of supply.

The nature of the commitment with respect to Mode 3 ( through commercial presence) and Mode 4 (through presence of persons) has been specified. In the former case, at least 51 percent foreign equity will be allowed and in the latter case, the economic need test will be given up. Apart from this multilateral approach, as the EC calls it, there may be a plurilateral approach where some members may agree to negotiate among themselves higher degree of commitments involving rights and obligations applicable only to the participants. Presumably there may be several plurilateral arrangements.

            While the EC stipulates two stage percentages, first in fixing the minimum number of sub-sectors and then selecting from them minimum numbers for different modes of supply, Japan goes straight to the modes of supply and specifies the percentages of sub-sectors in which commitment will be undertaken. For Modes 1 and 2 the percentages for developed countries, developing countries and the LDCs will be 50, 30 and 20 respectively. For Mode 3, the percentages are 60, 40 and 20 respectively. In respect of Mode 4, Japan asks for horizontal commitment (presumably extending across all sectors) in respect of four classes of persons: business visitors, intra-corporate transferees, independent professionals and contractual service suppliers. The developed countries, the developing countries and the LDCs will be undertaking commitment respectively for all these 4 classes, for 3 classes and for 2 classes. Japan also specifies the sectors it considers important for commitment.

            While these two proposals are on the methodology of commitments, Switzerland has proposed a numerical indexing system for a country’s commitments. A country will be indexed on the basis of the number of sub-sectors, the number of modes of supply and the extent of commitment on market access and national treatment (the two pillars of specific sectoral commitment in the GATS).

            In addition to these three main and substantive proposals, there are some other brief proposals. Korea’s proposal is for all countries taking commitment to bind the current level of applied liberalisation in a certain percentage of sub-sectors, not covered by commitment so far. The percentage for the developing countries may be different from that of the developed countries or, alternatively, the former may have a longer implementation period. There should also be a plurilateral exercise of deeper liberalisation in some specific sectors. Taiwan’s proposal is on the lines of Korea and, in addition, it has asked for liberalisation in Mode 4, delinked from commercial presence. Australia and New Zealand have also given proposals, the former asking for commitment in a minimum percentage of sub-sectors and the latter on a process for labeling a country’s liberalisation.

Inconsistency with GATS

The proposals do not appear to be in conformity with the GATS. Articles XVI, XVII and XIX of the GATS apply to the current negotiation on sectoral commitments. According to Article XVI, in case a Member has inscribed a sector in its schedule of specific commitment, it cannot apply any restriction on market access beyond what it has spelt out in its schedule. There is a similar provision in Article XVII regarding the national treatment. These two articles have the basic architecture that each country chooses the sectors and also the related restrictions on market access and national treatment. Then, Article XIX has provisions for negotiation of specific commitments. It envisages successive rounds for negotiation, one of which is currently going on. Article XIX(3) calls for establishing “negotiating guidelines and procedures”, which for the current round was done in 2001 (finalised by the Council for Trade in Services on 28 March 2001 and “reaffirmed” in paragraph 15 of the Doha Ministerial Declaration  on 14 November 2001).

 This is the comprehensive framework within which the negotiation has been going on. The new proposals are presumably sought to be covered by Article XIX(4), which says: “The process of progressive liberalization shall be advanced …through bilateral, plurilateral or multilateral negotiations directed towards increasing the general level of specific commitments undertaken by Members …”. It is also reflected in paragraph 11 of the Guidelines of 28 March 2001, which however makes it clear that “the main method of negotiation shall be the request-offer approach”. Thus bilateral, plurilateral or multilateral negotiations are permissible, but only as an addition to the request-offer approach which will be the main method. This would indicate that bilateral, plurilateral or multilateral routes are not barred as such; but what would appear to be prohibited is the content of the new proposals for these routes, as explained below.

There are certain mandatory limitations in Article XIX(2) which apply to all negotiating routes, whether request-offer or bilateral or multilateral or plurilateral. Process of liberalisation must satisfy certain mandatory conditions. Two of the conditions that are directly relevant here are: (i) due respect shall be given to the level of development of individual Members “in individual sectors”, and (ii) there shall be appropriate flexibility for “individual developing country Members for “opening fewer sectors” and “liberalizing fewer types of transactions” in line with their development situation. These mandatory limitations apply as obligation on all Members that seek commitments from the developing countries.

