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| CHAPTER X In the early morning hours of September 20, 1986, trade ministers from around the world successfully concluded a meeting in Punta del Este, Uruguay, by agreeing to launch a new round of multilateral trade negotiations. After days of virtually nonstop negotiations, exhausted delegates agreed to the text of the Ministerial Declaration on the Uruguay Round, which specified the agenda for the negotiations. One of the most controversial and historic decisions of the Punta del Este meeting was to initiate, for the first time, negotiations on trade in services as a major negotiating item. The seeds for the negotiations on trade in services were planted in legislation passed by the U.S. Congress in 1974 to authorize the participation of the United States in the Tokyo Round of multilateral trade negotiations. The Trade Act of 1974 directed U.S. negotiators to seek the elimination of barriers to trade in services. Getting agreement among a large number of countries to initiate comprehensive negotiations on a new topic, particularly a topic as new and different as trade in services, however, proved difficult. The most the United States was able to achieve in the Tokyo Round was a sprinkling of references to complementary services in a number of the codes dealing with nontariff barriers to trade in goods. The first major step forward came in 1979, when the United States succeeded in persuading the other industrial countries of the Organization for Economic Cooperation and Development to undertake a study of trade in services, with the objective of identifying areas for future negotiation. The analytical work and the discussions that have taken place in the OECD over the past eight years have created a substantial consensus among developed countries on the desirability of launching negotiations on trade in services in the GATT. In line with that consensus, OECD countries agreed in spring 1987 to release a paper titled "Elements of a Conceptual Framework for Trade in Services," which sets out the key elements to be included in an agreement on trade in. services. It has made a substantial contribution to the development of an intellectual foundation for the negotiations. The first serious discussion of trade in services in the GATT took place in 1982, when the GATT began to lay the groundwork for a new round of multilateral trade negotiations. The United States proposed that the work of the GATT include a study of trade in services. In support of that objective, the U.S. trade representative put forward ideas on a future multilateral agreement on trade in services in an article entitled "A Simple Plan for Negotiating Trade in Services," in The World Economy, a publication of the Trade Policy Research Center in London (see Brock, 1982). After a prolonged debate between developed countries, which generally supported a GATT study of services, and developing countries, which generally opposed such a study, trade ministers agreed in November 1982 that countries that were so inclined should undertake national studies of trade in services and exchange information on trade in services on the basis of those studies. The United States was the first country to circulate its national study, in spring 1984; eventually more than twelve countries completed such studies. The work on trade in services was given more formal recognition at the end of 1984, when the GATT Contracting Parties agreed to set up a working group under Ambassador Jaramillo of Colombia to examine whether or not services should be included in the new round of negotiations. In light of the prolonged and contentious debate, the Ministerial Declaration on the Uruguay Round offers remarkably clear guidance to the negotiators. The first phase of the negotiations will focus on the negotiation of a set of overall principles and rules that will establish the basic ground rules for trade in services and will provide a framework for the subsequent negotiation of more detailed commitments in individual sectors. These overall principles and rules will, in effect, constitute a general agreement on trade in services that will parallel the General Agreement on Tariffs and Trade, which has guided trade in goods for the past forty years. This-chapter will explore in detail the major issues that have to be addressed in the negotiations.1 We will start by looking at the language of the Uruguay Declaration and by analyzing its content. In examining these issues, we will go back and review some of the debates that preceded the agreement at Punta del Este, because the different-points-of-view-represented in those past debates continue to be reflected in the negotiations.
The Uruguay Declaration is divided into two parts. Part I deals with negotiations on trade in goods and Part II deals with negotiations on trade in services. Part I sets up a Group of Negotiations on Goods (GNG) and Part II sets up a Group of Negotiations on Services (GNS). This division recognizes that the negotiations on goods and the negotiations on services are legally different. Under Part I, the GATT Contracting Parties have agreed to negotiate a liberalization of trade in goods and a reform of trade rules within the framework of the existing GATT Articles of Agreement. Under Part II, the ministers as representatives of interested governments have agreed to negotiate a new agreement or agreements on trade in services. Both parts, however, are contained in a single political document, the Ministerial Declaration on the Uruguay Round, and both the Group of Negotiations on Goods and the Group of Negotiations on Services report to a single Trade Negotiations Committee (TNC), which provides overall political management of the negotiations. The declaration and the TNC thus recognize the two parts of the negotiations as a single political undertaking. Part II of the Uruguay Declaration, under the heading Negotiations on Trade in Services, reads as follows: Ministers also decide, as part of the Multilateral
Trade Negotiations, to launch negotiations on trade in services.
This conclusion resolved a major debate over the feasibility and desirability of negotiating trade issues in services as diverse as banking, insurance, professional services, data processing, and transportation within a common framework. Some argued that because each services sector raises unique issues, it made no sense to organize negotiations as a single undertaking. Others argued that many of the principles and rules of the GATT could be applied to trade in services and that a general framework of principles and rules would be more likely to succeed in achieving a broad liberalization of trade in services than a sector-by-sector approach. The language in the Uruguay Declaration supports the traditional trade policy view that general, across-the-board rules are needed to advance the liberalization of trade barriers. At the same time, the Uruguay Declaration also recognizes that sectoral differences are more fundamental in services than in goods and that effective negotiations ultimately have to get down to a sector-by-sector level. A framework approach puts the emphasis on general economic principles that are difficult to oppose in the abstract, and once agreed can provide a basis for challenging restrictive arrangements that serve narrow sectoral needs and interests. A purely sectoral approach, on the other hand, emphasizes sectoral differences and the unique characteristics in each sector that justify the status quo. A purely sectoral focus would have made it much more difficult to bring out the broader economic reasons why a liberalization of policies would further the general public interest. The decision to negotiate a general framework first thus was closely tied to the broader liberalization objective. After setting out the operational objectives of the negotiations, the Uruguay Declaration goes on to say that the purpose of the negotiations on trade in services is to achieve an "expansion of such trade under conditions of transparency and progressive liberalization." This language not only makes it clear that the primary focus of the negotiations should be the expansion of trade in services but also plots a path for pursuing that objective: 1) establishing transparency in policy measures that restrict trade in services and 2) progressively liberalizing measures that restrict such trade. This language clearly resolved the dispute over whether it was appropriate to expand trade in services through a process of liberalization. Alternative objectives that could have been adopted include 1) an equitable or fair distribution of market shares in world trade in services, 2) the harmonization of national regulations affecting trade in services, or 3) the resolution of regulatory conflicts whenever traded services are subject to overlapping jurisdiction (for example, when two countries have responsibility for regulating a common activity like a commercial flight from one country to another). The last part of the long sentence on objectives establishes the negotiations "as a means of promoting economic growth of all trading partners and the development of developing countries." This language serves to remind negotiators that the ultimate purpose of their efforts should be to promote economic growth and economic development. It is also a statement of conviction that liberalization of trade in services and the development of an agreed framework of rules for trade in services can advance the economic growth of all countries, as well as the development of developing countries.
In the course of the debate over the inclusion of services, the fear was often expressed that a GATT framework agreement on trade in services would undermine the achievement of national regulatory objectives. The Uruguay Declaration addresses these concerns by stating that "such framework shall respect the policy objectives of national laws and regulations applying to services." This language spells out the obvious, that any trade agreements on services will have to leave countries enough flexibility to pursue domestic regulatory objectives. By focusing on the objectives of national laws and regulations rather than the laws and regulations themselves, the language of the declaration leaves open the possibility that the liberalization of trade might require changes in the way national laws and regulations implement policy objectives. This is a distinction the GATT has made before with respect to the application of technical and regulatory standards to internationally traded goods. The Standards Code, negotiated in the Tokyo Round of multilateral trade negotiations, gives countries the right to pursue national regulatory objectives but requires that they pursue such objectives in a manner that will minimize distortions of trade. Another concern often voiced in the course of the debate over services was that GATT negotiations could conflict with existing international agreements negotiated in sectoral organizations such as the International Telecommunications Union (ITU). In recognition of this concern, the declaration provides that a framework agreement "shall take into account the work of relevant international organizations." Clearly, the negotiations will have to address the relationship between any new trade agreements in services and sectoral agreements in transportation, telecommunications, and tourism. Here too, GATT agreements negotiated in previous rounds of negotiations provide useful models. In the area of standards, for example, governments had to define complementary responsibilities for the GATT and the International Standards Organization (ISO). While the challenge to define a division of responsibilities may be somewhat greater in services than it was in goods, the language in the Uruguay Declaration is based on the proposition that such a division of responsibilities can and should be worked out.
