Services Negotiations after Hong Kong: The South Asian Perspective

Dr. Selim RaihanAssistant Professor

Department of EconomicsUniversity of Dhaka, Bangladesh

Presented at the SAFITII Meeting, New Delhi, 21-22 December 2006

Outline of the Presentation Importance of Service Sector in South

Asia Benefits of Services Liberalisation Development Elements in GATS Services and poverty alleviation Operationalisation of Article IV (special

& differential treatment) of GATS Operationalisation of LDCs Modalities Disciplines on domestic regulation and

building regulatory capacity Targeted technical assistance to LDCs

Importance of Service Sector in South Asia

Countries Services Industry Agriculture

1990 2000 2004 1990 2000 2004 1990 2000 2004

Bangladesh 48 51 52 22 24.7 27 30 24.3 21

India 41 48.9 52 28 27.1 27 31 24 21 Nepal 32 -- 37 16 -- 23 52 -- 40

Pakistan 49 48.9 53 25 24.9 25 26 26.2 22

Sri Lanka 48 52.1 55 26 27.3 27 26 20.6 18

South Asia 43 49.2 52 27 26.7 27 31 24.2 21

Sectoral composition of GDP: South Asian Countries

Country 2000 2001 2002 2003 2004 Services exports 11 11 12 13 12 Bangladesh Services imports 17 16 15 15 16 Services exports 28 28 28 28 29 India Services imports 26 28 28 27 25 Services exports 14 14 20 20 17 Pakistan Services imports 19 19 18 22 24 Services exports 15 22 21 22 - Sri Lanka

Services imports 20 25 22 22 - Services exports 39 36 33 35 - Nepal

Services imports 11 13 14 14 -

Significance of services in total trade (% of country’s total trade)

Importance of Service Sector in South Asia (cont.)

Benefits of Services Liberalisation

• The gains stemming from the liberalization of services could potentially be larger than in all other areas of international trade.

• It is widely recognized that carefully designed and prepared liberalization can contribute to improve the economic performance of developing countries through their integration in the world economy.

• Developing and least developed countries have not all gained from liberalization and some have remained marginalized in the world economy.

Preconditions for countries to benefit

• Coherent domestic services and development strategies

• Favourable multilateral and bilateral agreements

• Adequate regulatory, institutional and competition frameworks;

• Necessary infrastructure.

Development Elements in GATS• GATS allows WTO Members to select the sectors, modes of

supply and regulatory conditions in which market opening commitments are made.

• Because of such flexibility and the emphasis in GATS on the progressive nature of liberalisation the Agreement is often described as the most “development-friendly” of all Uruguay Round agreements .

• Among all WTO agreements, the GATS allows its member countries in integrating the multilateral trading system at their own pace and in accordance with their national priorities and objectives.

• Several of the GATS’ provisions focus specifically on the particular needs and constraints faced by developing countries in services trade.

• For instance, the Agreement’s Preamble recalls the particular need developing countries may have to regulate their services markets in accordance with national policy objectives. Article IV focuses attention on the practical means of enhancing the participation of developing countries in world trade in services, notably through improved access to information networks and distribution channels.

• Similarly, Article XIX, on which the modalities governing the current set of multilateral negotiations are based, provides that “there shall be appropriate flexibility for individual developing country members, and especially least developed countries, to open fewer sectors, liberalise fewer types of transactions, extend market access in line with their development situation and attach conditions aimed at strengthening their domestic services capacity and competitiveness.”

• Crucially, the GATS calls on developed countries to lift restrictions in sectors and modes of supply of export interest to developing countries.

Development Elements in GATS (cont.)

Services and Poverty Alleviation

• All the south Asian countries are interested in mode 4 liberalisation. There are also growing interests on mode 1.

• Clear relationship between mode 4 and poverty alleviation in South Asia.

• Also, significant implications for crucial services, i.e., health and education, which have important connections with poverty alleviation.

• Important implications for achieving the MDG goals

Operationalisation of Article IV (special & differential treatment)

of GATS

General flexibility in the GATS • Members may exclude an entire sector or parts of a sector from their commitments.

WTO Members are free to define the sector as they wish - they may refer to a list developed for the GATS negotiations, or the United Nations Central Product Classification to which the GATS list refers, or they may use their own definitions.

• Members may exclude some modes of supply, or apply special conditions to particular modes of supply across all sectors in their schedules.

• Members may place limits on the market access they offer provided they list them in their schedules.

• Members may discriminate against foreign providers in favour of nationals provided that they list any such measures in their schedules.

