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The General Agreement on Trade in Services: Doomed to Fail? Does it Matter?

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Abstract

Little progress has been made to date in using the GATS framework to lock-in already implemented unilateral reforms, let alone in inducing new liberalization. The same is true for rule-making efforts. A number of potential explanations for the lack of traction are identified and assessed. These include limited feasibility of using the reciprocity mechanism to mobilize domestic export interests; less need for reciprocity to achieve global welfare improvements in policy; weaknesses in domestic regulatory capacity; and uncertainty/asymmetries regarding the magnitude and distribution of costs and benefits of policy reforms. All these factors play a role in reducing the scope for the GATS to be an effective instrument to help governments overcome domestic and international policy externalities. Changes in negotiating modalities and focus could help strengthen the relevance of the GATS as an instrument of multilateral cooperation.

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Notes

  1. The original GATT-1947 did not cover services because when the GATT was negotiated services were mostly nontradable and GATT did not cover investment. It is only relatively recently that technological change and regulatory reforms allowed an increasing number of services to be traded internationally through telecommunications networks.

  2. This may occur even if there is limited scope for productivity growth in the services concerned, as assumed by Baumol. Oulton (2001) has shown that an expansion in stagnant services inputs may increase overall growth, because greater outsourcing of services by (productive) firms in non-stagnant sectors entails a reallocation of factors that increases overall output and aggregate productivity.

  3. Rutherford and Tarr (2008), for example, develop a model where services FDI is a source of new knowledge and competitive pressure, and helps host countries to produce and export more advanced products. As barriers to trade in producer services fall, costs of imported services drop, and imports (including through FDI) rise and displace domestic firms. However, the additional varieties available to the economy generate positive externalities for final goods production, raising TFP and welfare disproportionately.

  4. For example, in firm-level analyses of the Czech Republic, a set of African economies and India, Arnold et al. (2006, 2007) and Arnold et al. (2008) find a positive relationship between services liberalization, FDI in services and the TFP performance of domestic firms that use services. The presence of services FDI is the most robust variable affecting TFP in user firms.

  5. This rationale for trade agreements is conditional on agreements being enforced, and, in practice, agreements may not be enforced against small countries because the costs for affected exporters exceed expected benefits (Bown and Hoekman 2008). The large number of holes and loopholes that are embodied in the WTO—the ‘incompleteness of the contract’—weakens both the terms-of-trade and the credibility-cum-commitment argument: governments still have great leeway to (re-)impose protection (Ethier 2007).

  6. The GATS does not apply either to measures affecting natural persons seeking access to the employment market of a Member, or to measures regarding citizenship, residence or employment on a permanent basis.

  7. See, e.g., Jensen and Kletzer (2005).

  8. See http://www.unctad.org/Templates/Page.asp?intItemID = 1923&lang = 1.

  9. Non-equity FDI (franchising, management contracts, leasing) is not captured in the forgoing statistics.

  10. For each sector and mode of supply the openness of policy towards foreign suppliers is mapped on a 5-point scale ranging from 0 (for no restrictions) to 1 (highly restricted), with three intermediate levels of restrictiveness (0.25. 0.50 and 0.75). Sectoral results are aggregated across modes of supply using weights that reflect judgments of the relative importance of the different modes for a sector. Thus, mode 4 (temporary movement of suppliers) is important for professional services, but not for telecommunications, where mode 3 is the dominant mode of contesting a market. Sectoral restrictiveness indices are aggregated using sectoral GDP shares as weights. The country income group indices are derived using GDP weights for the countries in the sample.

  11. No comprehensive, cross-country, comparable datasets exist that allow a summary assessment of the prevailing levels of services trade and investment barriers.

  12. In India, for example, professional services like accountancy, legal, and retail distribution, postal and rail transport services are formally closed to foreign participation.