Considerable time was devoted to the relationship between negotiations on trade in services and negotiations on trade in goods. Actually, this argument was not only over the relationship between two sets of negotiations but also over the relationship between the eventual agreements that might come out of the negotiations. The United States, which led the campaign for the inclusion of services, wanted a close relationship between the negotiations on services and the negotiations on goods, while Brazil and India, which led the opposition to the inclusion of services, wanted a distant relationship between any negotiations on trade in services and the negotiations on trade in goods. Basically, the United States wanted to make sure that the negotiations on services and the negotiations on goods were seen as a single political undertaking and that it was clear from the outset that the negotiations could not be concluded successfully without an agreement on services. Those who were opposed to the negotiations wanted to have as loose a relationship as possible so that the continued liberalization of world trade in goods would not be tied to a successful outcome of the negotiations on services. Looking into the future, the group of countries led by Brazil and India wanted to minimize the likelihood that an eventual agreement on trade in services would be made an integral part of the GATT, thus giving countries the legal right to link performance on trade in goods to performance on trade in services. To put the issue more simply, would countries have a right to put restrictions on trade in goods in retaliation against another country's failure to live up to obligations on trade in services? Since Brazil and India felt that it was not in their interest to tie their hands in services, they did not want to expose themselves to retaliation in goods in response to barriers they might impose or maintain on trade in services. While the United States has not taken a position on the legal relationship between the GATT Articles of Agreement and a new agreement on trade in services, the United States in recent years has taken the view that trade in goods and trade in services are linked both commercially and politically, and therefore cannot be separated in the management of trade policy. Congress also seems to have taken this approach by adding services to existing legislative provisions dealing with trade in goods, rather than drafting entirely new provisions to deal with trade in services. Section 301 of the Trade Act thus directs the president to retaliate against unfair trade practices by foreign countries in both goods and services, without making any distinctions between the two. In pushing for a close relationship between the negotiations on trade in services and the negotiations on trade in goods, the United States also wanted to emphasize that many of the principles and concepts contained in the GATT Articles of Agreement could be applied to trade in services. The United States recognized that the GATT articles did not cover trade in services and that the existing rules of the GATT for trade in services could not be extended to. trade in services without major adjustments. At the same time, U.S. officials believed that a number of concepts and principles embodied in the GATT could be applied to the development of new rules for trade in services, and more generally that thirty years of GATT experience would prove useful. By dividing the negotiations into two parts, the Uruguay Declaration recognizes that the negotiations on goods and the negotiations on services are legally different. Both parts, however, are contained in a single political document, the Ministerial Declaration on the Uruguay Round, and both the Group of Negotiations on Goods and the Group of Negotiations on Services report to a single Trade Negotiations Committee, which provides overall political management to the negotiations. The declaration thus recognizes that the negotiations on trade in goods and the negotiations on trade in services are a part of a single political undertaking.
The text of the declaration says that "GATT procedures and practices shall apply to these negotiations" and that "GATT secretariat support will be provided." Thus, even though the declaration recognizes that the negotiations on trade in services do not legally come under the GATT Articles of Agreement, it brings the negotiations on services institutionally into the GATT and makes the accumulated knowledge and experience of the GATT directly accessible to the negotiators on trade in services. The relationship between a new General Agreement on Trade in Services and the General Agreement on Tariffs and Trade will ultimately have to be worked out at the end of the negotiations.
The most fundamental issue with respect to multilateral trade negotiations in services is whether the liberalization of trade is an appropriate objective in services. It is fundamental because the motivation for all multilateral trade negotiations has been to liberalize trade and the whole intellectual framework that supports trade negotiations is based on the proposition that the reduction of trade barriers will generate economic gains as trade expands. There would be very little reason to pursue trade negotiations in services if liberalization were not an appropriate objective. Alternative objectives that can be postulated, such as the harmonization of domestic regulations in services, could be carried out much more efficiently by officials responsible for such regulations, in negotiations carried out in sectoral organizations like the International Telecommunications Union that have developed great expertise in national regulatory systems. The question whether the liberalization of trade in services is a desirable goal rests on the theoretical question whether trade in services will lead to mutual economic gains for the countries participating in such trade. Application of the theory of comparative advantage to trade in services leads one to conclude that trade in services under a broad range of circumstances will lead to mutual economic gains for participating countries. Those who question the desirability of liberalizing trade in services make four key arguments against liberalizing trade in services. 1. Trade liberalization will undermine the contribution
made by the services sector to the achievement of broad social goals.
It is argued that in many service industries the achievement of nonmarket
social goals is more important than the achievement of economic efficiency
and that the high priority assigned by society to the achievement
of social goals in services is reflected in the extensive regulation
of most services. 2. Empirical evidence would suggest that quality as well as price can deteriorate when there is insufficient competition. The fact that market pressures or government regulations have led to only limited competition in many service industries may be an argument more in support of trade liberalization than against trade liberalization. The increased competition generated by trade could force domestic producers to adopt more efficient production methods. 3. Trade in services complements foreign investment in services where foreign investment is allowed and provides an alternative to foreign investment where it is not permitted. Foreign trade in services complements foreign investment in services since foreign-owned service enterprises often derive their competitive strength from business service inputs imported from abroad. The competitive strength of fast food chains such as Baskin Robbins or Kentucky Fried Chicken, for example, depends on the design of the facilities, the development of managerial techniques, and centralized procurement of equipment and food, service inputs that are generally imported. Where foreign suppliers of services are not allowed to invest in local facilities, trade can provide a second best alternative. The requirement for an international movement of information, people, money, or goods to transfer services does not eliminate the advantages of removing barriers to trade. As long as the movement of information, people, money, and goods is not completely restricted, the liberalization of barriers to trade in services can improve economic welfare. It is equally true, of course, that the freer the international movement of information, people, money, and goods, the larger will be the expansion of trade in services resulting from the removal of barriers to trade, and therefore the greater will be the economic gains from such liberalization. 4. The existence of restrictive arrangements among foreign producers of services is an argument for the removal of such restrictive arrangements, not an argument against the liberalization of trade. After weighing these and other arguments, the world's trade ministers decided at Punta del Este that an effort to expand trade through the progressive liberalization of barriers to trade in services made economic sense. At the same time, they made it clear that the negotiations on trade in services should "respect the policy objectives of national laws and regulations applying to services." The argument comes down to one of balance between the pursuit of the economic gains that will result from a liberalization of trade in services and the pursuit of national as well as international regulatory goals. Trade negotiations aimed at the liberalization of barriers to trade in services can make a contribution to the achievement of greater economic efficiency in the production of services, even while respecting the achievement of domestic regulatory goals.
The second issue in the debate over goals was whether the negotiations on trade in services should be carried out within a common framework of principles and rules, or on a sector-by sector basis. Those who favored the development of a common framework of principles and rules argued that the economic issues involved in removing barriers to trade in services were quite similar, regardless of the unique circumstances found in each services sector, and that it is therefore more efficient to develop generic principles and procedures for dealing with barriers to trade in services. Those who favored a sectoral approach argued that each sector in services is so different that it would be impossible to reach any conclusions about barriers to trade across the board, and that any effort to define common principles and rules would be either counterproductive or doomed to failure. The trade ministers at Punta del Este bought both sides of the argument. They agreed that the negotiations should lead to the development of a common "multilateral framework of principles and rules for trade in services," and to supplement such rules with the "elaboration of possible disciplines for individual sectors." By concentrating first on the development of a multilateral framework of principles and rules, negotiators will be able to develop common ground rules for the negotiations that will safeguard the liberalization objective of the negotiations. At the same time, the ministers recognized that there are some important differences among sectors that will require the "elaboration of possible disciplines for individual sectors."