• Members may discriminate among foreign suppliers if they have a MFN exemption for the relevant service or are party to a regional trade agreement notified under Article V.

• Members may commit to providing less access than they currently provide in their market.

• They may commit to liberalising at a chosen future date, rather than immediately.

What does Article IV Say

The increasing participation of developing country members in world trade shall be facilitated through:

– the strengthening of their domestic services capacity and its efficiency and competitiveness, inter alia through access to technology on a commercial basis;

– the improvement of their access to distribution channels and information networks; and

– the liberalization of market access in sectors and modes of supply of export interest to them.

Doha, Declaration, July Framework and Hong Kong Declaration

• Such calls were re-emphasised in the Doha work programme for services that WTO members reaffirmed the in July 2004 decision of the trade body’s general council.

• In the Hong Kong Ministerial, it was again highlighted to give particular attention to sectors and modes of supply of export interest to developing countries.

Progress So Far and Problems• A large number of developing countries have encountered difficulties in

identifying their specific sectoral interests in the negotiations and the barriers to their exports.

• Progress in tabling meaningful liberalization commitments has been slow.

• Of particular concern to developing countries is the question of how to evaluate the requests received from trading partners and the formulation of their own requests and offers. The latter is a particularly complex task as countries need to determine their national policy objectives and the competitiveness of each sector or sub-sector.

• There are no signs of real progress in the liberalisation of Mode 4 in categories and skill levels of interest to developing countries. There is no indication of any attempts to streamline or increase the efficiency of processing mechanisms for visa and work permits.

• In the cover pages to their offers certain WTO Members 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 and reciprocity should not be requested of them.

Operationalisation of LDCs Modalities

Comparison of Services Imports/Exports (Selected Regions, 1980-2002)

Source: South Centre, 2004, The WTO Services Negotiations – an Analysis of the GATS and Issues of Interest to LDCs

0 200000 400000 600000 800000 1000000 1200000 1400000

Developed import

Developed export

Developing excl. China import

Developing excl. China export

Developing Asia import

Developing Asia export

Developing America import

Developing America export

Sub-Saharan Africa import

Sub-Saharan Africa export

LDC import

LDC export

Millions of dollars

1980 1990 2002

Why Special priority for LDCs?• For LDCs, services continue to play a key role in the eradication of

poverty because of their social, cultural, and welfare-enhancing functions.

• The services sector plays a crucial role in human development in the form of essential services.

• The pre-requisites for a strong services sector such as basic infrastructure, telecommunications, banking and financial services, entrepreneurial, and technical skills, administrative and institutional capacities, are still under-developed in most of LDCs.

• Expecting LDCs to compete in international trade in services on MFN basis (equal footing) with the rest of the WTO Membership, as provided for in the GATS, excludes them from the benefits that this trade presents.

• LDCs remain net-importers of services.

• LDCs have comparative advantages in provision of services through the movement of their natural services suppliers (Mode 4) in all skill levels. Typically, these services suppliers send remittances to their countries of origin. For LDCs, remittances have proved to be a major, and relatively stable, source of capital inflows.

• Special priority market access for LDCs is a critical first step in ensuring their beneficial participation in the international services economy.

Summary of mandates for according special priority

• GATS Article IV:3 provides special priority for LDCs

• Paragraph 6, LDC Modalities requires Members to provide effective market access

• Paragraph 7, LDC Modalities requires Members to develop appropriate mechanisms with a view to achieving full implementation of GATS Article IV:3

• Paragraph 47, Hong Kong Ministerial Declaration calls on Members to implement the LDC Modalities and give priority to sectors and modes of interest to LDCs

• Paragraph 3, Annex C, Hong Kong Declaration calls for full and effective implementation of the LDC Modalities

• Paragraph 9 (a), Annex C Hong Kong Declaration requires Members to develop appropriate mechanisms for according special priority in sectors and modes of interest in accordance with Article IV:3 and paragraph 7 of the LDC modalities

• Paragraph 9 (b), Annex C, Hong Kong Declaration calls for undertaking commitments in sectors and modes of supply of interest to be identified by LDCs

• Paragraph 11 (e), Annex C, Hong Kong Declaration provides a deadline for implementation of 9(a) of 31 July 2006

Progress so far and the Problems• In March 2006, the LDC Group submitted a proposal to the CTS in

special session 13, aimed at creating a Mechanism to accord special priority to market access in sectors and modes of LDC export interest.