            The current proposals envisage commitments by the developing countries covering a minimum number of sectors/ a minimum level of liberalisation in respect of various modes of supply. Even if the selection of the sectors will be done by a developing country itself, a prescription of these minima will detract from the mandatory flexibility given to the developing countries in Article XIX(2) as explained below.

         Article XIX(2) appears to give flexibility regarding both the “number” and “selection” of sectors and transactions. If a minimum number of the sectors or transactions is prescribed for commitment, it may not be feasible to give due respect to the level of development of a country “in individual sectors” or to open only “fewer sectors” and liberalise only “fewer types of transactions” in accordance with its development situation. The number of sectors/types of transaction appropriate for liberalisation in line with the development situation of a country may happen to be much less than the minimum numbers prescribed. These are clearly “individual features” of a developing country and thus cannot be captured adequately by formulas prescribing “minimum” number of sectors or transactions.  Thus the very principle of prescribing a minimum number of sectors or a minimum number of transactions appears to violate the flexibility which is mandatory under Article XIX(2).

         Accordingly, the proposals of the type now introduced may first require an amendment of Article XIX(2).

Development implications 

            Also there are serious development implications for the developing countries. Much more than in manufacturing sector, there is the need of caution and care in taking binding commitments for liberalisation in services sectors. These sectors have critical and sometimes even strategic role in economic development, as competitive production of commodities and manufactures depends a great deal on the supporting services used in these activities. A country will of course import these services for a while, but may prefer to develop indigenous capacity, particularly in the sectors that are critical and strategic for its development. With the current vast differential in the technological and financial resources of the developed countries and the developing countries, development of indigenous capacity in the latter may become almost impossible without an umbrella of protection at least for some time. 

Thus a rushed and untimely binding commitment of liberalisation in services sectors, which is very much an irreversible process, may have serious adverse impact on the long term prospect for production of commodities and manufactures. What is needed is a well modulated liberalisation process which can enable a country to utilise foreign services so long as desirable and necessary and then to develop its indigenous capacity, as necessary. This critical option may be closed if the route suggested by these new proposals is adopted.

Aggravating imbalance

            There is also the question of balance of rights and obligations in the WTO system. The GATS, being primarily focussed on liberalisation of services, gives direct benefit to countries having more developed supply capacity in service sectors. (A country may benefit by the use of imported services; but that can be achieved by autonomous and flexible liberalisation policy without taking binding commitments in the WTO system which are irreversible.) With the vast difference between the services supply capacity in the developed countries and the developing countries, the benefit from GATS is naturally very much unbalanced as between the developed and developing countries. Imbalance has been aggravated by priority and accelerated negotiation in some sectors of primary importance to the developed countries, e.g., financial services and telecommunication services, while the developed countries have been reluctant to liberalise supply of services through the movement of persons which could have brought direct benefit to the developing countries.

            It was expected that the imbalance would be reduced in the current negotiations by the developed countries first undertaking liberalisation in the sectors and modes of interest to the developing countries before seeking further commitments from the developing countries. But it did not happen. The negotiation started on the request-offer basis. Some developing countries that had been disappointed by the earlier negotiated results in this area and did not foresee any particular benefit to them in these negotiations made limited offers or refrained from making any offer. It was fully within the framework of the request-offer method of negotiation.

            Now through these new proposals they are being asked to make commitments compulsorily in certain minimum number of sectors. This is a progressive aggravation of imbalance. First, the developing countries did not get any significant benefit in this area earlier. Second, there was no special move to correct the past imbalance. And now the method of negotiation is sought to be basically altered to coerce them into making commitment in some minimum number of sectors.

Suggestions 

            While the proposals are fraught with dangers for the developing countries in general, there is no advantage in them even for those developing countries that are comparatively better off in services export. These countries can hope to drive a much better bargain in the request-offer method than through a multilateral stipulation of minimum sectors/transactions for liberalisation. In most cases they are themselves attractive markets; hence the developed countries should be willing to give them special and meaningful concessions through request-offer route in specific sectors/modes/transactions.

Considering all aspects mentioned above, the developing countries will be well advised to reject these proposals outright. Engagement in detailed negotiations on these proposals will only drain their already feeble resources, making it difficult for them to pursue the subjects of their own interest in this area and other areas, e.g., agriculture.

            If the developed countries persist with these proposals, there is a risk of the WTO system being destabilised once again as happened after Seattle and Cancun. Hence in the interest of the stability of the system, the proponents will be well advised not to pursue with their proposals. They can let it rest for the time being and continue with the negotiations in the ongoing format.