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Services Summary Papers Links

Services Summary

With global trade in services rapidly growing and changing, WTO members are faced with creating new rules on trade in services and updating old rules to keep up with proliferating e-commerce and foreign direct investment. However, WTO members are divided on whether or not to deepen liberalization beyond the sectors that are covered under the General Agreement on Trade in Services (GATS). Countries with strong private service industries want to gain better access to international markets and improve labor mobility, while countries without a private service industry are not convinced that it is in their best interest to liberalize their nationally owned service sectors. Additionally, countries that have a large investment capacity want to improve the security of international investment by eliminating controls on capital flows, while countries that are hosts for investment want to preserve their regulations. Since WTO members did not get a chance to discuss services at all before the collapse of the Cancun Ministerial Conference, it is unlikely that there will be an agreement on services before the end of the Doha Development Round.

General Agreement on Trade in Services

In 2001, services constituted about sixty percent of the world's output (in GDP) according to WTO statistics, and international trade in services continues to grow rapidly. [1] Trade in services has increased particularly in developing countries, accounting for more than fifty percent of total export revenues for some nations. In recognition of the growing importance of services in the world economy, trade ministers negotiated the GATS in 2000 as the first attempt to draw international trade in services into a multilateral framework of rules and market access guidelines.

The GATS agreement classifies services into four modes of trade: services supplied across borders such as international telephone calls, services consumed abroad such as tourism, services provided by establishing a commercial presence in a foreign country such as a foreign branch of a commercial bank, and lastly, services provided by the movement of natural persons across borders such as consulting. However, under the GATS, nations do not have to apply Most Favored Nation (MFN) status to trading partners in all service sectors. A nation only has to apply MFN status in service sectors it has made a commitment to liberalize in the WTO. Otherwise, it may apply special treatment to national service providers that it does not extended to foreigners. The GATS is only as comprehensive as the few commitments to liberalize services WTO members have made in the past. The chief concern of Doha negotiations is to broaden the limited scope of the GATS and construct overarching rules to apply more generally to trade in services.

GATS-Style Liberalization

WTO members that favor greater services liberalization, such as the US, EU, and Japan, highlight the flexible nature of liberalization under the GATS agreement, and emphasize that any expansion of liberalization would keep that kind of structure. The GATS agreement allows for countries to select which sectors to liberalize through bilateral negotiations, determine the length of time needed to open its market, and even reverse liberalization as long as they pay due compensation to affected foreign firms.[2]

The World Development Movement and the Third World Network argue that the flexibility in GATS in actually a myth. They assert that even though countries can open up sectors autonomously, developing countries can be pressured in bilateral negotiations to open up sectors they would prefer to keep under protection. Also, because of the burden of paying compensation, liberalization is not easily reversible. Since the mentality of the WTO is to strive for the lowering of all trade barriers in all sectors, countries are likely to feel compelled to open up sectors before they are ready.[3]

Main Debate: Regulation vs. Liberalization

One argument against liberalization is that some sectors still need regulation to protect the environment, improve public health, and maintain a level of economic welfare. Many nations also worry that liberalizing trade in services may weaken the sovereignty of local and national governments by jeopardizing control over land use, licensing, environmental health, and local content and production rules in media.[4]

WTO members in favor of liberalization of trade in service assert that domestic regulatory measures are exempt from the scope of commitments as long as they do not discriminate against foreign firms. Yet, other WTO members argue that the interpretation of that caveat could take a strongly deregulatory tone and favor foreign business interests.

