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| CHAPTER XI There are obvious differences among individual sectors in services-differences in market structure and the scope for competition, differences in regulatory objectives and the nature of government regulation, and differences in the historical development of domestic and international institutions. Any meaningful regime has to reflect the institutional and market realities of each sector. As noted in previous chapters, however, a negotiation carried out purely along sectoral lines would be dominated by the sectoral regulatory agenda and would inevitably focus on major philosophical differences among countries with respect to the proper role of government and the optimal regime for achieving regulatory objectives. The development of a general, trade-oriented framework of principles and rules makes it possible to approach the issue of services on the basis of a common desire to obtain the mutual economic gains from trade. The expansion of trade opportunities thus establishes a focus for the development of a common framework. What is clearly needed is a dual approach to the negotiation of an international trade regime for services-an approach that combines the trade-liberalizing thrust of a generic set of principles and rules and the down-to-earth aspects of a sectoral focus. The Uruguay Declaration, therefore, called for the negotiation of general rules and principles as well as the elaboration of possible disciplines for individual sectors. In this chapter, we will examine the elaboration of the General Agreement on Trade in Services for the major sectors. One option for combining the benefits of both a general and a sectoral approach would be to record all sectoral deviations and exceptions in the general framework agreement, 'alongside the statement of general principles and rules. The risk of such an approach would be to dilute the liberalizing thrust of the general principles and rules by creating a confusing and ambiguous document. The alternative approach, recommended here, is to develop separate annotations of the general agreement for individual sectors. The development of sectoral annotations could follow and build on the exchange of information on barriers and regulations described in Chapter 10, and a subsequent analysis of the applicability of the principles and rules of the general framework to individual sectors. A somewhat similar process is currently under way in the OECD Trade Committee, which is examining the applicability of the concepts contained in the Conceptual Framework Paper OECD, 1987) to individual sectors. Some have argued that the sectoral agreements negotiated under the general framework should contain the substantive, binding commitments for the liberalization of trade barriers to services. This would mean that the negotiation of substantive commitments would primarily have a sectoral focus. This would be undesirable, because it would constrain the scope of liberalization and give excessive emphasis to the regulatory issues. The approach recommended here, therefore, is to treat the sectoral understandings as interpretations of the general rules and principles with respect to individual sectors, and to organize the negotiation of substantive commitments on the basis of a general exchange of requests and offers across all sectors. Such a negotiation would follow, in effect, the pattern of past GATT negotiations in tariffs and quantitative restrictions. Whatever route is chosen, the negotiation of a set of agreements that remain true to the overall liberalizing thrust of the general agreement, while accommodating sectoral realities, poses a real challenge. By its nature, the process of liberalization has to involve a confrontation between purely sectoral regulatory objectives and the broader economic objectives that are served by trade liberalization. This will inevitably lead to a certain tension between the principles, rules, and procedures of the general agreement on one side, and the rules and procedures developed in a sectoral context. It will also, inevitably, lead to bureaucratic clashes between government departments, each of which acts as the guardian of governmental objectives. The key to the success of the whole enterprise will be to achieve and maintain a proper balance between the general rules and procedures on one side, and the sectoral disciplines on the other. Too much emphasis on the general framework could leave the whole process too far removed from the real world, with the result that it does not lead to many substantive changes in policy measures at the sectoral level. On the other hand, too much emphasis on the sectoral issues could get the whole process bogged down in regulatory minutiae without a clear focus on trade liberalization. The resulting agreements could end up creating new obstacles to global economic adjustments in individual sectors rather than facilitating market adjustments.
Sectoral annotations have been used to develop the U.S./Israeli agreement on trade in services further and have proved extremely useful in familiarizing regulatory officials with trade concepts and in familiarizing trade officials with the basic sectoral concepts. It will not be necessary to negotiate sectoral understandings for every conceivable sector in services. For some sectors such as management consulting, the provisions of the general agreement will provide an adequate basis for liberalizing trade. Barriers affecting trade in such sectors would be reviewed and negotiated according to the procedures established in the general agreement. It needs to be clearly established that the principal purpose of such annotations is to interpret the general rules and procedures, not to displace them with sectoral rules and procedures. The primacy of the general principles, rules, and procedures will need to be preserved, except in those few cases where the structure of the market or the structure of existing agreements is fundamentally inconsistent with the principles and rules in the general agreement. Where trade is dominated by monopolies, as in basic telecommunications services, for example, it obviously does not make sense to impose trade rules that assume free and open competition on the basis of market criteria. Where market access today is dominated by a comprehensive system of bilateral reciprocity agreements, as in air transport, it would not make sense to adopt a multilateral framework ab initio. In such cases, the annotations need to spell out the scope of the exceptions clearly. The sectoral annotation of the principles and rules of the general agreement would not create substantive, binding obligations with respect to market access and national treatment. These would be negotiated as part of the general exchange of concessions envisioned under the provisions of a General Agreement on Trade in Services. The sectoral annotations would offer guidance on how the principles and rules of the general agreement should be interpreted in the context of a particular sector. The agreed interpretation of the market access commitment or the national treatment commitment with respect to specific service activities or specific policy instruments would not come into force until a government had agreed to bind market access with respect to such services or to bind national treatment commitment with respect to such policy instruments. The challenge in framing the sectoral annotations will be to avoid getting bogged down in debates over differences in regulatory philosophy or a particular country's choice of trade measures. The annotations should be based on facts and not on normative judgments, facts such as the operations that have to be performed in order to produce particular services. It should then be possible to define national treatment in terms of the ability of a foreign firm to carry out such operational activities on the same basis as domestic firms supplying the same services. Market access would be defined in terms of a new firm's being able to carry out the operational activities associated with the sale of particular services.
