| return to Articles & News |
| CHAPTER
VIII
One of the things the official wanted to accomplish in Washington was to explain to U.S. trade officials why the regulations in question were fully legitimate and essential for implementing Japanese communications policy. The issue concerned the use of leased communication lines for accessing data bases stored in U.S. computers. The Japanese regulations did not permit the use of such lines if they were connected to more than one computer in the United States. The Japanese authorities were concerned that such interconnections would enable data base users in Japan to use the data lines for making telephone calls to the United States, thus bypassing the public telephone monopoly. After thanking the Japanese official for his explanation, I explained in turn why the current regulations made it impossible for Japanese clients to take advantage of the full range of data provided by U.S. vendors of information services. The commercial viability of selling American information services to Japan depended on the use of leased lines (which are cheaper for heavy users) and the ability to access over a hundred data bases stored in dozens of computers all over the United States. This regulation, in effect, made the service unavailable to potential Japanese clients. Both sides of the issue having been clarified, the question that needed to be considered was whether regulations could be developed that would deal with Japanese concerns about bypass while permitting full access to data bases in the United States. The Japanese visitor said he would think about it. A few months later Control Data and other American companies received the green light to proceed on the basis of agreed precautions for avoiding abuse. At the time this conversation took place, the United States and Japan had a large number of other trade issues before them. While no direct link was ever made to a number of other issues that concerned Japan, the link had been made implicitly by putting the issue on the agenda for bilateral consultations by trade officials. Having obtained U.S. recognition of the legitimacy of their objectives, and recognizing in turn that U.S. trade officials would continue to pursue the commercial issue, the Ministry of Post and Telegraph decided to solve the problem its way by quietly changing its interpretation of the regulations. · This encounter is cited to illustrate the
application of a trade policy framework to international services
issues. It provides some insights into The purpose of these laws, regulations, and rules is to assure that commercial enterprises follow market rules, that policymakers do not adopt beggar-thy-neighbor policies that advance one country's interests at the expense of another, and that broader social goals are preserved. Political pragmatism and commercial savvy dictate a certain mercantilist bent to trade policy, which emphasizes the value of exports more than imports, but every trade official knows that ultimately the country benefits both by exporting what it can produce most efficiently and by importing what others can produce at less cost.
The goal of trade policy is to achieve economic gains from trade. To achieve this goal, trade policy thus seeks to establish the right economic conditions for the achievement of economic gains. Trade will lead to economic gains for each country if exporters and importers follow market signals,- if intervention by other governments does not excessively distort market results, and if market decisions are adjusted for any nonmarket costs and benefits of trade. It is the responsibility of trade officials to see to it that the behavior of market participants and governments approximates the conditions necessary for the achievement of mutual economic gains from trade. Trade policymakers pursue this goal by developing and negotiating international trade rules to guide both the behavior of enterprises engaged in international trade and the behavior of governments when _they adopt policies that affect trade. Generally, these trade rules are based on principles drawn from international trade theory and are designed to establish the conditions for mutual economic gains from trade. Trade officials have to be sensitive to the impact of trade policy measures on both the economic interests of different industries and the achievement of policy goals in other areas of domestic and foreign policy. In order to pursue an expansionary trade policy, it is usually necessary to convince a large number of business leaders, workers, and policy officials that proposed measures are fair and advantageous to the economic interests of the country as a whole. The process that is used to manage trade policy is usually as important as the outcome of trade policy. Trade officials engage in extensive consultations at home with managers of domestic enterprises and officials responsible for other areas of policy, and they meet regularly with officials from other governments to consult on specific trade problems and to negotiate longer term agreements that establish the ground rules for the conduct of trade. The most important trade agreement is the General Agreement on Tariffs and Trade (the GATT), which provides both a set of trade rules that are now accepted by ninety-six countries and an institutional setting for negotiating multilateral agreements on the reduction of trade barriers. Many countries have also negotiated more stringent trade rules bilaterally with individual countries, or plurilaterally with a small number of other countries. In managing their trade policies, countries have to balance the political concepts of national sovereignty and independence, and the economic reality of interdependence. As we saw, the trade rules reflect this balance by limiting government intervention in trade but not in the domestic market. The rules provide some indications of how this balance is to be maintained but leave a very considerable amount of ambiguity and room for interpretation. When exactly does a domestic measure create unacceptable harm to the trade interests of another country? When should a country be able to expect its trading partners to accept an action it must take to protect an important domestic social objective? The rules provide some guidance for sorting out differences. The system could never work, however, if countries were not also willing to accept the spirit of the delicate balance built into the rules, both in managing their own policies and in evaluating the policies of their trading partners.