  13. These include limitations on: (a) the number of service suppliers; (b) the total value of services transactions or assets; (c) the total number of services operations or the total quantity of service output; (d) the total number of natural persons that may be employed in a particular sector; (e) specific types of legal entity through which a service can be supplied; and (f) foreign equity participation (e.g. maximum equity participation).

  14. Services bindings have much more limited coverage than those applying to trade in goods. OECD countries have generally bound 100% of all tariffs. All agricultural tariffs are bound for both OECD and developing countries. The extent of binding of tariffs on manufactures varies across developing countries, but averages (at least 50%) for larger countries such as Brazil and India. It should be noted that binding is more important in services than for goods because in the GATS national treatment only applies if a commitment has been made. In GATT, this is a general rule that is independent of whether a tariff has been bound.

  15. Of course, if rent shifting was in fact a concern for investors, one would expect this to have been raised in the negotiations. This does not appear to have been the case. One reason for this may be that to some extent the perceived risk of expropriation and other, less far-reaching forms of rent shifting policies has been addressed through other instruments—e.g., bilateral investment treaties (BITs). Egger and Pfaffermayr (2004) find that a BIT has a statistically significant positive impact on the bilateral outward FDI stock. Given that these span most of the major FDI flows, investors may perceive little additional value from multilaterising the provisions.

  16. A case in point was the dispute between Antigua and Barbuda and the US on gambling services. The WTO Panel and Appellate Body ruled that the US prohibition of internet gambling was inconsistent with the specific commitments the US had made on market access, even though the US prohibition applied equally to foreign and US providers. The inconsistency arose because specific commitments on market access were determined to preclude even non-discriminatory (regulatory) prohibitions.

  17. What follows draws on Hoekman et al. (2007).

  18. This is contained in the Trans-Pacific Economic Partnership Agreement, between Brunei, Chile, New Zealand and Singapore.

  19. The incentives to seek preferential access will be significant if the PTA removes previously binding barriers to entry in a sector. The US-DR-CAFTA is an example. It requires Costa Rica to open access to previously monopolized telecommunications and insurance markets. While CAFTA requires Costa Rica to open these markets to firms originating in signatory countries, whether it will do so on a discriminatory basis remains to be seen (the agreement has yet to be implemented by Costa Rica at the time of writing).

  20. The Doha declaration built on this, stating that: “The negotiations on trade in services shall be conducted with a view to promoting the economic growth of all trading partners and the development of developing and least-developed countries. We recognize the work already undertaken in the negotiations, initiated in January 2000…and the large number of proposals submitted….We reaffirm the Guidelines and Procedures for the Negotiations adopted by the Council for Trade in Services…as the basis for continuing the negotiations, with a view to achieving the objectives of the GATS…Participants shall submit initial requests for specific commitments by 30 June 2002 and initial offers by 31 March 2003 (para. 15).

  21. Past practice suggests that for sectoral liberalization agreements to be applied on a MFN basis the “internalization” ratio needs to be on the order of 90% of total trade. This was the figure used in the negotiations on the Information Technology Agreement.

  22. See Prowse (2006) and Njinkeu and Cameron (2007) for discussions of the rationale for aid for trade..

  23. See Hoekman and Mattoo (2007) for an elaboration of this argument..

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Correspondence to Bernard Hoekman.

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Earlier versions of this paper were presented at the conference “Globalization of the Production of Services: Implications for Small Open Economies,” Research Institute of Industrial Economics, Stockholm, November 20, 2006 and at seminars at the University of Minnesota, Stanford University and the World Bank. I am grateful to a referee, Aaditya Mattoo, Keith Maskus, Andre Sapir, Bob Staiger, Richard Steinberg and Alan Sykes for helpful comments, suggestions and discussions. The views expressed in this paper are personal and should not be attributed to the World Bank.

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Hoekman, B. The General Agreement on Trade in Services: Doomed to Fail? Does it Matter?. J Ind Compet Trade 8, 295–318 (2008). https://doi.org/10.1007/s10842-008-0036-z

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