In order to be manageable the sectoral annotations should be rather general, and should not get into national regulatory differences. They should take a generic approach in highlighting the most important characteristics of a sector that are unique to the sector across a wide range of countries. Each sectoral annotation would have four major sections: 1) a description of the sector, 2) an interpretation of the provisions contained in the general agreement for the sector, 3) supplementary provisions applicable to this sector, 4) general exceptions with respect to the sector. Descriptive Section. This section would describe the scope of activities covered by the sector, the structure of the market (including differences among key segments of the industry), how domestic and international activity is regulated among member countries (in very general terms), the key policy objectives served by the regulations applicable to this sector, the way services in this sector are traded, the form of barriers to trade in the sector, and existing international agreements applicable to the sector. Interpretive Section. The interpretive section would describe how all the key provisions of the general agreement are to be interpreted in the context of the industry. In other words, this section would describe how the national treatment principle, the least trade-distorting regulation principle, the equivalent competitive opportunity principle, the public monopoly provisions, the fair trade provisions, and the balance of payments, travel, and international data flow provisions are to be interpreted with respect to trade in services in the sector. If no sectoral interpretation was considered necessary with respect to certain provisions, one could merely indicate that no sectoral interpretation was necessary and that the provisions apply as written. The sectoral annotations would provide an opportunity to relate the rules and principles of the general agreement in a fairly direct way to the specific functional and operational activities that have to be performed by foreign firms that wish to supply specific services covered by the sector. For example, in order to export shipping services, one has to be able to dock the ship in an accessible harbor, one needs access to secure warehousing facilities, one has to be able to maintain a sales office and carry out a marketing effort, and so on. The elaboration of the general rules with respect to each of these activities could provide a fairly concrete-notion of what national treatment means with respect to shipping. Sectoral Rulemaking Section. The sectoral rulemaking section would supplement the general rules and procedures contained in the general framework with additional rules and procedures that are deemed necessary to further international cooperation and the liberalization of trade in the sector. Exceptions to the General Rules. This section would address general exceptions that arise from fundamental characteristics of an industry. It would not cover individual national exceptions that arise from the regulatory regime of an individual country. National exceptions would be covered in. the context of the subsequent negotiation of binding, substantive commitments discussed in the next chapter. As foreseen under the procedures of the general agreement described in the preceding chapter, substantive national commitments would be negotiated as part of a general exchange of commitments covering all sectors. It could be argued that the negotiation of a detailed sectional annotation would be a waste of time since it would add another step in the negotiations before substantive commitments are negotiated. Such sectional annotations need not be very long, however. As already noted, many of the principles and rules will not require sectoral elaboration, and it will be sufficient to note that the general provisions apply without the need for further elaboration. Much of the work related to the preparation of these sectoral annotations can be carried out through the preparation of background papers by the secretariat. The experience with the U.S.-Israeli negotiations and the U.S.-Canadian negotiations has shown that the process of working through a sectoral annotation can be extremely helpful in clarifying sectoral issues that arise under the more general trade agreement. Without a clear understanding of the sectoral interpretation of the general principles contained in the overall framework agreement, it will be difficult to persuade many countries to assume binding obligations with respect to the management of sectoral regulations. While it might be possible to achieve this objective through an informal work program, it will be impossible to achieve meaningful results without a sectoral review of some kind.
In order to understand how the various elements could fit together, and how the process would work, we have to probe more deeply into the relationship between the trade negotiations and domestic regulations. We have established that most barriers to trade in services are embedded in domestic regulations. In some cases, the barriers to trade embedded in domestic regulations are not essential for the achievement of the legislated regulatory objective and have been added for purely protectionist reasons. In other cases, the barriers embedded in the regulations are an unavoidable by-product of the domestic regulatory regime. Both the general rules and procedures and the sectoral annotations basically are aimed at the first set of barriers to trade in services, barriers embedded in domestic regulations that are not essential for the achievement of regulatory objectives. The second type of barriers, which cannot be divorced from the domestic regulatory regime, could be tackled in more ambitious negotiations that would address the regulatory regime itself. These are the higher level sectoral agreements that would be negotiated on a conditional most-favored-nation basis. The negotiation of such agreements is beyond the mandate established in the Uruguay Declaration. Trade officials do not have a comparative advantage in debating regulatory objectives or philosophies. They can ask whether mandated regulatory objectives are being pursued in the least trade-distorting manner possible. They can also examine the commercial consequences of alternative regulatory systems and devise appropriate strategies and tools for protecting a country's commercial interests in light of the regulatory systems employed by its trading partners. While the negotiating mandate places an obligation on negotiators to respect each country's regulatory objectives, that does not require them to ignore the commercial consequences of a country's decision to pursue certain regulatory objectives. Moreover, it is perfectly consistent with that mandate to say that countries with similar regulatory regimes should have an opportunity to expand trade opportunities with each other in a manner consistent with their national regulatory objectives. Trade officials within the context of their own turf do not have either the mandate, political clout, or resources necessary to pose a fundamental challenge to any country's regulatory regime, even where such regimes pose major hurdles for trade. This limitation of the scope of trade negotiations inevitably limits the possibility for major breakthroughs toward liberalization, since domestic regulatory systems pose the greatest barriers to global liberalization. This does not preclude the possibility, however, that regulatory officials interested in pursuing major regulatory reforms within one industry or another might seize on trade negotiations in services as a vehicle for pursuing such reforms among a group of like-minded countries. To put this issue more bluntly, trade officials have no business negotiating over regulatory objectives. At the same time, the prospects for expanded trade opened up by trade negotiations could persuade the relevant regulatory authorities to negotiate a common approach to various regulatory issues, and this in turn could open up the possibility for the negotiation of an expanded market access agreement.