• The proposal contends that there are no provisions under existing rules that would allow countries to accord 'special priority' to LDCs without having to extend it to all Members in order to comply with the WTO's core most-favoured nation (MFN) treatment obligation prohibiting discrimination among trading partners.

• It argues that the Hong Kong mandate instructs Members to make this possible. To this end, this proposal proposes the creation of a new mechanism which would allow Members to provide "non-reciprocal special priority... only to LDCs," in areas of export interest to them. LDCs are particularly keen for instance on obtaining specific commitments providing Mode 4 quotas in favour of LDCs.

• The LDC proposal generated mixed reactions. Various concerns were raised, i.e., the legal form that such a mechanism would take, whether an amendment of the GATS was necessary, whether the proposal had to be binding, inconsistency with the MFN principle, what special priority means in practice, whether bilateral approaches cannot solve the problem, and whether reporting to the CTS on unilateral processes wouldn’t suffice.

• Some developing countries were supportive of the LDC proposal, notably the African group. However, some others were wary of the introduction of preferences in the context of the GATS, arguing that this would divert their markets.

• On the basis of these questions, LDCs made responses at various sessions of the CTS.

• In the meeting, however, it became clear that developed countries do not support the proposal. They do not support a permanent legal exception to the MFN principle of the GATS. They argue that MFN is sacrosanct and as such, cannot be contravened (Bridges, 28 June 2006).

• Developed countries also argue that implementation of the proposal would be burdensome, as it would require a two-track regulatory regime for its administration.

• The Quad, headed by the European Communities, presented a counter proposal by way of room document.

• In essence, it is proposed that each member submits a report indicating how their offers take LDC interests into account. These reports would then be circulated to LDCs for comment, and a dedicated session of the CTS-SS would collectively assess them.

Progress so far and the Problems (cont.)

Disciplines on domestic regulation and

building regulatory capacity

Why Domestic Regulation• Domestic regulation has its importance in protecting national policy

objectives with a reservation of not to be applied as a means for undue trade restrictions.

• Regulation can protect consumers through ensuring quality and appropriateness of services in the midst of wide range of providers under progressive services trade liberalization.

• Regulatory measures can be applied to limit anti-competitive practices that may arise from market penetration by dominant foreign firms.

• There is a rising concern about repatriation of profits which may result in serious balance of payments crisis for LDCs. LDC governments can regulate this capital outflow by imposing restrictions, like investing in the local securities market, as a measure against potential balance of payments shocks.

• The measures of domestic regulation should aim at ensuring a healthy environment for capital inflows in terms of attracting foreign direct investment and also offer a friendly mechanism incorporating domestic and foreign service providers

Domestic Regulation in GATS

• Article VI.4 of GATS is related to Domestic Regulation, which highlights the right of members to regulate, and to introduce new regulations, governing the supply of services within their territories in order to meet national policy objectives.

• Also in the preamble of GATS, given the existing asymmetries with respect to the degree of development of services regulations in different countries, the particular need of developing countries to exercise this right has been recognized.

• Paragraph 7 of the Doha Ministerial Declaration reaffirms the right to regulate and to introduce new regulations governing the supply of services.

• In Hong Kong Ministerial, members have been asked to develop disciplines on domestic regulation as mandated under Article VI: 4 of the GATS before the end of the current round of negotiation on December 2006, and there was a call on members to develop text for adoption.

• In June 2006, developed and developing countries have submitted what a WTO official characterised as a 'critical mass' of formal and informal proposals on a broad set of issues relating to the disciplines (Bridges, 28 June 2006).

• All the submissions stress the need to strike a balance between respecting Members' right to regulate and curbing regulatory measures that could potentially undermine market access.

• One area where this tension is particularly evident is in the sensitive debate over the so-called 'necessity test' for regulatory measures. While the GATS mandate stipulates that qualification and licensing requirements should not be 'more burdensome than necessary to ensure the quality of a service,' some Members are concerned that such a test may constrain their ability to introduce regulations which seek to implement national policy objectives that go beyond simply ensuring the quality of a service.

Progress So Far and Problems

Targeted technical assistance to LDCs

• The Hong Kong Declaration has emphasized on assisting LDCs to enable them to identify sectors and modes of supply that represent development priorities (item 9(d) in Annex C). The full and effective implementation of the LDC modalities also calls for providing targeted and effective technical assistance and capacity building for LDCs.

• It has been clearly stated that amongst others the targeted technical assistance should be provided through the WTO secretariat ‘with a view to enabling developing and least-developed countries to participate effectively in the trade negotiations’ (item 10 in Annex C).