The ultimate purpose of multilateral trade negotiations is to increase the output of goods and services and thus the economic growth of countries participating in the negotiations. Many developing countries have expressed the- view, however, that the liberalization of barriers to trade in services would not advance their economic interests since they do not believe that they could compete with developed countries in the production of services at their current stage of economic development. Developed countries argued, however, that developing countries were underestimating both their capacity to export services and their gain from the liberalization of barriers to trade in services. Developed countries pointed out that a number of developing countries have become major exporters of services such as construction, data entry, printing, computer programming, and engineering. In the end, the developing countries agreed to launch multilateral trade negotiations in services, provided the developed countries agreed that the negotiations should promote the development of developing countries. One of the key issues in the negotiations will be how the negotiations should achieve this objective.
The Uruguay Declaration points to the negotiation of a framework of principles and rules as the first task of the services negotiations. Such a framework of principles and rules will, in effect, constitute a General Agreement on Trade in Services.2 The basic purpose of such an agreement is to establish what countries hope to achieve through multilateral negotiations on trade in services and how they hope to achieve it. The agreement will thus provide a common framework for trade in services. Three sets of activities will be affected by such an agreement: 1) the commercial operations of enterprises engaged in international trade in services, 2) the development and implementation of government policies that affect trade in services, and 3) the subsequent negotiation of more detailed agreements that will cover trade in specific services or that will cover the use of specific policy instruments. Since the objective of a framework agreement is to define the means for achieving the economic benefits of mutually advantageous trade, the logical structure of the agreement has to reflect the theoretical conditions for the achievement of mutual gains described in the section on economic theory. It also has to accommodate the reality of the current pattern of measures that affect trade in services, because changing existing measures is likely to involve a protracted process of negotiation. In other words, the agreed framework has to establish a process forgetting from here to there, from the policies in effect today to a modified set of policies that will more closely approximate the ideal conditions for mutually advantageous trade. Thus, while the framework needs to point toward an ideal world, it must also encompass the current reality. Finally, the framework has to take account of the political dynamics that drive the development of sectoral policies in each country. The few who have a very large stake in the outcome of a policy measure devote a great deal more political energy to defending those interests than the very much larger number of people who stand to lose from a policy that benefits one specific sector. The negotiating process therefore has to be structured in such a way that it forces a continuing balancing between broad consumer interests and sectoral interests, as well as between general economic policy goals and sectoral regulatory goals. Trade negotiations inevitably take on the appearance of gladiatorial contests between industries and between bureaucracies, even though the ultimate purpose of such negotiations is to obtain higher quality services and cheaper services for consumers. These fights over profits and bureaucratic turf nevertheless serve the very useful purpose of forcing negotiators to consider the various goals of a society that have to be factored into the final outcome of negotiations. In constructing a framework agreement for trade in services, it should prove instructive to examine the underlying framework of the GATT Articles of Agreement.3 Trade in services is sufficiently different from trade in goods that a general agreement for trade in services will have to be different from the GATT for trade in goods. An analysis of the basic GATT framework and the reasons for its key principles should, nevertheless, prove instructive. By comparing the policy measures that have traditionally distorted trade in goods with the policy measures that restrict trade in services, one should be able to draw some conclusions about the framework that might be developed for trade in services. There are also two other powerful arguments for starting with an analysis of the GATT articles. First, these negotiations are the result of lobbying by the business community in favor of the negotiation of a GATT-like agreement for trade in services. Second, the GATT has shaped the thinking of all the trade officials who will lead these negotiations.
Stripped down to its basic elements, the GATT framework for trade in goods can be described as follows: · • Trade barriers should be imposed at the border, and once a good is inside the border it should receive national treatment, which means that it should be treated like a domestically produced commodity. By narrowing trade harriers to the border, the GATT framework narrowed the range of policies that need to be addressed in trade negotiations, made it easier for enterprises engaged in trade to identify the barriers they would have to overcome, and discouraged the use of domestic regulatory measures as trade barriers. · Barriers at the border should preferably be in the form of tariffs rather than quotas. Tariffs allow some adjustment in trade flows in response to market forces, while quotas freeze trade patterns. The GATT therefore strictly limits the use of quotas. · Tariffs should be negotiable. The GATT provides procedures for exchanging commitments by member countries with respect to the tariffs that apply to individual categories of goods. · The results of tariff negotiations should be bound. The binding of a tariff commits the government not to impose a higher duty or to take any other policy measures that would result in a higher level of protection. A tariff bound in the course of negotiations can be higher or lower than a tariff currently in effect. · Tariff cuts negotiated with another GATT
member country are automatically extended to all other GATT member
countries on a most-favored-nation (MFN) basis. The GATT articles also prevent countries from trying to improve their terms of trade through unilateral tariff increases, by making it clear that other countries have the right to impose equivalent tariff increases that would wipe out any gains. The GATT rules thus closely parallel the theoretical requirements for mutual gains from trade described in the section on economic theory. The GATT articles set up a negotiating process that takes account of the political resistance any government must face when it seeks to change policies that affect the interests of specific groups. GATT negotiations are therefore structured to. match "concessions" in the form of tariff cuts or policy adjustments by the home government with "benefits" received as a result of equivalent actions by foreign governments. Similarly "obligations" to observe certain rules are carefully matched with "rights" connected with the obligation of other countries to follow rules. A final point that needs to be made about the GATT framework is that it provides negotiating procedures where governments had to make major changes in policies at the time the GATT was initially negotiated, and it imposes rules where governments did not have to make major changes in policy. Most trade barriers at the time the GATT was negotiated were in the form of tariffs and quotas imposed at the border. The GATT framework established a procedure for phasing out the quotas and for negotiating the reduction of tariffs. Domestic regulations were generally not used to restrict trade, and most countries therefore did not find it very difficult to agree that domestic regulations should be applied equally to domestic and foreign goods-that is, to provide national treatment for all domestic regulations. In contrast with the situation that existed with respect to goods at the time the GATT was negotiated, most barriers to trade in services are not imposed at the border and instead are embedded in domestic regulations. In services, the application of national treatment will have to be achieved through a prolonged process of negotiation, rather than through the adoption of a rule as was the case in goods.