To offer a more precise description. of possible sectoral annotations, the remainder of this chapter will focus on some of the principal sectors in services. Since this is an overview, we will not be able to probe very deeply into each sector; the suggestions provided with respect to the contents of individual sectoral annotations are merely illustrative. The illustrative sectoral annotations provided here are probably on the ambitious side, and should be viewed as ideal models. In order to be manageable, the scope of the actual agreements that are negotiated may well have to be more modest. The parallel volumes of the American Enterprise Institute Trade in Services Series (also published by Ballinger provide more in-depth analysis of the major sectors, as well as suggestions for possible agreements.
On the face of it, tourism seems to be an unlikely candidate for an early sectoral focus in negotiations on trade in services. Trade barriers in this sector are not immediately obvious. At first glance, trade negotiations on tourism might seem frivolous. Tourism provides an excellent basis for starting work on trade in services for a number of reasons, however. Tourism is an industry where most countries, and in particular developing countries, can gain from expanded trade. Negotiations on tourism services can also provide early tangible benefits for a broad cross section of the public. Who has not been frustrated by the unavailability of accustomed services while traveling abroad? Negotiations on tourism would give travel agents, an extremely well-organized group of people with a large presence at the grass roots level, a stake in the negotiations. The discussion of policy issues affecting trade in tourism would also touch on .regulations covering a large number of other sectors in services and thus provide useful precedents for subsequent negotiations in such sectors. Trade in tourism covers not only the opportunity of the tourist to travel abroad but also the opportunity of those who sell services that support tourists to market and deliver their services in other countries. An annotation on tourism thus could cover the activities of travel agents and tour operators, the sale and use of traveler's checks and credit cards, charter flights, cruise ships, air and hotel reservation systems, automatic cash machines at airports, flight travel insurance, travel regulations, and the management of global hotel chains. Each of these services associated with tourism opens a window on a much wider range of regulatory issues. The development of a sectoral annotation on tourism thus could provide a dry run for a large number of other sectors. In other words, tourism provides the possibility for a useful experiment and learning experience in a sector where everyone can gain and where commercial and regulatory conflicts are minimal. The regulations that create barriers to trade in tourism services usually are not the result of an explicit policy to protect the domestic industry. Rather, they tend to be a by-product of policies aimed at a variety of domestic regulatory objectives or policies designed to reduce foreign exchange outlays. This makes it simultaneously easier and more difficult to deal with these issues-easier because resistance from the domestic industry is likely to be less pronounced than in other industries, but more difficult because officials will need to consider the regulatory implications. On balance, the annotations on tourism are likely to prove easier to negotiate than the other sectoral annotations. (For further material on trade in tourism services see Richter, 1987, and Feketekuty, 1987.) Descriptive Section. This section would describe the
various activities to be covered by the annotation on tourism, including
the sale of travel and hotel services, the sale of tour packaging
services, the operation of reservation systems, the sale of flight
insurance, credit card, traveler's check, and check cashing services,
the sale of cruise ship and air charter services, and the provision
of hotel services. Presumably it would also cover the right of residents
to travel abroad. The descriptive section would also enumerate governmental policy objectives served by regulations that affect the production, marketing, and delivery of services covered by the sectoral annotation. The annotations would undoubtedly point out that the regulations affecting international travel and trade in tourism services serve broad policy objectives that go beyond public policy concerns in tourism. The annotations might refer to fiduciary, immigration, balance of payments, transportation, and communication policy objectives. Interpretive Section. This section would relate the principles, rules, and procedures of the general agreement to the needs of international travelers and the needs of businesses that support international travelers. The section would translate the general principles into terms that are meaningful to international travelers as well as travel agents, tour operators, vendors of credit card, traveler's check, and flight insurance services, operators of cruise ships and charter flights, automobile leasing companies, and companies that manage hotels. This section would apply the general provisions dealing with monopolies to the specific problems faced by foreign exporters of travel services who have to both procure certain services from monopolies and compete with the monopolies in supplying related services. Foreign charter airlines, for example, may well have to depend on the national airline for ground handling and customer services, while competing with them for the charter business. Companies operating air and hotel reservation systems depend on the communications monopoly with respect to access to the public communications system, while at the same time competing with the communications monopoly with respect to the provision of electronic message services. The interpretive section could also apply the general provisions regarding the international movement of people, money, information, and goods to such travel-related issues as the international transfer of information on travel and hotel arrangements, foreign exchange controls on expenditures by tourists, and visa regulations related to tourism travel. It could also apply any general provisions regarding investment to such operational issues in tourism as building and operating hotels, car leasing companies, or travel agencies. As noted earlier, the annotation would not establish substantive obligations in these areas but would help frame the issues in order better to set the stage for the exchange of substantive, binding commitments in the subsequent phase of the negotiations. Section on Exceptions. The section dealing with exceptions would make clear what activities in each functional area (for example, financial services, transportation services, communications services) are not covered by the provisions contained in the sectoral annotation.
