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CHAPTER V Any concept that has been as little explored as trade in services lacks precision in language, and there is therefore a certain fuzziness in communications when people talk about the subject. As discussed in previous chapters, most people have only a vague notion about trade in services, and those who do know what the phrase means are likely to find few who agree with them on that meaning. This chapter is therefore devoted to an effort to clarify some of the differences in the concepts that are associated with trade in services, and to set out a consistent definition. Now that serious negotiations have been launched on trade in services, the debate over the definition of trade in services has increasingly become a debate over the scope of the negotiations. Those who want to include certain activities within the scope of the negotiations are putting forward expansive definitions that would cover the desired activities. Those who are opposed to the inclusion of certain activities in the negotiations are putting forward restrictive definitions that would exclude such activities from the negotiations. ALTERNATIVE DEFINITIONS OF TRADE IN SERVICES The precise definition of a word inevitably depends on context. When the phrase trade in services is used as a label for an observable category of economic activities measured by statisticians for the national income accounts, it has a definition that is determined by the needs of national income accounting and the use of national income data for the management of macroeconomic policies. When the term is used by economists to describe a concept in economic theory, the definition is determined by the logical structure of such theories. When businessmen talk about trade in services they often talk about it in terms of the competitive position of the firm vis-à-vis its foreign competitors. And when lawmakers and policymakers talk about it they inevitably seek to fit the definition to broader political and policy requirements.
The statisticians who are responsible for maintaining the national income and balance of payments accounts define exports of services as services that are sold to residents of another country, and imports of services as services that are purchased from residents of another country. A resident is anyone who has decided to live in a country for more than a temporary period.1 Trade is the sale of something valuable to someone living in another country. A service is any economic activity that does not result in the manufacture of a product. Alternatively, services can be defined as the output
of a list of industries, professions, and establishments-shipping,
bank banking, insurance, hotels, restaurants, barbershops, education,
en A few examples might help to illustrate how a range
of transactions would be classified in calculating exports and imports
of services for national income and balance of payments Services provided by an American travel company in Italy to German tourists result in Italian exports of services to Germany. If the travel company processes the invoices in the United Kingdom and handles legal claims in New York, the sale of services by the American company in Italy will also result in British and American exports of services to Italy. Definitions always have many gray areas and many of the dividing lines seem rather arbitrary. Why should the repair of a piece of equipment fall into the category of services, while the assembly of that equipment is called manufacturing? 2 Where do you draw the line between a resident and a temporary visitor? Is a computer tape full of information a manufactured product or a service, or is it both? 3 How do you distinguish between the residence of an individual producing services and the legal status of the company that employs that individual? 4 International trade statistics collected by the government for the purposes of calculating national income and balance of payments are primarily designed to answer a number of questions related to the functioning of a nation's economy, and the management of macroeconomic policy. For example, the government wants to know how much domestic output of goods and services and how much domestic employment were generated by sales of goods and services to other countries. The government also wants to know to what extent domestic consumption of goods and services is satisfied by goods and services produced abroad. Third, the government wants to know to what extent the country's supply of foreign exchange was increased by exports and reduced by imports of goods and services. A secondary purpose of government trade statistics
is to shed light on the competitive position of producers located
inside the country vis-à-vis producers in other countries.