Most barriers to trade in services are embedded in domestic regulations for two reasons. First, the production and consumption of many services is heavily regulated by the government, and such regulations provided a convenient basis for restricting trade. Second, governments have great difficulty in controlling the flow of services across national borders because such flows are invisible. Governments have therefore found it easier to restrict the right of foreign suppliers to sell services in the local market or to restrict the right of domestic consumers to use services produced by foreign suppliers to meet domestic regulatory requirements. Some have argued that despite this basic difference between goods and services, an agreement in services should follow the basic structure of the GATT framework-that trade barriers should be imposed only at the border, that the protection provided by border measures should be quantifiable like a tariff, and that national treatment should prevail with respect to domestic regulations. Since most barriers to trade in services are embedded in domestic regulations, however, the. GATT model cannot be transferred to trade in services without major modifications. Each element of the GATT framework, nevertheless, contains an underlying principle that could be applied to trade in services in another form and accomplish the same purpose. The goal of the GATT framework-making import barriers more visible, more focused, and more price-sensitive-should also be a goal of the framework of principles and rules for trade in services. The GATT rule that trade measures should be imposed at the border would not work for services because few barriers are at the border today and a wholesale conversion of regulatory barriers into border measures would absorb too much time and energy that negotiators should put into the liberalization of barriers. Moreover, border measures in services are not easily enforced, and if enforced would prove very unpleasant. In order to identify and control trade in services, the government would have to amass an enormous amount of information about the people, information, money, and goods crossing the border, and that would lead to both an excessive invasion of personal privacy and an excessive disruption of the international- movement of people, information, and money. While it does not make sense to impose barriers to trade in services at the border, it does make sense to identify discriminatory barriers to trade and to separate them functionally from domestic regulations. The clear identification of barriers and their separation from domestic regulations would substantially facilitate the process of negotiating the reduction of such barriers. It is difficult to negotiate a reduction of barriers if you do not know whether you are negotiating over import restrictions or over domestic regulations. Separating import restrictions from domestic regulations would also reduce the protective effect of existing barriers by removing or reducing the uncertainty that businesses now face with respect to the rules of the game. If any regulatory decision can be turned into a protective device arbitrarily, how can a business know what it will cost to meet regulatory requirements in the future? Separating import restrictions from domestic regulations will also encourage good government by clarifying decision-making responsibilities within a government. It will force governments to identify the officials responsible for trade decisions and the officials responsible for domestic regulatory decisions, and the ground rules for making each set of decisions. The process of identifying barriers and separating them from domestic regulations will not be an easy or simple process. In many cases, the achievement of domestic regulatory objectives legitimately requires different treatment of foreign and domestic suppliers, and deciding when different treatment constitutes equivalent treatment (national treatment in the GATT terminology) may require qualitative judgments. Two examples can illustrate the problem. Insurance regulators, for example, can require domestic insurance companies to keep their capital invested in stable financial assets, but they are likely to find it difficult to enforce such a provision with respect to foreign insurers. In order to achieve their regulatory objective, they may therefore require foreign insurance companies to maintain local deposits. The vexing question for trade negotiators is the following: What is a reasonable deposit in order to assure that domestic policyholders will be able to collect a claim? What level of deposit will result in the same degree of consumer protection as the asset requirements imposed on domestic insurance companies? In other' words, what is national treatment in this case? An even more vexing question regarding equivalent treatment arises when the total number of authorized suppliers, both domestic and foreign, is controlled through a licensing procedure. What criteria do you use to decide whether foreign suppliers have been given national treatment when it is up to regulators to decide who is given a license? Typically, regulators consider a large number of factors in awarding a license to one of a number of competing applicants, and it may be quite difficult to decide whether foreign applicants are given the same consideration as domestic applicants. Establishing transparency with respect to barriers to trade in services will take time, since governments will have to sift through a large number of regulations and they may need to organize detailed discussions of both the objectives and the effects of discriminatory measures. Some may argue that a process of separating regulations that serve as barriers from regulations that serve legitimate domestic regulatory purposes is at best useless and at worst an unnecessary source of debate. Those who make this argument will point out that a process of identifying barriers will inevitably degenerate into a debate over the motivations behind a particular measure and that such a debate is fruitless because it is impossible to determine objectively whether the motivation behind a particular measure is to protect the domestic industry or to further a domestic regulatory objective. Why not just get down to a negotiation of the regulations that have a protective effect, as against a protective intent? There has to be a process, however, for determining which regulations are negotiable and which regulations are not negotiable. The purpose of trade negotiations is to reduce barriers to trade, and by common consent this is to be achieved without infringing domestic regulatory objectives. In the words of the Uruguay Declaration, the objective of the negotiations is to achieve an expansion of trade "under conditions of transparency and progressive liberalization," while at the same time the framework resulting from the negotiations "shall respect the policy objectives of national laws and regulations applying to services." It follows that the framework agreement should provide the means for identifying restrictive measures that are not essential for the achievement of domestic regulatory objectives. In deciding whether or not a particular measure should he treated as a barrier subject to negotiation, one has to consider both the protective effect of a discriminatory measure and its regulatory objective. Neither criterion by itself is likely to provide a sufficient basis for identifying the measures that should be covered by such negotiations. Whether or not a measure creates an impediment to trade is best established on the basis of the effect of the measure on trade. Whether or not a measure that creates impediments to trade should be treated as a negotiable barrier or not, however, depends on whether or not it is essential for the achievement of legitimate domestic policy objectives. Identifying barriers therefore necessitates identifying measures with restrictive trade effects and deciding which of these measures are essential for the achievement of domestic policy objectives. Exporting countries are probably in the best position to determine whether a particular measure has restrictive trade effects, and the importing country is in the best position to identify the extent to which such measures are necessary for the achievement of domestic policy objectives. A natural division of labor thus suggests itself. Exporting countries should be asked to draw up lists of regulatory measures in importing countries that create impediments to trade, and importing countries should be asked to identify the extent to which such measures are essential for the achievement of domestic policy objectives. Naturally, exporting countries would be asked to explain why the measures on their list are restrictive, and importing countries would need to defend their claim that certain provisions are essential for domestic regulatory purposes. Reconciling differences between exporting countries and importing countries over what is a barrier will be an extremely useful exercise for both. Exporting countries will obtain a better understanding of the regulatory systems of importing countries and importing countries may find that many practices they have always accepted as the normal way of doing things in fact are restrictive measures. In summary, a services agreement should establish the principle that barriers to trade in services should be clearly identified as barriers to trade and functionally separated from domestic regulations. The framework agreement should also include a procedure for implementing this principle, whereby regulations that create barriers to trade are identified and separated from purely domestic regulations. How this is to he accomplished is addressed in greater detail below. This reformulation of the GATT rule that barriers should he at the border will accomplish the same purpose as the GATT rule. It will identify the regulations that restrict trade and subject them to negotiation. This will reduce the likelihood that purely domestic regulations will be used as hidden trade barriers, and lead -to-better-government by separating domestic regulatory objectives and domestic regulatory instruments from trade policy objectives and trade policy instruments. Ideally it will also lead to a separation of domestic regulatory procedures from trade policy procedures, and a clear separation of roles between officials responsible for the achievement of domestic regulatory objectives and officials responsible for the achievement of trade policy objectives.
The second element of the GATT framework is the principle that barriers to trade should generally take the form of tariffs because tariffs leave more room for adjustment to changes in market conditions than quotas. It would be impractical to incorporate this principle in a framework for trade in services for the same reason that it would be impractical to require barriers to trade in services to be at the border. The rationale for the GATT preference for price-sensitive measures over quantitative measures, however, is as valid for trade in services as for trade in goods. Negotiators will therefore need to consider whether the underlying principle that price-sensitive measures are to be preferred over quantitative measures should be applied to trade in services in another form. A framework agreement could include the principle that barriers to trade in services whenever possible should take the form of price-sensitive measures rather than quantitative measures. What that means is that barriers to trade in services should take the form of an added financial burden imposed on services supplied by foreign suppliers, rather than a quantitative limit on the services that can be sold by foreign suppliers. Any government measure that imposes an added cost on foreign suppliers would satisfy this principle, including taxes, reserve requirements, a requirement to serve disadvantaged regions, or a requirement to train nationals. Where a government believes that it must impose a quantitative limit on foreign suppliers, it could auction licenses to potential foreign suppliers. Foreign suppliers of services that have gained access under current quotas could be expected to resist adoption of this principle, since they could end up losing a privileged economic position. They not only would face new costs, but also would lose the extraordinary profits they can now earn. In order to make the adoption of this principle acceptable to current foreign suppliers, it would have to be implemented gradually, in the context of the liberalization of current barriers. They would lose their privileged position but would gain the opportunity to expand their business. Barriers to trade in services, like barriers to trade in goods, should be negotiable. In the context of trade negotiations, to label a government policy measure a trade barrier is tantamount to saying that it falls within the legitimate scope of trade negotiations. This does not mean that a government has any obligation to alter or to remove a trade barrier, but rather that it will be under moral pressure to talk about it in the context of trade negotiations. Any negotiated reductions in barriers to trade in