The overall goal of trade policy is to maximize the economic gains that can be obtained from an expansion of international trade, while keeping the adjustment costs within politically acceptable limits. Since trade will lead to economic gains only if certain conditions are fulfilled, trade policy has to establish the necessary conditions for mutually advantageous trade. Moreover, since trade will result in a redistribution of income among industries, policy also has to keep the pace and the cost of adjustment for affected industries within socially acceptable limits. We saw in Chapter 7 that the expansion of trade can adversely affect the economic interests of workers or shareholders in the least competitive industries. Even if the economic gains of the country as a whole far exceed the losses of a few, policy cannot ignore the rights and interests of those who lose. Legitimate government depends not only on the support of the majority but also on the passive acceptance of government policies by those who disagree with them. Trade policy must therefore take account of the interests of those who are adversely affected by an expansion of trade. We also saw in Chapter 7 that some industries that are not internationally competitive today could become highly competitive if given enough time to develop the necessary skills and to exploit the economies of scale that come from growth. This is the case for so-called infant industries in developing economies. This is sometimes also the case with mature industries in developed economies that have not kept pace with advances in technology and management techniques. Trade policy has to take account of the possible need of such industries for time to develop the means for becoming competitive.
The international trade rules contained in the GATT are based on a number of basic concepts that are derived from economic theory. The key principles are as follows.1 The Market Principle. Central to broad public acceptance of the redistribution of income that results from trade, the market principle is a cornerstone of the trading system. Market competition is also fundamental to the ability to demonstrate mutual gains from trade on the basis of the theory of comparative advantage. Through a process of negotiations, each government that subscribes to the GATT rules has agreed to limit tariffs on imports to- a maximum rate specified for each product and not to erect other barriers to imports. Governments have also agreed not to subsidize their exporters of industrial products, and to limit export subsidies for farm products. In an ideal world, it would have been desirable not
only to limit government intervention in trade but also to establish
rules concerning market competition inside national markets. National
governments, however, have not been willing to commit themselves explicitly
to manage their domestic economies on the basis of market principles.
The international trade rules thus do not require competition in domestic
markets. Governments are not prohibited from intervening in their
economies provided they do not discriminate against foreign producers,
and governments are allowed to establish domestic monopolies provided
such monopolies follow market rules in their dealings with foreign
enterprises. The reciprocity principle is the source of all discipline in the GATT system. The GATT system works because each country knows that if it seeks to obtain unfair advantages through unilateral actions at the expense of other countries, such countries will surely retaliate. On the other hand, the reciprocity principle also facilitates liberalization, because it enables each government to provide a convincing rationale for reductions in barriers that adversely affect specific economic interest groups. The government can thus say: We cannot expect other countries to take painful steps that will help us, unless we are prepared to take some painful steps ourselves. The Nondiscrimination or Most-Favored-Nation (MFN) Principle. Governments must treat all foreign exporters alike, regardless of their country of origin. This principle is designed to encourage global market adjustment and avoid the politicization of trade issues. It has the supplementary benefit of simplifying customs procedures. In order to minimize conflicts with the reciprocity principle, negotiations in the GATT are carried out on a multilateral basis, giving each country the opportunity to evaluate the benefits of such negotiations both on a global basis, and on a bilateral basis with individual countries. In recent years, however, the tension between the MFN principle and the reciprocity principle has led to the growing application of the MFN principle on a conditional rather than an unconditional basis. On the basis of conditional MFN, a country is able to obtain the benefits of a new agreement only if it is willing to sign the agreement. The Legitimacy of Domestic Regulation Principle. The pursuit of economic gains based on a market calculus should not preclude the attainment of social objectives in areas such as morals, public health and safety, environmental standards, and social equity. The trade rules give governments the right to intervene in trade if trade adversely affects the achievement of enumerated social objectives. The National Treatment Principle. Governments must implement domestic laws and regulations in an evenhanded manner with respect to domestic and foreign producers. In other words domestic regulations cannot be enforced selectively in a way that favors domestic producers over foreign producers. By limiting the ability of governments to intervene on behalf of their own producers, the national treatment principle reinforces both the market principle and the reciprocity principle. It also protects the legitimacy of domestic regulation by saying that