Tourism

For Costa Rica and other countries that specialize in eco-tourism, liberalization of its tourism sector could have both positive and negative impacts. If Costa Rica were to agree to tourism liberalization through the Central American Free Trade Agreement (CAFTA) negotiations, it could benefit from increased flows of foreign investment that would help the country further develop its tourist industry. On the other hand, since Costa Rica would have to scale back regulations, there are fears that liberalization will be damaging to the very thing that attracts tourists - biological diversity. Because of these environmental concerns, Costa Rica withdrew from the CAFTA in December 2003.[5]

Financial Services

Because financial services are an important component of national economic policy, WTO members disagree vehemently on whether to deepen liberalization in the Doha Round. For many countries, national banking services constitute part of a regulatory system that prevents capital flight, minimizes fluctuations in the exchange rate, and manages foreign investment. The US, EU, and Japan have been the major demandeurs of financial services liberalization, arguing that these regulations hamper economic growth and financial stability.[6] They also have well-developed financial service industries that would benefit from access to international markets. However, the rapid flow of money out of developing countries in the Latin American crisis in the 1980s, and the East Asian crisis in 1997, demonstrated that liberalizing financial markets is far from a guarantee of success without proper planning and management of investment.[7] Additionally, nationalized banks often provide services to poorer populations that private banks consider unprofitable, such as high risk loans, insurance, and pension funds. Brazil has opposed liberalizing its financial sector in FTAA negotiations for fear that privatizing its national bank conglomerate would jeopardize the access lower income populations have to banking services and insurance.[8]

Services affecting Public Goods

Another major concern of developing countries is that they will be pressured to open up sectors that provide public goods and are currently government-owned monopolies, such as water and energy services. While these monopolies are criticized by economists as being inefficient and for generating a public deficit, there is concern that if public goods are privatized they will become more expensive and less accessible. In India, for example, the government started to privatize water but had to roll back the liberalization in response to protests and an overwhelming negative reaction from its citizens.[9] Nevertheless, countries like the EU have been pushing for developing countries to relinquish the state-owned monopolies for the sake of their development as well as for the benefit of EU business interests.[10]

Services in Regional Trade Agreements (RTAs)

A number of RTAs, including FTAA and the Association of South East Asian Nations (ASEAN) free trade area, have incorporated services as part of their regional liberalization. Within ASEAN, Taiwan has been a forerunner in services liberalization; it has recently opened its telecommunication sector and has plans for opening up computer, audio, video, and marine services.[11] ASEAN countries will be able to reap the most benefit from the investment that comes with services liberalization because they have skilled workforces but lack sufficient capital.

What's Next for Services in the Doha Round?

WTO members negotiated on trade in services in a general council meeting in Geneva, December 2003. The chair of the General Council expressed disappointment that there was relatively little progress made in Geneva and that negotiations were not back on track. Services will likely remain in the background as the WTO focuses on reaching a consensus on agriculture, TRIPS, and the Singapore issues. As a consequence, RTAs will become the preferred method of negotiating liberalization of services. Because regional agreements will compete with WTO obligations, the proliferation of RTAs may pose a significant barrier to forming a multilateral agreement.

Last updated December 2003.


[1] International Trade in Services Statistics Manual http://www.wto.org/english/res_e/statis_e/its_manual_e.htm
[2] < a href ="http://www.wto.org/english/tratop_e/serv_e/requests_offers_approach_e.doc" target="blank">Request-Offer Approach of the GATS
[3] GATS-style liberalization: http://www.twnside.org.sg/title/twe275e.htm
[4] ICSTD Services Brief http://www.ictsd.org/issarea/services/index.htm
[5] Edward Alden, "US agrees trade deal with Central American nations." Financial Times (London, England), December 18, 2003.
[6] IIE Policy Brief, "Further Financial Services Liberalization in the Doha Round?" Wendy Dobson, August 2002.
[7] IIE Policy Brief, "The Asia Financial Crisis," Morris Goldstein. 1998 http://www.iie.com/publications/pb/pb98-1.htm
[8] "Bankers prepare for FTAA and WTO," Gazeta Mercantil, Brazil, September 9, 2003. and "Banks ask for more space in the FTAA," Gazeta Mercantil, Brazil, November 25, 2003.
[9] "Indian economic reform on hold until after poll," South China Morning Post, July 20, 2003.
[10] WTO: EU Proposals for Services Liberalization http://www.wto.org/english/tratop_e/serv_e/s_propnewnegs_e.htm#energy
[11] "Taiwan to further open service market in new WTO talks," Taiwan Economic News, November 19, 2003.