services should lead to clear and firm commitments by the government
making the offer not to increase the level of protection above negotiated
levels. In the terminology used by the GATT, reductions in barriers
should be bound. Bindings with respect to most regulatory measures
that restrict trade in services will not have the same degree of precision
as the binding of tariffs, since it will be difficult to calculate
the protective effect of such measures with any precision. It will
be all the more important for negotiators to define the outcome of
negotiations on individual measures with as much precision as possible.4 National Treatment-The Core Concept in a Trade Regime for Services The GATT principle that all barriers should be at the border, for the sake of logical consistency, requires a complementary principle that domestic policy measures should not be used as trade barriers; that is, domestic policy measures should not be used to protect domestic industry. This companion principle is the so-called national treatment principle, which requires governments to treat imported goods that have satisfied border measures as they would treat goods produced within the country. Since it is not practical to require that barriers to trade in services be erected at the border, the national treatment principle cannot be applied to trade in services in the same way that it has been applied to trade in goods in the GATT. To apply national treatment to trade in services across the board would be tantamount to ruling out the possibility of protecting domestic services industries, and this would not be acceptable to many governments. The underlying concept is, nevertheless, crucial to development of an effective regime for trade in services, and the only question is how the GATT national treatment principle should be modified to fit the requirements of a service regime. In discussing the GATT principle that barriers to trade in services should be at the border, we came to the conclusion that the equivalent principle for services should be that barriers to trade in services should be transparent, that is, that they should be identified as barriers. It follows that all domestic policy measures not identified as barriers should receive national treatment. In fact, one could define as a barrier to trade in services any regulatory measure that is not applied on a national treatment basis. In applying national treatment to services it is also necessary to recognize that the same regulation may affect services produced abroad differently from services produced in the importing country, or it may affect services produced by a foreign firm in the importing country differently from services produced by domestic firms. Moreover, regulations may achieve the desired regulatory objective when applied to services produced at home but not when applied to services produced abroad, or they may achieve their regulatory objective when applied to domestic firms but not when applied to foreign firms. National treatment in services therefore has to be defined as equivalent rather than identical treatment. So much for logic and semantics. The question that needs to be addressed is whether a framework agreement should require governments to provide national treatment (defined as equivalent treatment) for all regulatory measures not identified as barriers. As indicated earlier, such a process could take a considerable amount of time, and it would not be possible to put such a rule into effect until governments have completed a thorough examination of all regulations that affect trade in services. There is an important reason why governments may not be willing to commit themselves to provide national treatment for all measures that have not been identified as barriers. The reason for this reluctance is that a commitment to provide national treatment may not result in equivalent market access when countries have very different regulatory regimes. A regulatory regime that allows open competition among domestic as well as foreign suppliers provides more trade opportunities than a regulatory regime that limits competition, both by domestic suppliers and by foreign suppliers. Countries that permit unlimited domestic competition may wish to withhold a firm commitment to provide national treatment, thus reserving their future bargaining leverage. National treatment for specific services could thus become the subject of negotiation. This does not mean that a national treatment binding would need to be an all-or-nothing proposition. A commitment to provide national treatment in a specific area could be viewed as equivalent to a zero tariff binding in the GATT. A country could, instead, commit itself to provide national treatment with respect to all policy instruments except certain enumerated policy instruments. Of course, in addition to negotiating a national treatment binding for nonprotective policy tools, governments would be asked to put a ceiling on the potential protection provided through policy measures not covered by a national treatment commitment. The negotiations would thus consist of two components-a negotiation over the list of policy tools for which governments would bind national treatment and a negotiation over the extent of protection offered through the application of policy measures excluded from the application of a national treatment commitment.5
It was mentioned earlier that a commitment to provide national treatment in the application of domestic regulations can lead to widely different results with respect to market access. It is not always easy to determine what constitutes national treatment when the regulations leave considerable room for discretion by the regulators. The larger the number of regulations that are applied in any given area, the larger the ambiguity created by the discretion available to the bureaucrats that administer the regulations. In fact, practice shows that a large number of the complaints lodged against foreign regulatory measures are directed not at the measures themselves but at the interpretation of the measures by officials. Another, even more serious problem arises with respect to licensing regimes that limit the number of firms, domestic and foreign, authorized to supply a given service. A country that has decided to freeze the number of firms can offer national treatment and yet exclude foreign competition altogether. Even if foreigners are not excluded altogether, how is anyone to know whether foreign suppliers are allocated a fair share of a limited number of licenses? The question is whether the national treatment commitment can be made less ambiguous, less subject to the whims of regulators, and less subject to distortion through licensing decisions. This could be accomplished by reinforcing the national treatment principle. A number of additional principles could be considered to reinforce the national treatment principle. Each would remove some degree of uncertainty with respect to the achievement of the market access that could be expected to result from national treatment. One such principle might be called the least trade-distorting regulation principle. This principle would require governments to design their regulations as much as possible in terms of desired regulatory performance criteria, rather than in terms of the specific means for achieving a desired level of performance, and to allow firms in different circumstances to develop their own means of achieving the mandated objective. Governments would have to specify- what- they want to achieve with respect to specific regulations, and they would be obligated to work out alternative means for accomplishing their regulatory objectives when current provisions create unnecessary distortions of trade. Implementation of this principle will be useful not only for minimizing regulatory barriers to trade but also for minimizing the economic cost of achieving domestic regulatory objectives. The least trade-distorting regulation principle presented here is patterned after the Standards Code of the GATT. That code, negotiated during the Tokyo Round of multilateral trade negotiations, establishes rules for minimizing the trade-distorting effects of health, safety, environmental, and product standards. The Standards Code recognizes the right of individual governments to set their own social objectives with respect to health, safety, and the environment but at the same time commits governments to pursue such goals in a manner that minimizes the restrictive effect on trade. In particular, the code requires governments to develop standards on the basis of performance criteria rather than design criteria. Under the Standards Code, a government cannot, for instance, base standards on a particular technology that is used domestically, since that might be discriminatory against foreign companies that use a different technology to achieve the same regulatory objective. In effect, the code provides an elaborate interpretation of national treatment with respect to the development and implementation of standards and goes beyond a nominal interpretation of national treatment to require that standards not impose a greater burden on foreign suppliers than on domestic suppliers. Adoption of the least trade-distorting regulation principle would go a long way toward correcting some of the inherent weaknesses of the national treatment principle. It probably would not deal adequately,, however, with the trade-restrictive aspects of. regulatory regimes that place a fixed ceiling on the number of enterprises authorized to supply any given services. It is probably impossible to construct a principle that would establish clear, operational commitments for the management-of restricted licensing regimes. Nevertheless, it would be useful to include in a framework agreement what might be called the equivalent competitive opportunity principle or 'the effective market access principle. If the equivalent competitive opportunity or effective market access principle were adopted, countries that restrict the number of authorized suppliers would have to set up transparent, objective, and competitive procedures for awarding limited licenses. Countries would be expected to demonstrate that the criteria employed to allocate available licenses were based on defensible economic principles. Moreover, in order to make this even more concrete in operational terms, countries that are prepared to bind their regulations in a specific sector would be expected to spell out the steps they intend to take to assure foreign suppliers of effective market access and equivalent competitive opportunities. In summary, a framework agreement on trade in services should go beyond a simple definition of the national treatment principle to assure that the design and implementation of domestic regulations do not impede access to the market by foreign exporters of services. Among the principles that could be considered as a basis for elaborating the national treatment principle are the least trade-distorting regulation principle and the equivalent competitive opportunity for effective market access) principle.