The technological revolution in telecommunications and data processing has been central to the rapid growth of international trade in services in recent years. Regulations that limit the use of the new technologies are considered major barriers to grade in services by the business community. The new technologies have created three sets of issues. First, the new technology has led to the creation of new services dependent on communications facilities, services related to data processing, electronic data bases, banking, insurance, and transportation. Since the competitive position of firms offering these services often hinges on the terms and conditions of access to communications facilities, disputes over communications charges and restrictions placed on the use of the communications facilities have become trade issues. Second, the new technology has made it economically feasible and commercially advantageous for many corporations and industry associations to develop their own internal communications networks and to use such networks not only for internal management purposes but also for the distribution of specialized services to customers. This has created disputes over the extent to which private entities should be allowed to build such networks and to interconnect them with the public system to deliver services to clients around the world. It has also created disputes over the communications equipment that firms are allowed to interconnect with the public network. Third, the new technology has made it economically feasible to supply many telecommunications services on a competitive basis. Inevitably there have been disputes over the degree of competition that should be allowed in various segments of the market and over the ground rules that should govern competition between the communications monopoly and competing firms, where both are allowed to compete in the same segment of the market. The emergence of competition in international telecommunications services in some countries, while the provision of such services remains a monopoly activity in other countries, has created commercial problems for both sets of countries. International telecommunications obviously requires the cooperation of public communications companies in at least two countries, the country in which a call originates and the country where the call is received. Firms that supply international telecommunications services have to negotiate so-called interconnect agreements with their counterparts in other countries. International telecommunications firms in a country such as the United States that permits competition naturally find themselves in a poor bargaining position vis-à-vis foreign telecommunications monopolies. Countries that have retained an international communications monopoly on the other hand have trouble finding a practical and equitable way of channeling outgoing calls to competing foreign firms in countries that permit competition. What is unique about this sector is that user issues are as important in this sector as supplier issues. Thus the annotations on telecommunications and data processing services will have to distinguish clearly between the principles and rules that apply to users on one hand and to suppliers on the other hand. Trade-related user concerns generally relate to services purchased from communications monopolies. Fundamentally, this covers basic telecommunications services and some value-added or enhanced services, to the extent the government involved has limited competition in these services. Trade-related supplier concerns generally relate to services provided on a competitive basis. This category covers data processing and information services, and value-added or enhanced telecommunications services subject to international competition. There has been considerable debate over the tradeability of telecommunications services and therefore over the extent to which basic telecommunications services raise trade issues. The view taken here is that basic telecommunications services raise critical trade issues for users whenever such services are provided by monopolies and for suppliers whenever international telecommunications services are provided on a competitive market basis. These are controversial, hotly debated domestic regulatory issues in each country. They have also become major trade issues that can no longer be treated as purely internal, domestic issues. Any international trade agreement in services will have to address these issues. A trade agreement, and in-particular an annotation of general principles and rules on trade in services more generally, will not be able to resolve all the difficult issues and establish a fully satisfactory framework for everyone; but such agreements can help to clarify the issues involved from a trade point of view and establish a framework for sorting out the trade issues that arise and for structuring meaningful commitments that could be included in the negotiation of substantive, binding commitments. Any trade agreements negotiated in this sector will have to be coordinated closely with the negotiation of agreements within the framework of the International Telecommunications Union. In fact, substantial negotiations are currently under way in the ITU to update many of the agreed guidelines and recommendations of the ITU. The GATT and the ITU have complementary roles. The GATT and trade officials are best equipped to deal with international commercial issues that arise in the context of competitive markets and the relationship between competitive and noncompetitive markets. The ITU and communications officials are best equipped to deal with issues that arise from the operation of an international communications network, and the relationship between noncompetitive suppliers. For a more detailed discussion of the trade issues in this sector, see Aronson and Cowhey (1988) in the same series. Also see Feketekuty and Aronson (1984a), a comprehensive article on the issues.1 The primary function of an annotation in this sector will be to establish a framework for the negotiation of substantive commitments over a number of years. It should not be so specific that it will be out of date before the ink is dry. Given the continuing rapid pace of change in both technology and government policies, there is a danger that the wrong kind of agreement could become an impediment to market adjustments. In order to avoid these pitfalls, the annotation should not become too detailed, and in particular, it should not be too specific in spelling out which activities should be open to competition and which activities should remain the prerogative of public monopolies. The annotations should establish different principles or rules for different competitive situations. For example, there could be a set of principles or rules for trade in services produced and sold in competitive markets, a set of principles or rules for the participation of communications monopolies in competitive markets, and a set of principles or rules that would apply to communications services that are supplied by communications monopolies in some countries and competitive suppliers in other countries. Each country could then decide whether to permit or not to permit competition with respect to specific telecommunications services. Descriptive Section. The descriptive section of the annotation on telecommunications and data processing services would need to describe the range of activities covered, the needs of users, the role of public communications monopolies, public regulatory objectives, and the impact of changing technology. This section would also have to note the differences in regulatory policies among member countries, the resulting, differences in market structure, and the various types of trade issues that arise as a result of the intermingling of competitive and monopoly activities, with many national variations. The annotation would contain separate sections dealing with users and suppliers issues. The separate interests of different classes of users would be identified, including those of small end users (small business entities that must depend entirely on the public network), large end users (large business entities that can lease their own lines or build their own satellite-based network), and users who are themselves suppliers of enhanced or value-added telecommunications services or data processing and information services. The descriptive section would also need to address the relationship between trade in services and equipment issues. The services that can be provided through the telecommunications network may depend significantly on the equipment that can be attached to the telecommunications network. Needs differ with respect to the security required, the nature of coding or decoding, the speed of transmission, and other matters. Finally, the descriptive section should describe the existing international agreements on telecommunications negotiated within the framework of the international Telecommunications Union and should establish a relationship between trade-oriented agreements on telecommunications negotiated within the framework of the General Agreement on Trade in Services, and agreements negotiated within the framework of the ITU. Interpretive Section. This section could relate the key principles and rules in the general agreement to the needs of enterprises that supply enhanced or value-added telecommunications services, data processing services, and information services. It would also relate the general principles and rules to the specific needs of users engaged in international trade of other information-based services. This section could apply the nonestablishment principle to the ability of data processing and information companies to offer their services across national borders without establishing themselves locally. It could also apply any principles contained in the general agreement on foreign investment and on the right of presence to the establishment of facilities for the provision of enhanced or value-added services. The interpretive section. would also need to relate the general provisions dealing with public monopolies to the problems faced by competitive foreign suppliers of enhanced or value-added services, who must both depend on the telecommunications monopolies as users of basic telecommunications services and compete with them as suppliers of enhanced and value-added telecommunications services. Sectoral Rulemaking Section. This section would contain added principles and rules to deal with the needs of users. The general rules are geared to deal with market access problems faced by suppliers, rather than problems experienced by users in gaining access to services provided by monopolies. Such user-oriented principles or rules could address, for example, access to leased lines and the terms and conditions for such access. The sectoral rulemaking section may also have to address issues related to the importation of telecommunications equipment, where needed equipment cannot be obtained locally at reasonable prices. It might also deal with the right of service providers and users to attach the requisite communications equipment to the public switched network. An agreement on standards for telecommunications equipment installed on customer premises is at an advanced stage of negotiations in the GATT. This agreement, generally referred to as the Interconnect Agreement, is being negotiated under the Standards Code of the GATT. The sectoral annotation could build on this agreement. Exception Section. Issues pertaining to basic telecommunications services that are not covered by these annotations would be covered as exceptions.