Data on exports and imports of a particular service such as advertising
thus also provide information on how well a country's advertising
industry is doing in competition with industries in other countries. The Businessman's Definition of Trade in ServicesBusinessmen frequently have in mind a broader concept of trade in services based on the nationality of the firm producing the services. What counts for an individual firm is not whether a service was produced by a facility in the United States, but whether it was produced in a facility owned by the firm. In a world where global firms compete with each other head to head in a global market, this broader concept comes much closer to commercial reality, because a firm will ultimately succeed or fail in areas dominated by global competition on the basis of its ability to build up its share of the global market with all of its global facilities, not on the basis of its exports from the home country. The U.S. government recognizes that the broad economic interests of the country are advanced when American firms do well in the global competition. Policy officials responsible for international commerce are therefore interested not only in transactions between U.S. territory and foreign territories, but also in the total volume of sales made by firms owned by U.S. citizens. As a reflection of this interest, the U.S. government collects data on all international sales and purchases of services by American-owned firms, encompassing both exports and imports ports of services from facilities in the United States, and all sales and purchases made from U.S.-owned facilities abroad. These data are collected not every three months as the data on trade based on a territorial definition are, but once every five years. 6 For some purposes it might also be useful to have data on services produced abroad by a country's citizens living andworking abroad. After all, as long as someone has decided to retain home country citizenship, this must be an indication of an intention to return. Many expatriates living abroad also send back regular remittances to family members who have stayed at home. Income earned abroad by citizens can thus be viewed as an addition to national economic wealth. Indeed, some countries, including the United States, tax their citizens residing and working abroad. Few countries, however, collect useful detailed statistics about the services produced by their citizens residing abroad With so many different concepts of trade in services it is easy to get confused. To avoid fuzzy thinking we will use the phrase trade in services only for transactions that fit the statistical definition based on the residence of the producer, and we will use the phrase international transactions in services or international commerce in services for transactions that fall into the broader definition based on the nationality of the firm. The Policymaker's Definition of Trade in Services The definition of trade in services has become a hot topic of debate because it can determine which policies are subject to international trade negotiations. To label an activity trade can be tantamount to saying that it should be covered by a country's trade laws and international trade agreements, and that can affect both profits and bureaucratic turf. As commercial interests line up behind one bureaucratic faction or another, a debate over definition begins to look more like a gladiatorial contest. The definition of trade in services can affect the profits of particular enterprises and their owners since the application of domestic trade laws and international trade agreements to an activity carried out by an enterprise could either help or hurt an individual enterprise. An activity that falls within the definition of trade could benefit from government programs designed to assist exports or from international trade negotiations designed to relax foreign regulations that restrict exports. An activity that falls within the definition of trade could also be hurt if the home government agrees in the context of international trade negotiations to relax regulations that now restrict foreign competitors. Whether or not an activity is defined as trade can also determine whether policy issues that affect such activities come under the bureaucratic responsibility of trade officials. Trade officials in most governments have the responsibility to enforce domestic trade laws, to formulate trade policy objectives, and to negotiate international trade agreements. If an activity is labeled trade, it is generally assumed that trade officials will have the primary responsibility to coordinate government policy with respect to such activities and to negotiate international agreements on such policies.
The intimate relationship between trade in services and other economic activities raises questions about the extent to which the definition of trade in services should cover such activities. When should an international movement of people, information, money, and goods associated with trade in services be treated as trade in services and when should it be treated as immigration, a noncommercial flow of information, an international capital flow, or trade in goods respectively? Perhaps even more to the point, when should policy issues that arise in each of these areas be treated as policy issues concerning trade in services, and when should they be treated as immigration issues or issues of international information, international finance, or international trade in goods? Similarly, when should international communications and transportation be defined as trade in services and when should they be defined as domestic activities jointly undertaken with foreign entities that provide the same services domestically in the other country involved? When should policy issues affecting international communications and transportation be treated as trade policy issues, and when should they be treated as domestic or international regulatory issues? Finally, to what extent should an international cross-border transaction in services be defined as trade if it requires a substantial presence in the other country, including investments in local facilities? These questions are addressed in greater detail below. Immigration Under the definition of trade in services used by statisticians, someone who travels to Greece from Germany for a vacation is importing services into Germany as long as that person remains a resident of Germany. A person who travels from New York to Ankara to advise a foreign client on the construction of a bridge is exporting services from the United States as long as he or she remains a resident of the United States. There is no fixed definition of a resident, however, since each country has its own laws and regulations on residence. The statistical definition of trade in services involving movement of people is thus closely tied to national laws and regulations defining a resident. Under U.S. immigration laws and regulations, a foreign exporter who wants to meet clients in the United States can obtain a B-I visa under the treaty-trader principle. U.S. immigration officials until recently did not recognize the applicability of the treaty-trader principle to trade in services and therefore did not grant B- I visas to foreigners exporting services to the United States. At the urging of U.S. trade officials, U.S. immigration officials have been willing to consider applications for B-I visas by foreigners exporting services to the United States, but they have yet to develop a workable definition of trade in services for this purpose. Generally they have granted such requests only where more than half the total value of services sold in the United States is produced abroad. There are few policy issues as sensitive as immigration Policy. What that means is that most countries assign a high priority to the objective of controlling entry by foreigners and lower priorities to trade and other policy objectives. At the same time, international trade in services could not flourish if people could not move from one country to another for temporary periods. The definition of trade in services with respect to the movement of people is therefore one of the most difficult issues that negotiators will have to face in developing future agreements on trade in services.