The beauty of the GATT framework is that it provides a basis for a bilateral exchange of tariff reductions on the basis of reciprocity and at the same time it makes the results of such bilateral negotiations available to all other GATT member countries on a most-favored-nation basis. Enforcement of a country's rights under the GATT depends on reciprocity of the eye-for-an-eye concept in the Old Testament, since the most powerful incentive to adhere to the rules of the GATT comes from the expectation that countries affected by a unilateral action are likely to retaliate with measures aimed at the offending country. This raises the question whether this hybrid system combining reciprocity and most-favored-nation treatment should be incorporated in the framework for trade in services. Both the reciprocity principle and the most-favored-nation principle should be included in a framework for trade in services. First, all the provisions of a General Agreement on Trade in Services should apply equally, on a most-favored-nation basis, to all countries that agree to adhere to the obligations of the agreement. Second, each country should be expected to table a list of services for which it is willing to grant national treatment to all member countries on a most-favored-nation basis, subject to enumerated barriers and reservations. As is currently the case with respect to negotiations on goods under the GATT, each country will have to evaluate the commercial value of the commitments it is offering, versus the commercial commitments it is being offered by other countries. In other words, countries will be able to apply a general reciprocity test to any commitments that are made. If the value of commitments made by others is inadequate, a country can adjust its offer by not making as many reductions in barriers affecting some services, or by withholding commitments on other services. The scope for a general exchange of commitments on a general most-favored-nation basis is constrained by the value of the commitments made by the most restrictive countries. While it is difficult to assess in the abstract the potential scope of the commitments countries will be willing to offer in a first general exchange of commitments, the large differences among regulatory systems will inevitably limit the scope of a general exchange of commitments on a most-favored-nation basis. Countries with relatively few regulatory restraints will be reluctant to provide full national treatment commitments in sectors where other important member countries maintain tight regulatory controls. A framework that gives all participants the same level of benefits regardless of the restrictiveness of the domestic regulatory system will thus not fully exploit opportunities for trade liberalization. The services framework therefore needs to give countries with relatively unconstrained domestic competition an opportunity to negotiate supplementary agreements that would enable firms from other countries with an equivalent market structure to compete freely on an international basis. In effect, such countries would agree to bind themselves to a regulatory regime that permits open competition. Any country that adheres to the general agreement should have a right, however, to join such an agreement provided it is prepared to accept the obligations of such an agreement. This is usually referred to as conditional most-favored-nation treatment. Countries that are prepared to exchange higher levels of obligation with each other on a conditional most-favored-nation basis should have a right to do so, though there should be a commitment to include as many other countries as possible. Countries with a substantially more open regulatory regime than other countries could withhold a national treatment commitment in that sector, and seek to negotiate an exchange of commitments with other countries with similar regulatory systems. In other words a country with a nonrestrictive regulatory regime could exclude that sector from the list of sectors for which it is prepared to bind national treatment, and enter into a subsequent exchange of commitments on national treatment with countries that had an equally nonrestrictive regulatory regime. Extensive government ownership and control in service industries like aviation and communications have led over the years to a network of bilateral sectoral agreements in which governments have exchanged limited access commitments on a basis of reciprocity. It is highly unlikely that governments will want to eliminate these agreements in the context of multilateral trade negotiations in services. Any framework for trade in services will therefore also have to accommodate reciprocal arrangements in some sectors. A multilateral framework has to be based on market-oriented competition among a substantial number of enterprises. Where this condition is not met, it would be counterproductive to adopt a multilateral framework since it probably will ultimately not work, will create intergovernmental frictions, and will lead to frustrated expectations. To the extent that a small group of countries are prepared to allow free competition among their air carriers or communication carriers, however, they should be allowed and encouraged to do so under the conditional most-favored-nation concept. The most important challenge for the negotiators of a trade agreement in services is to develop a framework that will achieve clarity and reciprocity with respect to the trade effects of domestic regulations, without getting into a detailed negotiation of domestic regulations. The Uruguay Declaration specifically reserves the right of each country to pursue its own regulatory objectives in services: "Such framework shall respect the objectives of national laws and regulations applying to services." The declaration in this respect reflects both good politics and practicality. Each country's approach to the regulation of services is part of its national culture and not something easily sacrificed for the sake of trade negotiations that are only poorly understood in the first place. If the negotiations were to get too deeply involved in each country's regulatory goals, there would be little prospect for substantive progress any time soon. The negotiations would get hopelessly bogged down in philosophical debates over regulatory minutiae. On the other hand, countries will not be willing to bind their hands with respect to their future actions without a clear idea what they can expect from others, and a sense that the bargain involves an exchange of roughly equivalent commitments. A services framework must therefore allow countries that are prepared to limit their regulatory options to enter into a restricted agreement among themselves, provided they are prepared to keep the door open for others.
A monopoly precludes trade by definition. How can a framework for trade in services encompass a monopoly that precludes trade by its existence? The decision of a country to establish a government-owned monopoly or a government-sanctioned private monopoly is a sovereign regulatory decision that each country must make for itself. From the point of view of other countries, however, a monopoly is equivalent to a prohibition of trade, and they can be expected to treat it as such in evaluating a country's trade commitments. That is their sovereign right. From the perspective of negotiations, monopolies can be treated the same way as any other restrictive domestic regulatory regime. Monopolies raise broader issues, however, because monopolies inherently have market power and can use this market power for their own ends. A trade problem can arise when a domestic monopoly is allowed to compete with private firms in producing services that fall outside the scope of their legitimate monopoly. A monopoly could, in such a situation, transfer monopoly profits from its monopoly activities to its competitive activities, or it could threaten to withhold monopoly services from firms that produce competing products. The key principle that should be adopted with respect
to the production of competitive services by domestic monopolies is
that monopolies should be required to maintain an arm's-length relationship
between their monopoly activities and their competitive activities,
and that they should follow normal commercial practices in producing
services outside the legitimate scope of their monopoly. The GATT Government Procurement- Code prohibits governments from discriminating against foreign suppliers in purchases made by government enterprises covered by Government Procurement Code. Trade negotiators responsible for this code in fact have already been discussing the possibility of extending the code to trade in services. While no conclusions have been reached with respect to the procurement of services, the issue is on the negotiating table.
Every agreement has its list of exceptions and so does the GATT and so must a new general agreement on trade in services. The GATT articles allow countries 1) to impose temporary import restrictions in order to give an industry more time to adjust when it is seriously injured by a rapid increase in imports, 2) to restrict imports across the board in order to deal with a serious balance of payments deficit, 3) to restrict imports that threaten public health, safety, morals, the environment, or the general public welfare, 4) to restrict imports that threaten national security, and 5) to restrict imports where that would facilitate the development of infant industries. When a country restricts imports under the first of these provisions, it must notify other countries of the measures it has taken and agree to consult with any other country that feels that its exports have been unreasonably disrupted by the measures involved. Moreover, the right to restrict imports for any of the reasons cited above does not remove a country's obligation to maintain the overall balance between the market access it provides to exporters from other countries and the market access its own exporters receive from such countries. If other countries insist, it must either offer tariff reductions in other areas or accept an equivalent increase in tariffs by countries adversely affected by its restrictions. A framework agreement for trade in services will need to include a similar list of exceptions and an obligation to maintain the value of past commitments when a country imposes temporary restrictions on imports. An ambitious agreement in services that extends into related policy areas such as investment, information flows, or perhaps even immigration will inevitably have to have a long list of exceptions.
The GATT articles contain several provisions dealing with specific unfair trade practices like dumping and government subsidies. The provisions prohibit dumping of goods abroad and the subsidization of exports (except on primary products); they also give countries injured by foreign dumping or subsidies the right to impose duties that are equivalent to the dumping or subsidy margin. What is different about the right to act in response to subsidy and dumping practices as against the right to act against other types of unfair trade practices is that the GATT does not require governments to seek approval for antidumping and countervailing duty actions. In contrast, before a government can retaliate against other unfair trade actions that are illegal under the GATT, it must first submit its complaint to a GATT dispute settlement panel, and the panel as well as the GATT council must agree that retaliation is warranted. Government subsidies and dumping practices create trade problems in a number of service industries, particularly in construction, aviation, and shipping. This is particularly a problem with respect to government-owned domestic monopolies that also supply related services on a competitive basis. A number of characteristics of services., however, make it very difficult to identify objectively the subsidy or dumping margin for any given service, and it would be extremely difficult, if not impossible, to apply the GATT system of antidumping duties and countervailing duties to trade in services. Moreover, the subsidy problems that arise in individual sectors of services are different in different sectors. A framework agreement for trade in services will therefore need to include a system of disciplines and remedies for export subsidies that fit the needs of the individual sectors. Among-the-most fundamental characteristics of services are their invisibility and elusiveness. While it is possible to identify the inputs that are used to produce a stream of services over time, it is extremely difficult to identify and measure on an objective basis the cost of a standard unit of service. A system that is based on the calculation of subsidy and dumping margins associated with trade in individual units of a service would not be practical. A different kind of problem arises with respect to services such as transportation and communications, where fixed costs account for a large portion of the total cost of producing individual services, and variable costs are relatively low. Individual enterprises, on solid commercial grounds, could choose radically different strategies with respect to the amortization of fixed costs and with respect to the development of a price schedule for different segments of the market, reflecting the demand elasticities in each market segment. In terms of economic theory, it always makes sense to price the sale of marginal units on the basis of marginal costs. It is therefore extremely difficult, with respect to the sale of individual units, to determine objectively whether they are being dumped and, if the government owns the enterprise, whether such sales are. being subsidized. A framework agreement in services should contain the general principle that exports of services should not be subsidized or dumped in a manner that distorts the market and injures the commercial interests of other enterprises. The provisions of the agreement should give countries adversely affected by a pattern of injurious subsidy and dumping practices the right to seek compensation or to take remedial steps against the offending country. Before taking action, however, a country that wanted to pursue such remedies should have to go through the normal dispute settlement procedure provided in the agreement. This is necessary, because cases of dumping and subsidization will be extremely difficult to prove objectively with respect to individual transactions, and a country should have to be able to demonstrate that there has been a consistent pattern of subsidy or dumping abuses. In addition to the general principle and related provisions contained in the framework agreement, more detailed disciplines and remedies will need to be developed in individual sectoral agreements.