• However, there is no such initiative from the developed country members to consider the special priority sectors and LDC modes of supply. A more careful reading reveals that the development initiatives relating market access are either objectives for commitments or, procedural under the request-offer approach. There lacks LDC initiatives to prepare a negotiable ground and it is quite reasonable that without proper technical assistance from the developed countries LDCs will not be able to come out identifying areas most important for negotiation for them within such a short time frame.

Plurilateral Approach

• Members in the Hong Kong Ministerial agreed to pursue plurilateral approach to request-offer negotiations in addition to the traditional bilateral approach to negotiations. Plurilateral requests will be addressed directly from the demandeurs to other members to whom these are made.

• Under the plurilateral negotiations any Member or group of Mem bers may present requests or collective requests to other Memb

ers in any specific sector or mode of supply, identifying their obj ectives for the negotiations in that sector or mode of supply. Mor

eover, plurilateral negotiations should be organized with a view t o facilitating the participation of all Members, taking into accoun t the limited capacity of DCs and smaller delegations to participa

te in such negotiations.

• Doubts and skepticisms were expressed particularly about the new plurilateral approach of negotiations. It is being feared that this new approach will erode the existing flexibilities under GATS and eventually leads to binding commitments by developing countries.

Progress so far and Progress• After the Hong Kong Ministerial, Plurilateral meetings took place (27

March-7 April) to discuss and negotiate the requests. Available information suggests that 22 collective requests had been placed and discussed between demandeurs and demandees. Of these 16 were sector specific, 3 were related to modes of supply (including mode 4), and the final 3 were concerned about the elimination or reduction of existing exemptions from MFN treatment (ICTSD, 2005).

• Amongst the developed countries, Japan had participated in 13 requests, while the EU and US joined in 12. Hong Kong, from the developing world, has shown the strongest offensive interest in services trade participating in 11 requests followed by Mexico (10), Singapore (9), and Chile (8). In computer and related services, and in those on mode 4 and cross border services through modes 1 and 2, India participated in the plurilateral request.

• To follow up, India received 15 requests in opening up the key sectors like, financial services, telecom, energy, legal, maritime, retail, education, environment and construction.

• The plurilateral requests on mode 4 involved a highest number of 15 developing countries and none of the LDCs had received any plurilateral request, which is consistent with the Hong Kong Declaration that they are not expected to undertake new commitments.

Concluding Remarks and Concerns

• Concerns have been raised over the fact that the flexibilities and even the architecture of GATS itself may come under threat if the proposal of ‘benchmarking” is accepted in the future. Under this proposal, countries would be required to liberalise in a certain minimum number of key sectors.

• To what extent South Asian LDCs (Bangladesh, Maldives and Nepal) can collaborate with their regional developing counterparts, namely India and Pakistan is an emerging concern. Given that India has witnessed rapid growth in Modes 1 and 2, and given that the prospect of liberalization of Mode 4 is bleak, a shift in the emphasis in favour of Modes 1 and 2 can greatly jeopardize the negotiating position of South Asian LDCs.

• On the whole, the LDC policy stance should focus on negotiations relating the ‘non-reciprocal’ mode 4 liberalization, separation of temporary from permanent movements of natural persons, and to go for plurilateral negotiations with the developing countries to place the request for multiple entry GATS visa. Further, there should be requests for provisions to bring uniformity in definition of service personnel and to increase coverage.

• LDCs should prepare for submitting proposals highlighting the sectors of their interest for consideration of the negotiators focusing on issues like, inclusion of the less skilled under contractual service suppliers under a new sub-category, addressing definitional and classification issues, non-uniform enforcement issues regarding SPV and to develop a revised model schedule to incorporate lower skill categories of service providers.

• At the same time, LDCs should take into consideration the need for (and costs of) commitments to liberalize their own markets in response to their requests to other countries. There LDCs may seek for the special provisions under LDC modalities, in terms of ‘non-reciprocal treatment’.

• The development element naturally includes whether South Asian LDCs can take part effectively in the negotiation process. In this respect, the Hong Kong Declaration may have serious implications. When LDCs are not required to undertake new commitments, they may also be reluctant to take part in the discussion and negotiations, since they might consider that anything agreed between demandeurs and demandees ( involving other countries) will be passed on to them on an MFN basis. Therefore, there is need for LDC negotiation strategies taking into account that how seriously a demandeur’s request would be taken into consideration when the demandeur is not expected to offer anything in return.

Concluding Remarks and Concerns (cont.)