domestic regulations should not be used as hidden barriers to trade. The Orderly Adjustment Principle. Trade can create difficult social adjustment problems, and countries should therefore have the right to stretch out reductions in trade barriers or to limit the growth rate of imports, if a high rate of growth in imports would create serious adjustment problems for an affected domestic industry. This principle is incorporated in the safeguard provisions, which allow countries to limit the growth of imports under specified circumstances. Application of the orderly adjustment principle has also led to the practice of phasing in any negotiated reductions in trade barriers over a number of years. The international trade rules contained in the GATT, and the more general trade principles on which they are based, maintain a delicate balance between the right of each country to intervene in its own economy in the way it sees fit and the obligation of each country to allow market forces to determine its trade with other countries. Policy measures that are explicitly directed at exports or imports are quite clearly subject to the limitations on government intervention set by the rules. The difficulty arises with respect to domestic economic policy measures that affect trade. It is difficult for a government to intervene in its domestic market for any tradeable product and not affect trade. The rule of thumb, therefore, is that a country should avoid domestic policy measures that have a disproportionate effect on trade and that significantly injure the trade interests of other countries.
The smooth operation of the system also depends on certain procedural principles, which help to avoid misunderstandings between countries and provide a way to work out mutually acceptable accommodations when domestic measures create trade problems. These procedural trade principles are incorporated in most trade agreements. The key ones are as follows. The Transparency Principle. Governments should notify foreign exporters and their governments of the details of policy measures that affect international trade and the intended objectives of such measures. Adherence to this principle can prevent misunderstandings about facts, which occur fairly commonly because of differences in language, culture, and ways of doing business. The more credibility a government can achieve in the clarity and integrity of its policies, the fewer suspicions it will face from its trading partners. The Consultation Principle. A government that is concerned about the trade effects of a policy measure taken by another government should be able to discuss the issue with the government concerned. In the first instance, such consultations serve to clarify the facts regarding the policy measure in question and its effect on trade. Once there is reasonable agreement on the facts or, at least, once differences in the interpretation of the available facts have been identified, the consultations can provide a mechanism for working out a mutually acceptable accommodation. The Dispute Settlement Principle. Countries that cannot resolve bilateral trade disputes through bilateral consultations should submit such disputes to an agreed dispute settlement procedure, in which trade experts are given an opportunity to evaluate the facts and arguments_ presented by the two sides.
Trade policy officials advance their countries' commercial policy objectives through bilateral negotiations with individual governments and multilateral negotiations in organizations such as the GATT. The GATT provides a global framework for negotiating the reduction of trade barriers and the development of international trade rules. The GATT serves as the international trade organization, and would be called that if Congress in one of its contrary moods had not turned down the charter for the International Trade Organization (ITO) during the early postwar years. In addition to the trade rules contained in the GATT, the ITO would have established international disciplines in many areas not traditionally covered by the GATT, such as competition policy, investment policy, and services. Bilateral discussions and negotiations between trade
officials of two countries can provide a relatively flexible basis
for resolving bilateral trade issues that touch on sensitive areas
of domestic policy. While no government may be willing to concede
another government's right to interfere with its domestic regulatory
policies, it may nevertheless be willing to make some pragmatic adjustments
in its regulations to accommodate the commercial needs of one of its
trading partners. Since the staff available to discuss issues with foreign governments is limited, trade officials have to be selective when adding issues to the bilateral agenda. Problems brought to the attention of trade officials are reviewed with respect to the available facts, the effort that has been made by the company itself to solve the problem through contacts with foreign government officials, and the policy issues at stake in the case. If the problems seem real and pressing, the company has done everything it could to argue its case with the relevant regulatory authorities, and the policy issues at stake seem manageable, the issue is included in the shopping list of bilateral trade issues to be taken up with trade officials of the government concerned. If bilateral consultations fail to resolve a trade problem, the bilateral process takes on the character of a negotiation. In this stage of the process a direct link is established between resolution of the problem and possible actions the U.S. government might take. Progress on issues that have been raised by the other government are tied directly to a resolution of the problem. Information is leaked about possible retaliatory actions. Hints of retaliation can be a