The GATT provides an elaborate system for settling disputes. A government that believes that its commercial interests have been hurt by an action by one of its trading partners can initiate a dispute settlement procedure. The first step in this procedure is to request and hold consultations with the other government, both to clarify the issues involved and to seek to resolve the issue on a bilateral, informal basis if at all possible. If such bilateral efforts fail, it can request the GATT council to establish a dispute settlement panel of GATT experts from third countries. The panel has to examine the issues in the case and the relevant provisions of the GATT and submit a report of its findings to the GATT council. The council must then decide whether the country that brought the complaint has sufficient justification to retaliate. Needless to say, at each step of this process, the two countries involved in the dispute are expected to make repeated bilateral efforts to resolve the dispute, and in practice most disputes are settled before they get to the final stage. The GATT system for settling disputes is cumbersome and no one is quite happy with it, and yet it has worked reasonably well most of the time. Its greatest failure has been its inability to deal with disputes involving politically sensitive issues like agriculture. The prolonged nature of the process has led to growing impatience. To some extent the delays built into the process are helpful in letting grass grow on the issue and helping governments to back off gracefully. More and more, however, countries have run out of patience with the process and have initiated retaliatory steps before the final approval of the GATT council. An effort is being made in the Uruguay Round to remedy these problems, and whatever conclusions are reached with respect to improvements in the GATT system will undoubtedly have some relevance for the dispute settlement process that is established for trade in services. Overall, there is no reason to believe that a dispute-settlement process that works for trade in goods will not also work for trade in services. In fact, the enforcement procedures built into the GATT through the dispute settlement provisions are one of the important reasons why the services industries in the United States supported the development of new rules for trade in services in the context of the GATT. The dispute settlement process will be even more important in services than in goods because the outcome of negotiations on trade in services will inevitably leave more ambiguity than the outcome of negotiations on trade in goods. Since it will generally prove impractical to reduce barriers to trade in services to a single number like a tariff, it will be far more difficult to evaluate the protective effect of any changes in the regulations identified as trade barriers. Moreover, changes in purely domestic regulations will frequently have a significant impact on competitive opportunities available to foreign suppliers, and it may be quite difficult to sort out when such changes in domestic regulations result in an unjustifiable increase in the level of protection. Even with the best intentions of the governments involved, differences will arise over the interpretation of negotiated commitments and the effects of national regulatory measures. In designing the dispute settlement process for trade in services, it may also be useful to borrow an idea from the GATT Standards Code. The code establishes two separate panels for the resolution of disputes: first,, a panel of technical experts who are asked to clarify the technical issues in the case, and second a panel of GATT experts who are asked to clarify the interpretation of the provisions of the code. Given the highly technical nature of many of the regulations in services, it will probably make sense to create the same division of responsibilities in a services agreement. Given the complexity of the issues in services, it would probably be useful to involve both the industry and the regulators in a dispute in the GATT process itself. Direct involvement might facilitate a greater understanding of all the issues related to the dispute and contribute to greater acceptance of the outcome. The dispute settlement system should also include a conciliation procedure that might be invoked at the request of two parties to a dispute. Such a procedure might be particularly helpful with respect to disputes that do not involve violations of binding commitments. Government measures that adversely affect the substantive commercial interests of another country can lead to disputes even though no legal commitments are violated, and such disputes could potentially lead to retaliatory actions. A conciliation procedure could be useful in defusing such confrontations.
The GATT articles also contain a number of rules designed to reduce the possibility of disputes. Many of the disputes that arise result from a poor understanding of domestic laws and regulations by foreign exporters and foreign government officials. The GATT therefore requires governments to notify other members of the GATT of any changes in laws and regulations that will affect foreign exporters or importers. This notification requirement covers not only specific import or export regulations but also domestic regulations in such areas as standards. Some GATT agreements also guarantee foreign exporters and importers the right to consult with government regulators in order to clear up misunderstandings or to work out adjustments in regulatory provisions, where such regulations create special hardships and an adjustment would not undermine the achievement of regulatory objectives. Foreign enterprises are also given the right to appeal to domestic courts or other adjudicatory bodies when such enterprises feel they have been wronged by regulatory decisions. All of these procedural rules, which generally fall under the general concept of due process, should be included in a general agreement on trade in services. Full use of domestic procedures can help to minimize the extent to which minor problems related to the implementation of regulations become disputes between governments. Once an issue is raised to the governmental level, it inevitably becomes political, and in some cases that actually makes it more difficult to resolve.