Because the aviation sector bears many similarities to the telecommunications sector, there is a certain logic in taking up this sector next. It differs from other sectors, however, in that trade in aviation is controlled by a comprehensive system of bilateral agreements. (See Kasper, 1988.) This system is well entrenched, and is considered satisfactory by most elements of the industry and by national authorities responsible for aviation. If we accept the current system of bilateral aviation agreements as a given, what contribution could a General Agreement on Trade in Services make to international aviation? More specifically is there a role for a sectoral annotation on aviation services? These two questions need to be addressed separately. The principles and rules of the general agreement can contribute to the development of a more market-oriented system by influencing the evolution of bilateral aviation agreements as such agreements are renegotiated. Further down the road it could help spur an effort to develop a more competitive framework for air transport services. In the near term, the principles and rules of the general agreement could be used to reduce regulatory barriers that now distort whatever competition is allowed by the existing agreements. From industry complaints, one would have to conclude that the bilateral agreements have not been very successful in dealing with many of the anticompetitive practices of national airlines in their home country or the restrictive regulations that limit the access of foreign air carriers to local passengers and freight. Foreign airlines that are granted landing rights thus often find that they are not allowed to compete with the national airline on an equal footing. The principal issues concern the quality of ground handling services provided by the national airline to foreign carriers, arrangements at airports for processing passengers and freight, regulations concerning the local marketing of international passenger service and international air freight services, and regulations requiring government officials to fly on a national airline and to ship government freight on a national airline. Ground handling in many countries is performed by a local monopoly that is owned by the national airline. It should not be surprising that this leads to conflicts of interest in the services provided to competing foreign airlines. The range of complaints registered by airlines is quite wide and includes complaints about discriminatory treatment in customs clearance, air traffic control, data collected by airport authorities, location of passenger processing and ticketing facilities, docking arrangements, and other details. With respect to marketing, many countries exercise strict regulatory controls over the minimum prices that can be charged for various services, and it is often argued that the regulations are less strictly enforced vis-à-vis the national airline than with respect to foreign airlines. This enables the national airline to undercut the regulated prices offered by foreign airlines, which are in a difficult position to follow suit without incurring the wrath of domestic regulators. The Fly National restrictions imposed on official travel and government freight are no different from the government purchasing practices covered by the GATT Government Procurement Code negotiated during the Tokyo Round of multilateral trade negotiations. Descriptive Section. This section of the annotation on airline services would describe the current organization of international aviation, the role of bilateral agreements on landing rights, the scope of the Chicago Convention (which sets out some common ground rules for international aviation) and the roles of the two principal international organizations in aviation, the International Civil Aviation Organization (ICAO), and the Internal Air Transport Association (IATA). ICAO is an intergovernmental organization that establishes common standards and procedures for international aviation. The membership of IATA is made up of airlines, and its purpose is to develop cooperative arrangements in such areas as ticketing, baggage handling, air schedules, and airport procedures. This section should describe the various activities airlines have to be able to perform- in order to provide- international passenger and air freight services, and the various areas of regulatory policy that can affect the ability of airlines to carry out those functions on an equivalent competitive basis. It would also describe the various policy objectives that motivate government regulations that affect the operation of airlines. Finally, differences in the market structure and regulation of passenger service and airfreight services could be addressed. Interpretive Section. The interpretive section would focus on the application of the principles and procedures of the General Agreement on Trade in Services to ground handling, marketing, and other operational issues involved in running an airline. Sectoral Exceptions. The exceptions section would spell out with some precision the extent to which the system of bilateral agreements should be exempted from the principles and rules of the general agreement.