very effective tool for bringing an issue to a head, particularly if the proposed retaliatory action can be designed to have a maximum political impact on industries or regions of the country that might be putting political pressure on the government not to permit greater competition from foreign firms. In some cases, where it is possible to identify specific politicians or interest groups that are resisting resolution of a case, it is possible to tailor the retaliation list in such a way that it will have a maximum impact on a politician's constituency, or an interest group's other interests. Bilateral negotiations on an issue-by-issue basis are very labor intensive, however, and the limited number of trade officials available for such negotiations sets a practical limit on the number of issues that can be resolved through a bilateral process. Governments therefore often find it useful to negotiate more comprehensive agreements with another government on a broad range of trade issues. Such agreements can establish some general ground rules for the development and administration of government measures that could affect trade. They also give businesses some certainty about the process a government will follow in issuing regulations that are likely to affect trade, and the principles they will apply in seeking to minimize any adverse trade effects. Since such broad agreements cannot deal with all detailed circumstances that could arise, however, they tend to complement and supplement the more ad hoc type of negotiations, rather than to substitute for such negotiations. The key weakness of all bilateral negotiations is that they can only apply to trade between the two countries involved. Multilateral trade negotiations provide an efficient framework for the development of broadly applicable international trade rules and for significant, across-the-board reductions in trade barriers. In a multilateral negotiation, each country, in effect, is negotiating with the rest of the world simultaneously, and can concentrate all of its commercial leverage on whatever it wants to achieve. The shortcoming of multilateral negotiations is that it is far more difficult to find solutions that fit the great diversity of commercial interests represented and can therefore take a long time. The rules that emerge from the process tend to leave excessive room for national interpretations. Multilateral trade negotiations take place under the GATT, which was negotiated after World War II. The GATT today also serves as the most widely accepted international trade organization, its rules accepted by ninety-six countries. Significant negotiations in the GATT take place in the context of so-called rounds of multilateral trade negotiations, which take place about once every ten years and last three to five years. The most recent round of negotiations was launched in Punta del Este, Uruguay, in September 1986, and is therefore called the Uruguay Round. The previous round of negotiations was the Tokyo Round, which was held from 1973 to 1979. It is sometimes argued that bilateral and multilateral negotiations are incompatible because the former inevitably lead to preferential arrangements between any two countries, while the objective of the latter is to provide common ground rules for all the countries willing to accept the international trade rules of the GATT. Multilateral negotiations by themselves, however, can never achieve as much specificity as bilateral negotiations, which thus are always a necessary complement to multilateral negotiations. The real question is whether the results of such bilateral negotiations should result in preferential arrangements, or whether everyone might not be better off if all countries agreed to generalize commitments derived from bilateral negotiations. This is the most-favored-nation principle. Application of the most-favored-nation principle clearly leads to a superior outcome, provided all countries are prepared to accept equivalent commitments. Where that is not the case, public opinion may not support generalizing bilaterally negotiated commitments that create new, substantive obligations. In such cases, it may be desirable to permit preferential bilateral or plurilateral agreements, and to limit the application of the most-favored-nation principle to issues on which multilateral agreement is possible. Given the complexity of the issues in services, and the great diversity of national regulatory philosophies, a hybrid approach to rulemaking in trade in services may be inevitable.
Trade policy officials tend to acquire certain attitudes in the course of their work that influence the way they approach issues and how they interact with businessmen and other officials. While it is somewhat foolhardy to generalize about something as ephemeral as attitude and approach across differences in personality, culture, and political organization, the task of trade officials is not very different from one country to the next, and that seems to foster a common culture. The trade policy mindset is as much apart of the trade policy framework as the GATT principles and as the negotiating tools used by trade officials. One of the hard facts of life in trade policy is that a successful implementation of policies requires the approval and consent of a large number of people-business leaders, politicians, officials from other government departments, and officials from other governments. Another fact of life is that success in expanding trade requires a pragmatic attitude toward issues. It is always easy to impose restrictions on imports, but to persuade other countries to remove barriers requires an ability to reconcile domestic policy requirements with hard trade opportunities. Trade officials also inevitably find themselves arbitrating conflicts among different interest groups.