In addition to the pervasive role of regulation, trade in services differs from trade in goods in terms of its dependence on an international movement of information, people, money, and goods. The most difficult challenge facing negotiators of a framework for trade in services thus concerns the international movement of information, people, and money. It is hard to conceive of a more emotionally charged agenda. The fact that trade in services is affected by government policies that affect the flow of information, money, and people is not necessarily a sufficient argument for dealing with these issues in the negotiation of a general agreement on trade in services. After all, the GATT articles did not deal with transportation issues, even though trade in goods is totally dependent on transportation. Nor did the GATT articles deal with issues related to communications, commercial visas, foreign exchange restrictions, and foreign investment, even though trade in goods is affected by policies in each of these areas. Nevertheless, trade in services is so dependent on policies in these areas that it will be difficult to ignore them altogether. .In fact, these issues already are at the core of much of the debate during negotiating sessions of the services group in Geneva. The issues in each of these areas of policy are complex and touch on sensitive areas of national policy. The framework agreement is unlikely to establish substantive, legally binding commitments in any of these policy areas. It could, however, establish the principle that governments should provide as much freedom of movement for information, money, and people, and as much freedom for foreign investment as is consistent with the achievement of national policy objectives. The framework agreement could also establish procedures for the subsequent negotiation of binding commitments. Such commitments could be negotiated as an integral part of commitment covering specific services. A commitment on professional services, for example, could include provisions dealing with immigration issues as well as the establishment of a professional practice; a commitment on financial services could include provisions dealing with monetary transfers and foreign investment; and a commitment on data processing could include provisions dealing with the international transfer of information. Alternatively, interested countries could decide to negotiate broad agreements establishing ground rules for the international flow of information, the international transfer of money, the international movement of service workers, or foreign investment in connection with trade in services. Information Flows. The purest form of international trade in services is trade based on international data flows. Services produced anywhere in the world can be made accessible almost instantaneously to users in other countries, provided they can be transmitted electronically, both producer and user have access to the necessary communications and computer equipment, and government regulations do not restrict either the use of the equipment or the transfer of the information. Given the central role of information flows to trade in services, high priority should be given to the negotiation of an agreement covering such flows. A generic agreement on international information flows could build on an agreement negotiated among OECD countries in 1985. Called the Declaration on Transborder Data Flows, the agreement commits OECD governments to minimize barriers to the international flow of data and to develop cooperative solutions to any problems created by the introduction of new communications and data processing technologies. A GATT in this area might also establish the right to use the public communications network to deliver services across national borders and the right to plug network compatible equipment into the communications network for the purpose of sending or receiving information related to trade in services. Other issues related to the international transmission of information could be dealt with in the context of a sectoral agreement on international trade in telecommunications, information, and data processing services. Monetary Flows. The ability to transfer money is not only central to financial services, but also necessary to effect a transfer of payments received for services. rendered. An agreement covering monetary transfers in connection with trade in services could commit countries subscribing to such an agreement to avoid restrictions on foreign exchange transactions associated with international trade in services, except when warranted by serious balance of payments problems. In reviewing restrictions imposed for balance of payments purposes, members of the agreement could seek the advice of the International Monetary Fund, as is currently the case with respect to GATT review of balance of payments restrictions imposed on trade in goods. Movements of People. Every country in the world seeks
to control the flow of people into its territory. At the same time,
most countries have established criteria and procedures for the admission
of foreigners for various purposes, and many countries have negotiated
bilateral visa agreements. It should be possible, in the context of
negotiations on trade in services, to build on existing bilateral
agreements. As a first step, it would be useful to develop a compendium
and an analysis of existing visa regulations and bilateral visa agreements. Foreign Investment and Foreign Trade: International trade in consumer services typically requires an extensive presence in the local market, and foreign exporters therefore often find it necessary to establish themselves in the foreign market by investing in local facilities, or by appointing local representatives and agents. The first set of arrangements raises the emotional issue of foreign-investment.-Like all other issues of an equal degree of sensitivity, the foreign investment issue will need to be broken down into its component parts if it is to prove manageable. First, a framework agreement should define a minimum presence in the importing country that would be granted to all foreign suppliers that have been granted national treatment. Such a minimum presence should include legal establishment (insofar as that is required by local regulations as a precondition for selling specific service products), establishment of local representative offices, the ability to use local business enterprises as agents for distributing and supporting the services product, and any investments that have to be made to satisfy regulatory requirements. This minimum presence should be incorporated in the definition of national treatment included in the framework agreement. Beyond the minimum presence, the framework agreement should make provisions for the exchange of higher levels of commitment with respect to foreign investment. Since foreign investment is absolutely essential in some sectors such as banking and most consumer services, any commitment on market access in these sectors should cover foreign investment. Moreover, given the importance of foreign investment to trade in virtually all services, every sectoral agreement will need to include provisions on foreign investment. International trade in business services, on the other hand, frequently takes place in the exporting country, and the foreign buyer takes responsibility for transferring such services to the importing country. Looking to the future, one can envision new techniques for selling services abroad electronically. Foreign exporters of services might in the future sell services through the mail, market through advertisements in local papers, and deliver electronically to home computer terminals. An international trade regime in services should address potential barriers to such future methods of marketing, selling, and delivering internationally traded services. Selling services to foreign buyers directly from abroad raises the issue of nonestablishment. Should exporters have the right to sell services to foreign customers in their own market without establishing themselves in the importing country? This is generally not a major operational issue today. In practice, anyone living in -a- country without comprehensive foreign exchange controls can buy any services abroad he wishes (even though he may not be able to use such services to fulfill local regulatory requirements). As international sales of services through the local advertising, mail 'order, and electronic delivery routes expand, however, we can expect governments to exert increasing controls over such transactions. It should be easier to deal with this issue before it becomes a major problem, rather than after it has become a problem. The framework for services should therefore include a provision dealing with nonestablishment. Activities of Local Governments Since international trade in services is largely controlled
through domestic regulation, trade in services much more than trade
in goods is affected by regulations under the authority of local governments.
If international agreements on trade in services are to have any meaning,
they will have to cover not only the regulatory activities of national
governments but also the regulatory activities of state, provincial,
and local authorities. This requirement can raise constitutional issues
in countries with federal systems, and these constitutional issues
will have to be addressed. In the United States the issue is less
a constitutional than a very difficult domestic political issue. It
should be possible to resolve it through close coordination between
the federal government and state authorities during the negotiations. Standstill Commitment The road to the negotiation of comprehensive, legally binding commitments on trade in services is likely to be a long one. This raises the question whether it is possible to adopt a standstill commitment at the time the General Agreement on Trade in Services is adopted. Countries adopting such an agreement could, for example, agree not to impose new regulations that would reduce market access for foreign firms. Countries adopting the agreement could also agree to do their best to resolve individual trade problems that arise in services on a case-by-case basis. These two commitments, a standstill commitment and a best efforts commitment to resolve problems, would give the framework agreement immediate practical value. They would put a ceiling on trade restrictions in services and provide a process for resolving problems while countries seek to negotiate more detailed rules for trade in services over the long run.
The last issue a framework agreement must resolve is the relationship between the GATT and the new General Agreement on Trade in Services (GATS). This is partly a legal issue, partly an institutional issue, partly a practical trade policy issue, and ultimately a political issue. Before analyzing these issues in detail, it may well be worthwhile to review the relationship established in the Uruguay Declaration between the negotiations on trade in goods and the negotiations on trade in services, because the issues are largely the same. Moreover, the political balance achieved in the Uruguay Declaration may well provide a model for the legal, institutional, practical, and political relationship between the GATT and the General Agreement on Trade in Services.6 The Uruguay Round of multilateral trade negotiations is legally divided into two separate negotiations: a negotiation on trade in goods within the framework of the GATT, and a negotiation on trade in services among interested countries that attended the meeting in Punta del Este. Each of these negotiations is supervised by a separate body, the Group of Negotiations on Goods (GNG) and the Group of Negotiations on Services (GNS). Both sets of negotiations are supported by the GATT secretariat. Both sets of negotiations also come under the common political mandate established by ministers in the Uruguay Declaration. The two negotiations are thus legally separated, but politically linked. The principal legal issue with respect to the future relationship between the . GATT Articles of Agreement and the new General Agreement on Trade in Services concerns the linkage, if any, between the rights and obligations of the GATT and the legal rights and obligations of a General Agreement on Trade in Services. It is conceivable that the two agreements could be merged into a new, more comprehensive agreement on international trade, along the lines perhaps of the stillborn International Trade Organization, which was negotiated at the end of World War II but never implemented because the U.S. Congress refused to ratify it. The path of least resistance, however, will be to adopt the General Agreement on Trade in Services as a separate legal agreement. This will make it possible to conclude the negotiation of an agreement on services even if not all GATT countries are ready to join at the same time. It would also remove concerns that legal rights and obligations negotiated in one agreement could be adversely affected by legal rights and obligations negotiated in the other agreement. The institutional issue with respect to the relationship between the GATT and the GATS is whether the GATT secretariat should be asked to administer the new agreement on services, in addition to the GATT articles and the related codes on trade in goods. The answer to this question is probably yes. Having the GATT secretariat administer the agreement not only would be practical from a housekeeping point of view, but also would preserve a pragmatic link between trade in services and trade in goods. With the GATT secretariat organizing meetings of the GATT as well as the GATS, trade officials attending meetings on trade in goods would thus be able to schedule parallel meetings on services at the same time. The accumulated experience of GATT officials in dealing with trade matters in goods would also remain available to officials wrestling with trade issues in services. It would probably make sense, however, to establish a separate division in the GATT on trade in services, and nonmembers may insist on separate financial contributions to support a services division. The practical issue is whether countries would be able to make a link between the enforcement of rights and obligations with respect to trade in goods and the enforcement of rights and obligations with respect to trade in services. The answer is that such a link could not be made in legal terms, but that countries will probably find a way of establishing a linkage in political terms. There are endless ways in which countries can affect the commercial interests of other countries without violating any GATT obligations, and it would be surprising if countries did not establish a broad political linkage between their commercial interests in goods and their commercial interests in services.
NOTES 1. The negotiations on trade in goods are being carried
out by the Contracting Parties of the GATT under the rules and procedures
of the GATT. The negotiations on trade in services are being carried
out by the negotiators acting as government representatives of interested
countries. |