Under the definition used by statisticians, an international flow of information results in trade in services when a resident of another country pays for the information. A letter to Aunt Nellie is not trade in services, nor is a public report on recent events. However, a news report by a press agency or a consultant's report on bookkeeping practices in Upper Agraria is counted as trade in services; so is information supplied by corporate headquarters to a subsidiary or branch abroad when that subsidiary or branch has to pay a fee to corporate headquarters. Some representatives of the press and some representatives of multinational corporations have expressed great concern about the classification of foreign press reports or internal corporate transfers of information as trade in services. They are concerned that a trade perspective could persuade some governments to impose tariffs or other restrictions on such flows in the mistaken belief that it would help protect a domestic industry. This is a rather surprising argument to trade officials since the major objective of trade negotiations is to reduce barriers rather than to impose them, but the concerns that have been voiced are understandable in light of the public debate in France, Brazil, and some other countries on taxing international information flows. Put another way, some people would argue that principles like freedom of the press and the free flow of information are more powerful arguments for maintaining a free flow of information than the free trade paradigm. Government regulations aimed at a number of policy objectives can affect trade in services in the form of international information flows, including the protection of privacy, the maintenance of records so the government can discharge its fiduciary responsibilities, the protection of intellectual property, and the preservation of reliable public communications. In each of these areas, a balance must be achieved between the trade policy objective of facilitating the flow of information as a channel for trade in services and the domestic regulatory objective. The conflict over the appropriate scope and definition
of information-related trade is particularly difficult in the area
of culture. Many governments believe that they have an important responsibility
to preserve the national cultural identity as expressed through the
media and the arts. Many of these governments also see the media and
the arts as channels for public education. These governments tend
to take the view that cultural activities should not be treated as
commercial activities but as public utilities provided by the state
or closely supervised by the state. Those who support this point of
view are also inclined to argue that international television and
radio broadcasts or international sales of newspapers, books, films,
or videotapes cannot be treated as just another form of trade. Most
commercial producers of newspapers, books, and so on show little reluctance
to seek the help of trade negotiators when foreign barriers limit
their sales abroad. Money can move from one country to another for a variety of reasons-in payment for goods and services, for the acquisition of financial or real assets, as a gift to a relative, or to transfer an inheritance. An international movement of money per se is not trade in services, but it can lead to trade in services if a foreign bank or investment house financial management performs services.7 Under the definition used by statisticians, the financial management services provided by a London bank to a resident of Hong Kong would be counted as an export of services by the United Kingdom and an import of services by Hong Kong, though no country has good data -on exports of financial management services. Contrary to common belief, however, interest, dividends, profits, or capital gains earned by the money invested in Britain have nothing to do with trade in services. They are treated as a return on capital, a separate category in the balance of payments accounts. There has been considerable reluctance on the part
of banks and finance ministries to recognize that financial management
services provided to residents of other countries constitute trade.
Banking and other financial activities are viewed as exclusive activities
that should be carried out on the basis of their own genteel rules
of the game, and not mixed together with the kind of bargaining that
takes place in trade negotiations. Finance ministries naturally also
have an interest in keeping trade officials off their bureaucratic
turf: Some of the more dynamic banks have gradually come to the view,
however, that a trade perspective could be beneficial to the removal
of restrictions on their activities abroad. Trade in Goods When is an international movement of goods trade in services and when is it trade in goods; or when is a policy that affects the international movement of goods a trade in services issue and when is it a trade in goods issue? Does it make a difference? Yes, it will make a difference because there are no current international rules for trade in services, and future rules for trade in services are likely to be somewhat different from the existing rules on trade in goods. Depending on whether they wanted their activities
covered by rules for trade in goods or by future rules for trade in
services, representatives of various enterprises have argued over
the definition of trade in services that takes the form of an international
movement of goods. The most common issues of debate have been the
following: 1) Should a machine that has been repaired abroad be treated
as an import of a machine or as an import of repair services? 2) Should
a computer tape that contains software and accounting information
be treated as an import of an unenhanced computer tape, as an import
of a computer tape whose value has been enhanced by the addition of
the software and accounting information, or as an import of computer