The goals, principles, procedures, and tools that make up the trade policy framework can be applied to trade in services as well as they can be applied to trade in goods. This means not that trade policy discussions should displace existing international agreements and institutions in individual service sectors, but that trade agreements and institutions can usefully complement existing international sectoral arrangements. International trade theories can be used to show that international trade in services can lead to the same kinds of economic gains for countries as international trade in goods. It follows that countries could gain from efforts to expand trade opportunities through a reduction of barriers to trade in services. We saw in Chapter 7 that under certain circumstances completely free trade in services, like completely free trade in goods, could create more costs than gains. For example, a sudden and rapid increase in imports of construction services could create major adjustment problems for workers in that industry. In an underdeveloped economy, unconstrained imports can prevent infant industries from developing economies of scale or acquiring the knowledge and experience that would make them internationally competitive. Subsidized or dumped exports of services by a foreign monopoly could drive viable domestic enterprises out of business unfairly and could leave the country open to exploitation. It is the responsibility of trade officials to identify the circumstances under which trade does not lead to mutual economic gains or creates unacceptable social costs, and to develop a set of policies that will either establish more favorable circumstances for trade or limit trade if other policy measures cannot correct the problem.
The production and sale of manufactured goods are also regulated for the protection of consumer standards, public health and safety, the environment, morals, and national security. Trade rules allow governments to intervene in trade to achieve these goals, while at the same time committing governments to minimize the trade-distorting effects of such intervention. The Standards Code negotiated in the last round of multilateral trade negotiations provides a model for dealing with regulatory issues. The difference between trade in goods and trade in services is that most trade barriers in services are embedded in domestic regulations, while relatively few barriers to trade in goods are embedded in regulations. The negotiation of the standards was largely a form of preventive medicine, designed to prevent new barriers. The major barriers to trade in goods have been in the form of tariffs and quotas imposed at the border, and many of the trade rules that deal with issues such as standards were designed to prevent governments from circumventing their commitments to reduce the protection at the border. For reasons discussed in the first few chapters, governments have found it difficult to control the flow of services across borders, and instead have focused their controls on the domestic sale of services. Since services are extensively regulated, most governments use the domestic regulatory machinery to control the sale of services to foreign suppliers. Any effort to liberalize trade in services has to concern itself principally with regulations, and that is likely to require a somewhat different approach to trade negotiations in services. Inevitably, the line between legitimate domestic regulation and trade barriers will be more difficult to draw for services than it has been for goods. It will be far less clear when governments violate trade commitments in services. Considerable weight will fall on bilateral consultations and multilateral procedures for dealing with disputes over potential violations of commitments. The temptation in negotiating trade agreements in services will be to negotiate documents covering every regulation in existence, but that not only will prove impossible to negotiate but also could prove to be self-defeating by embedding too many restrictive domestic regulations in trade agreements. The rules that would come out of such a negotiation would inevitably reflect the most restrictive domestic regulatory regime, rather than the most liberal. While trade negotiations in services cannot be aimed at the detailed harmonization of national regulatory systems, any trade negotiations must address the trade implications of different regulatory regimes. One of the major challenges will be to devise a set of rules to govern trade between countries with highly restrictive domestic regulatory regimes on one hand and countries that have substantially deregulated their own industry on the other hand. Without the recent -trend- in many countries toward deregulation, the opportunities for liberalization on a multilateral basis would be far more limited. Any new regime for trade in services will probably
have to provide for different levels of market access, depending on
the extent to which the domestic regulatory system allows open competition.