One part of the international shipping industry is relatively free of barriers and open to international competition, while the other part of the industry is affected by a wide range of anticompetitive practices and protectionist measures. International maritime transport of bulk commodities is relatively free of restrictions. International maritime transport of nonbulk commodities, provided by shipping lines serving specific routes on a regularly scheduled basis, is restricted both by anticompetitive practices sanctioned by many governments and by government measures that favor domestic shipping companies. Shipping within national borders, between any two points within an individual country, tends to be restricted to domestic shipping companies under the cabotage laws.2 The major factor in international liner shipping, and the source of greatest international debate, has been the conference system. Most governments allow shipping firms that serve particular routes to form shipping conferences that are permitted to negotiate agreed rates and schedules and can agree to split the cargo among their members. In other words, normal antitrust laws are not applied to such conferences. While ships outside the conference can steam into port. and pick up cargo, the conference has so much power vis-à-vis local shippers that they are usually reluctant to use nonconference carriers, even if the nonconference carriers offer cheaper rates. The second major institutional influence in international shipping is the United Nations Conference on Trade and Development (UNCTAD) Liner Code, negotiated in the mid-1970s at the insistence. of the developing countries. The UNCTAD Liner Code allows two countries connected by a shipping route to reserve 80 percent of the freight carried between them for their own merchant fleets, split evenly, 40 percent for each country's fleet. This leaves 20 percent of the cargo for shipping companies from third countries, carriers called cross-traders in the terminology used by the industry.3 In order to reduce the spread of bilateralism in shipping in the aftermath of the UNCTAD Liner Code, the United States negotiated an understanding with most of the other developed countries, who some time ago formed an organization called the Consultative Shipping Group (CSG). Parties to the U.S.-CSG agreement agree not to invoke their right under the UNCTAD Liner Code to reserve 40 percent of the cargo carried in bilateral traffic, thus leaving at least 60 percent of the cargo open to each other. The U.S. and CSG countries also agreed to discourage other countries from reserving their 40 percent of the cargo. The U.S.- CSG agreement also addresses the long-standing concern of the United States about the anticompetitive aspects of the closed conference system by establishing the right of excluded shipping companies to challenge exclusionary practices by the conference in the national courts. Governments also protect their national shipping industries through a variety of measures, including requirements that government cargo or cargo benefiting from government subsidies be carried by ships owned by nationals. Most countries heavily subsidize the construction and operation of the national merchant fleet and reserve all shipping within a country's borders to the national fleet. Increasingly, the competitive advantage in shipping goes to companies that can handle freight all the way from any inland point of origin to any inland points of destination; access to land transportation facilities therefore can also be a crucial factor in determining the competitive position of a shipping company. The principal objectives of a sectoral annotation on maritime transport should be to build on the U.S.-CSG agreement and provide a framework for an exchange of meaningful market access commitments. The annotations would have to take the conference system and the UNCTAD Liner Code as givens but could provide for as much market-oriented competition as possible within the existing system. Descriptive Section. The descriptive section of the annotations on maritime transport would be divided into two parts. The first would deal with general issues, and the second would deal with the institutional environment, market structure, and trade problems associated with scheduled liner shipping. The first part would describe the various facilities shipping companies need for transferring cargo to and from inland points and for marketing their services, and the trade barriers created by laws and regulations that create unequal access to such facilities. This part could also generally describe the various types of measures used by governments to protect their shipping industry, including restrictions placed on the shipment of government-owned or subsidized cargo and domestic cabotage laws. The second part of the descriptive section would describe the conference system and the UNCTAD Liner Code. It would address the anticompetitive practices that have traditionally created concerns about competitive access to cargo, and the extent to which national government regulations and existing international agreements deal with such practices. Interpretive Section. The interpretive section, like the descriptive section, would be divided into two parts, one part dealing with regulations affecting access to shore facilities and marketing activities, and the other part dealing with the operation of the liner conference system and the UNCTAD Liner Code. Among the principles and rules of the general agreement that could be given added precision for shipping are those dealing with transparency, national treatment, and the establishment of local facilities. Sectoral Rulemaking Section. The sectoral rulemaking section would have to include supplementary principles designed to curb the most. restrictive and anticompetitive aspects of the closed conference system and the UNCTAD Liner Code. Sectoral Exceptions. The section dealing with exceptions would need to spell out the extent to which the conference system and the UNCTAD Liner Code require deviations from the principles and rules of the General Agreement on Trade in Services.
International trade in insurance is affected by virtually every protective device that governments have invented to restrict international trade in services. The insurance industry is probably the services industry that most closely fits the generic discipline that might be contained in the General Agreement on Trade in Services. It is also one of the most protected sectors in many countries, and the sector that could most benefit from negotiations aimed at the liberalization of trade in services. 4 Since the primary purpose of insurance is to cover risk, and this requires the spreading of the larger and peak risks as widely as possible, there is an inevitable international dimension to insurance. This is particularly the case with respect to reinsurance and international transport insurance. At the other-end of the spectrum, life insurance is often viewed as a pool of national savings, and policies to restrict the participation of foreign companies in such cases are motivated by a desire to keep such savings at home. Yet, despite the inherent advantage in spreading risk over a global market, the insurance industry is protected in many - countries by every protectionist device conceivable. The barriers include restrictions on entry, restrictions on lines of insurance that an admitted firm can offer, restrictions on the right of residents to purchase insurance abroad, restrictions on the sourcing of compulsory insurance (motor vehicle insurance), controls on the use of foreign exchange to purchase insurance abroad, employment restrictions on foreign firms, compulsory reinsurance with a national company, excessive deposit and paid-in-capital requirements that apply only to foreign firms, restrictions on the number of offices a foreign firm can set up, restrictions on the regional areas that a foreign firm can serve, restrictions on the type of clients a foreign insurance company can serve, discriminatory taxes imposed on foreign firms, and restrictions on the ability of foreign firms to insure government cargo or facilities. In structuring the annotation on insurance, it might be useful to distinguish between four separate segments of the global insurance industry. 