software and accounting services? A conceptual difficulty arises in connection with the transportation of internationally traded goods. Who is the buyer of the transportation service, the exporter or the importer? Even though the exporter buys the transportation service, isn't the importer ultimately the real buyer of the service? This can be very confusing, and statisticians therefore usually treat all transportation associated with exports of goods one way and all transportation associated with imports of goods another way, no matter who actually buys the transportation service. Under the cash, insurance, and freight (CIF) method of valuing trade, the cost of transportation is treated as if it were purchased by the exporter and, under the free on board (FOB) method of trade, the cost of transportation is treated as if it were purchased by the importer. The representatives of some transportation firms have argued that all international transportation should be treated as trade in services, even if it is sold to domestic residents. "Their argument is that you cannot evaluate the size of the market that is contested between domestic and foreign transportation firms if you treat the sale of international transportation services to domestic residents differently from the sale of international transportation services to residents of other countries, or more to the point, if you do not collect and publish data on international transportation services provided to domestic residents on the same basis as international transportation services provided to foreign residents. This is probably not a very persuasive argument for changing the basic definition of trade, but it is certainly a persuasive argument for the collection and publication of more comprehensive data for analytical purposes. The representatives of some communications companies have made the opposite argument that international communications should not be treated as international trade since each international telephone call is serviced both by the telephone company in the country where the call was initiated and by the telephone company in the destination country. They argue that basic international communications services should therefore he treated as two separate domestic transactions, one in the country where the call was initiated and another in the country to which the call was made. Another argument that could be made is that almost all international telephone calls are purchased from a domestic telephone company and, therefore, should always be treated as domestic transactions. The real reason why some well-entrenched communications companies advance these arguments is that they do not want to subject themselves to negotiations that could reduce barriers to international competition in this area. For the same reason, new entrants into the international communications area make exactly the opposite arguments.
Services that are sold in a foreign country usually require additional inputs in that country, and in some cases the value of inputs supplied in the importing country is greater than the value of inputs supplied in the exporting country. For statistical purposes, the utilization of inputs in both the exporting country and the importing country does not pose any difficulties in defining trade in services. The service inputs provided in the exporting country are defined as trade in services, and the inputs provided in the importing country are defined as the domestic production of services. If the facility producing the local inputs in the importing country is owned by the foreign producer, the production of those inputs can also be defined as the product of foreign investment activity. A problem of definition arises with respect to policies that could affect the ability of a foreign producer to deliver services in the foreign market. Should policies that affect the ability of a foreign producer to supply services to a foreign market be treated as trade issues when the issue concerns the right of the foreign producer to invest in a facility that will supply the necessary local inputs? Many exporters of services argue that such policies should be treated as a trade issue because they affect their ability to sell services abroad. Others argue that the sale of services that require substantial inputs in the importing country should be treated as a foreign investment issue rather than as a trade issue. The reason for this debate is that it has traditionally been assumed that trade negotiations should address trade issues and not foreign investment issues. 8 Whether a policy is defined as a trade policy issue will therefore determine whether that policy will be subject to rules and agreements negotiated in the trade area or not. Without the ability to acquire local inputs, the scope for trade in both goods and services would be quite limited. In recognition of the need for local inputs, the existing rules for trade in goods provide that foreign exporters should have the right to be treated the same way as local producers with respect to the acquisition of local inputs; this is the so-called national treatment principle of the General Agreement on Tariffs and Trade (GATT). The national treatment principle in the GATT, however, does not give foreign exporters the right to own facilities (such as a car dealership) that produce the local inputs. Any rules that are developed for trade in services will have to address this issue and come up with an approach that reflects the special character of services. We will explore this issue in later chapters.
How a transaction is defined thus can have major policy implications, particularly in an area like trade in services, where the issues are complex and governmental objectives are not clearly delineated. The debate over the content and shape of future international agreements on trade in services to a considerable extent revolves around the scope of trade negotiations in services, and by implication around the definition of the term trade in services as used in a policy context.The resolution of this debate may well lead to a new definition of trade in services for policy purposes that will cover some but not all of the activities associated with the international movement of people, information, money, and goods, and the use of facilities in the importing country. At the same time, international communications and transportation issues are likely to be treated as both trade issues and sectoral regulatory issues. Where the boundaries will be drawn no one will know until the end of the negotiations.
1. Each country has its own definition of residence
embedded in its visa, immigration, and tax laws. For statistical purposes,
a resident is normally someone who lives in a country for more than
three months, though some might not consider someone a resident unless
that person lives in the country for at least one year. |