Thus while the negotiations should not focus on the domestic regulatory
regime per se, the domestic regulatory regime has to be a factor in
any negotiation. Some services such as transportation and communications are typically provided by monopolies. The most common rationale for a monopoly is that large economies of scale create natural monopolies. Transportation and communications usually require large investments in network equipment, and the establishment of the network tends to account for a large portion of the costs of providing such services. These high overhead costs create large economies of scale. Another argument advanced is that these services are
essential for public welfare and that their suppliers should be responsible
for providing uniform service for all segments of the public at all
times, regardless of cost differentials. A monopoly is needed, it
is argued, because only a monopoly is in a position to cross-subsidize
uneconomical segments of the market. A few years ago these arguments might well have been accepted without much debate. The underlying economic structure of these industries has been significantly altered in recent years, however, as a result of advances in technology and expansion of the market. Competition among a larger number of suppliers has now become possible in many segments of these industries. In light of these fundamental economic shifts, a number of governments have decided to deregulate large portions of these industries, or at least to permit and foster more competition. While competition remains fairly limited in many countries, international competition can no longer be ruled out. It is becoming increasingly clear that the old rules of the game in both international transportation and communications have become less and less relevant to the more competitive segments of these industries. The divergence among countries with respect to the degree of regulation makes the current rules even less generally acceptable. There is a need to rethink international rulemaking in these industries, with complementarity between rules developed in a regulatory context and rules developed in a trade context. In developing the new rules, it will probably be useful to segment each of the industries into sectors with different degrees of competition, based on common economic criteria. While differences are likely to remain in the degree of competition allowed or encouraged in different countries, the underlying economic fundamentals should ultimately persuade a majority of countries to adopt somewhat similar approaches to various segments of the market. Thus, for example, we should expect most countries in due time to allow broad competition for value-added and business communications services, to organize a limited form of competition for long-distance public telephone services, and to preserve a form of monopoly for the delivery of local public telephone services. It would make sense to give trade rules greater emphasis and regulatory rules less emphasis in the most competitive segments of the market, and to give trade rules less emphasis and regulatory rules greater emphasis in the least competitive segments of the market.
An important characteristic of trade in services that makes it different from goods is that it is dependent on the international movement of people, money, information, and goods. Services cannot be traded unless they become incorporated in people, money, information, or goods. Trades in goods would be severely hampered without people, money, information, and services moving back and forth across national borders-but it would still be possible to have at least some trade in goods. This makes trade in services different. The fundamental question is whether issues such as the granting of visas to service workers, foreign exchange controls, and data flow issues should be covered by trade negotiations. The movement of people, money, and information from one country to another are issues that go far beyond trade in services. Yet, as we have seen throughout this book, international trade in services is inextricably linked to movements of people, information, money, and goods. Policies dealing with the movement of people, money, and information raise sensitive issues of national policy in many countries. While most democratic countries permit a relatively open flow of people, money, and information into and out of the country, national governments have been most reluctant to constrain their freedom to control such flows. It is equally clear, however, that an agreement on trade in services could be frustrated by restrictions on the movement of people, information, money, or goods. Any services agreement therefore will have to address these issues. The question is how. Immigration. The admission of foreigners into a country is one of the most sensitive issues with respect to trade in services. Few other issues generate as much emotional political debate as the admission of foreign workers, and it is doubtful that countries are prepared to treat this issue on a purely commercial basis. Most countries consider this area of policy a purely internal affair, not subject to negotiation. Despite these sensitivities, most countries- permit considerable movement of people in and out of the country for commercial purposes, and many countries have signed bilateral visa agreements. One approach to this issue could be to build on the treaty-trader principle that has been applied in friendship, commerce, and navigation (FCN) agreements. Under the treaty-trader principle, persons engaged in international trade are granted temporary admission to a country in order to negotiate or facilitate exports or imports. The applicability of this principle to international trade in services, however, remains relatively undefined in most countries. There may be some scope in building on the existing structure of agreements in this area. U.S. trade officials have intervened from time to time with the immigration authorities in specific cases to obtain the application of the treaty-trader principle to trade in services. The question at issue in most cases has been over the extent to which work performed in the United States as against work performed in the home country should be treated as trade. The emerging practice has been to limit the work performed in the country to less than half of the total value of the services exported. Some economists have expressed concern that an international trade agreement in services that covers international information or data flows but not the movement of people would result in a distortion of trade patterns. Services that can be delivered in the form of transborder data flows would