1. Reinsurance and international transport insurance, which are the most inherently international segments of the insurance industry. Insurance in this area would be subject to the greatest international discipline, and buyers would be given considerable freedom on where they purchase such insurance. 2. Insurance purchased by large business. enterprises against property, casualty, and liability risks. This segment of the industry is not as inherently international as the first but nevertheless can benefit extensively from international trade. Business enterprises that are large enough to be able to buy insurance abroad would be guaranteed considerable freedom to do so. Governments often cannot prevent large businesses from buying certain types of insurance abroad anyway. 3. Fire, auto, and general liability insurance purchased by individuals. Such insurance is usually purchased locally from insurance companies that have established themselves in the national market under applicable national regulations. Foreign insurance companies have to establish themselves in the importing country and invest in local facilities in order to service this segment of the market. The international rules in this area would provide for a greater degree of national discretion in the nature of domestic regulations, though foreign insurance companies would be guaranteed the right to participate in the local market on the basis of negotiated conditions. 4. Life insurance, which many developing countries
consider a major domestic source of savings. This is an activity they
wish to control in order to direct the savings into high-priority
domestic investment projects. Life insurance is therefore likely to
be the area of insurance that will be most difficult to open up internationally. Interpretive Section. All the principles and rules are likely to find important areas of application in the insurance sector. The national treatment principle, for example, will need to be defined with greater precision with respect to the processing of license applications, the design and enforcement of standards with respect to financial soundness, requirements imposed on the investment and valuation of reserves, tax treatment, and the presence required to service insurance contracts. The equivalent competitive opportunity principle will need to be given precision in order to establish a standard of market access where a country restricts the total number of domestic and foreign insurers. The due process principle might be given greater precision with respect to the processing of licenses by regulatory authorities, and the transparency principle might be given precision by enumerating the type of administrative actions that will be covered by this principle. Sectoral Rulemaking Section. The sectoral rulemaking
section would establish added principles and rules with respect to
deposit and capital adequacy requirements imposed on foreign insurance
companies. It is reasonable for governments to ask foreign firms to
maintain a capital base and an adequate level of deposits inside a
foreign market to assure policyholders that their claims will be serviced.
The question is: What is a reasonable level to achieve this worthy
regulatory objective? This is clearly an area where additional standards
of fairness are needed; since the national treatment principle is
difficult to apply in this area. The sectoral rulemaking section might
also relate the national treatment principle to the activities of
local insurance agents, loss investigators, and claims adjusters,
the processing of claims, the role of testing laboratories, loss prevention
programs, and risk management. Sectoral Annotation on Professional Services An annotation on professional services could cover a wide range of professional activities, including accounting, law, economic consulting, advertising, medicine, educational consulting, engineering, architecture, hotel management, and many more.. The annotation could be quite broad, covering all professional services that can be sold across national borders, or it could cover a narrower range of professions in greater depth. As in the other sectors, the annotation should only provide a framework for the subsequent exchange of binding, substantive commitments. Some will undoubtedly raise the question whether it is possible to deal with all professional services in one agreement. Given the similarity in the issues, it probably will be of some advantage to deal with all the professions in one agreement, while segmenting each of the four sections of the annotation into separate subsections for the individual professions. International trade in professional services takes place both through the sale of professional services by individual practitioners to residents of other countries and through the sale of professional services by international firms specializing in particular areas of professional activity. International trade in professional services also takes place inside multinational corporations, which typically share a common international pool of professional experts. In both international professional firms and multinational corporations, there is obviously a great deal of intermingling of professional services provided by nonresident professionals and by local, resident professionals. This intermingling makes it difficult to identify pure trade of professional services across national borders, and services produced locally by international firms. The typical international firm in professional services is made up of national professional practices staffed largely by local nationals who have completed their professional training in their own country and have satisfied the professional qualifications established by local accreditation authorities. International firms also seek to establish uniform standards of professional performance and to develop international name recognition. Each firm also provides some opportunity for international movement by its professional staff, both to broaden the expertise of its professional staff and to augment the expertise available to individual practices. A short discussion of professional services as different and complex as law, accounting, and advertising cannot do justice to the issues that must be addressed. More detailed information can be found in a compendium published by the University of Chicago Legal Forum.5 Additional information can be found in Noyelle (1988) in this series. Descriptive Section. After covering the range of professional services addressed by the annotation on professional services, this section would describe the various means by which such trade takes place, including cross-border transmission of information, temporary travel by individual professionals, and services provided by international professional firms. This section would also need to describe the various things professionals and international firms have to be able to do to engage effectively in international trade in professional services. At the same time, it would be necessary to discuss the principal areas of government regulation and the major policy objectives that motivate such regulations. Interpretive Section. This section would need to relate the national treatment principle to the principal operational problems faced by foreign professionals and professional firms as a result of government regulations, including such issues as taxation, accreditation of qualified foreign professionals, and the right of foreign professional firms to establish commercial linkages with local professionals, including partnership arrangements and the sharing of fees. This section could also relate the general principles and rules dealing with the movement of information, people, money, and goods to such issues as international data flows, visa regulations, foreign exchange controls on remittances, and customs rules on such material accessories as computer tapes, architectural blueprints, advertising copy, and portable computers. Sectoral Rulemaking Section. This section could establish the principle that local partners of an international firm have a right to use the internationally recognized name of the firm. Another delicate area concerns the accreditation of qualified foreign professionals. Obviously, a foreign professional unfamiliar with local laws or building codes should not be accredited automatically. On the other hand, it might be useful to establish the principle that such professionals should be given credit for relevant professional education and experience in their home country or in third countries.
For purposes of analyzing the potential scope of_ sectoral agreements that might be negotiated for international trade in banking services, it is useful to divide international banking into three segments: offshore banking, foreign retail banking, and foreign sales of fee-based services by banks. Offshore Banking Activities. In the offshore banking market, the foreign client comes to the bank. Banks and their business customers operate in the global offshore market with relatively few government constraints. In order to participate in this market, however, both the bank and its customer have to be large enterprises. Offshore banking comes closest to a pure trade model, since it involves cross-border sales of services without any local establishment. In fact, it comes close to a model of free trade based on a single international market. The competitive pressures of this international market are so strong that many governments have found it in their interest to relax regulations and , tax provisions that affect the offshore banking activities carried out within their national borders. Other countries, including the Nordic countries and Australia, have found it in their interest to relax restrictions on the establishment of foreign banks in order to attract banking activities that had migrated to the international offshore banking market. Foreign Retail Banking. Foreign retail banking is conducted through branches and subsidiaries located abroad, (though the parent bank could provide a wide range of support services from the home office). Foreign retail banking is the furthest removed from cross-border trade, since most of the actual banking work is done on location abroad. Foreign retail banking is most often cited as an example of international trade in services that cannot be conducted without major foreign investment. Any trade agreements in services will not achieve much liberalization for foreign retail banking unless such agreements cover foreign investment. Fee-based Banking Services. Fee-based services cover a wide range of financial support services that banks sell for a fee; in other words these are services that are not provided free in conjunction with deposit or loan activity. Among fee-based services are global cash management for a multinational enterprise, data processing of a firm's payroll, investment advisory services, traveler's checks, credit cards, and mail order shopping services. Some of these services are produced in centralized data processing facilities or by investment analysts located in the home office, and therefore involve cross-border trade; others are produced in branches located abroad. Fee-based services provided by banks have been widely discussed in the press but are still poorly understood. Many fee-based services provided by banks to international customers are produced at the home office or in regional financial centers like London, Tokyo, and Singapore. It is not clear, however, to what extent the ability of a bank to sell such services to clients in a particular country depends on the establishment of retail banking activities in that country. Coverage of a Banking Agreement. One of the more difficult questions that will have to be addressed in the negotiation of a General Agreement on Trade in Services is the extent to which such an agreement should apply to any of the three segments of the international banking industry. The agreement on services negotiated between the United States and Israel, for example, covered the activities of representative offices of foreign banks, but not agencies, branches, and subsidiaries. The agreement thus implicitly covers offshore banking and fee-based services that can be produced at home or in third countries and sold through local agents in the importing country. By the same token, the agreement excludes foreign retail banking. In the book written for the AEI series on trade in services, Ingo Walter (1988) provides a comprehensive survey of the international banking industry and of the wide range of restrictions imposed by governments on foreign banking activity. He also discusses how international agreements on trade in services could facilitate the liberalization and expansion of international banking. A detailed discussion of the application of trade concepts to international banking is found in Feketekuty (1981d), "International Trade in Banking Services: The Negotiating Agenda," which is part of a collection titled The International Framework for Money and Banking.
The crucial question that has to be answered first with respect to an annotation on banking services is the coverage of such an agreement. Should it encompass all three banking segments-offshore banking, fee-based banking services, and foreign retail banking-or only the first two, insofar as they involve cross-border sales? There is likely to be considerable resistance to any trade agreement on banking, but particularly one that covers the operation of retail banks abroad. The suggestions below cover all three segments, although an agreement might not cover all three areas. Descriptive Section. For each of the three segments of the market, the descriptive section would provide a detailed description of the services covered by the annotation, the functional, operational activities banks need to carry out in order to provide financial services to foreign customers, and the various types of government regulations that have a bearing on the ability of the banks to carry out the enumerated operational activities. The descriptive section would also review the major regulatory objectives that commonly motivate government regulations that affect banking activities. Interpretive Section. The interpretive section would focus on the principal concerns that have been expressed by the banking community with respect to their ability to operate internationally. With respect to offshore banking, for example, the interpretive section could apply the effective market access principle and national treatment principle to the operation of representative offices abroad and the scope of local marketing efforts. It could also apply provisions dealing with the movement of money and personnel to specific issues in offshore banking, such as the application of foreign exchange controls to repayments of loans and travel arrangements for bank officials. With respect to international sales of fee-based services, this section could apply the principles and rules of the general agreement to such issues as nonestablishment, access to communications facilities, appointment of local agents, access to the credit histories of potential credit card holders, and the ability to .collect bills that are due. With respect to the operation of foreign retail banks abroad, the interpretive section might relate the application of the general principles and rules to the full range of operational problems faced by foreign retail banks, including access to local sources of funds, use of central bank rediscount facilities, scope of lending activities, employment of personnel, discriminatory tax treatment, and the application of foreign exchange restrictions. The interpretive section of the annotation on banking would thus provide a checklist of the type of commitments that governments would need to make in order to allow banks to operate in a reasonably efficient and equitable manner in another country. Since a number of governments will not want to give up their ability to control foreign banks, the interpretive section could also contain recommendations concerning the type of policy instruments preferred for controlling foreign banking activity.
The general principles, rules, and procedures of a General Agreement on Trade in Services will have to be augmented by sectoral annotations that spell out with some precision how the general provisions are to be interpreted in the unique environment of each sector. The analytical work on barriers and regulations described in Chapter 10 and the sectoral annotations described in this chapter will thus form the foundation for the general exchange of binding commitments covering all areas of services.
1. Other useful material can be found in Feketekuty
and Aronson (1984b), Sauvant (1986), Jussawalla (1987), and Rada (1987).
Bruce, Cunard, and Director (1985) contains a comprehensive review
of the telecommunications regime in the major countries, including
recent reforms and the likely course of future regulatory reform.
References to further readings can be found in Snow and Jussawalla
(1986) and Feketekuty and Aronson (1986). |