grow faster than trade in services that depend on the movement of people. That is all very true, but it is not clear that leaving out visa issues would be any worse than leaving out any other set of government policies that affect trade in services. Any partial liberalization leads to a distortion of the patterns of trade, but that does not mean that such a partial liberalization does not lead to economic gains from the trade that is generated. A more convincing argument has been made by Jagdish Bhagwati (1984a, 1985, 1986) and others that the comparative advantage of some countries lies in the plentiful supply of cheap labor, and that they would lose their major source of potential economic gain if any agreement did not cover the services that could be provided through a temporary international movement of people. International Monetary Flows. The movement of money is only a little less sensitive than the movement of people. National controls on international financial flows are covered by existing rules of the International Monetary Fund, and the international trade rules of the GATT contain provisions dealing with balance of payments restrictions that affect international trade in goods. Efforts are underway in the Uruguay Round to strengthen the GMT discipline, and this could serve as a basis for equivalent rules for trade in services. International Data Flows. The issue of international data flows is a relatively new issue, and as such not subject to extensive regulation by an entrenched bureaucracy. The negotiation of international trade rules thus seems a more manageable challenge. Many industry representatives have argued, in fact, that an agreement on international data flows should constitute a core element of any international trade agreement in services. The issue of international information flows is nevertheless a very sensitive issue for some countries, raising questions about national control over the dissemination of cultural material and giving foreigners access to information about national assets. Countries that restrict freedom of the press and the dissemination of information more generally will obviously resist commitments in this area. Industrial countries took a first step toward the development of an international regime on international information flows with the adoption of the OECD Declaration on International Data Flows in 1985. This declaration commits countries to minimize barriers to the international flow of information. It recognizes the right of countries to establish regulations for the protection of individual privacy and national security, and the maintenance of vital data within national borders, but it also commits countries to minimize the disruption of international flows of data in connection with the enforcement of such regulations. It has been suggested that another principle that should be established in an international trade in services agreement is the right to plug equipment into the public communications network for the purpose of transmitting services from one country to another.
Most services sold to consumers and small businesses are not easily sold across national borders, or even over long distances within a country. The delivery of these services depends on close contacts between producers of services and consumers of services; so they are ideally produced where they are consumed. If foreign suppliers of these services want to sell in a particular market, they have to invest in local production and distribution facilities or have to be able to lease such facilities from local owners. The work performed in local facilities, however, is usually only part of the production process. Many of the technical, developmental, managerial, and administrative service inputs are typically produced abroad. In light of this close link between trade and investment, one could argue that the right to invest in local facilities for the production and distribution of services should be addressed in any trade negotiations in services. Others have argued conversely that services produced by local facilities do not constitute trade in services, and, therefore, should not be addressed in trade negotiations. An even closer link between trade and investment policies is created when a government imposes an investment requirement as a condition for the sale of services. Many countries, for example, require foreign insurance companies and banks to establish local branches or subsidiaries before they are allowed to sell such services locally. In these situations where the government itself makes the link between trade and investment, the right to invest becomes a clear trade issue.
Until a few years ago, economists and government officials did not look at the delivery of services as a form of trade. The traditional way of looking at international services was as a stream of services produced by an international delivery system. Thus scholars wrote textbooks and governments formulated policies largely in terms of an international postal delivery system, an international communications system, and an international air transport system. The international delivery system in turn was seen as nothing more than an international extension of national delivery systems. The systemic view or model of the international delivery of services grew naturally out of a domestic regulatory approach. Services have thus been treated as a special category of economic activity that needed to be supervised more closely by the government than other forms of economic activity. It has just been taken for granted for a long time that the government should `be responsible for the way the mail is delivered, how banks and insurance companies manage other people's money, how well doctors, accountants, and architects perform their services, how well the phone system works, and whether trains run on time. The traditional regulatory approach to international services is well demonstrated by the allocation of responsibilities between domestic regulatory agencies and executive agencies in the United States. Authority to regulate services provided by foreigners is largely in the hands of the domestic regulatory agencies, even though the president is otherwise responsible for foreign relations. The president and executive agencies have had very little authority to decide whether foreigners should he allowed to provide a broad range of services, and the conditions under which they should be allowed to do so. While regulatory agencies are theoretically not authorized to negotiate with foreign governments, they have been thrust into that role in practice by the need to reconcile differences between domestic and foreign regulations with foreign regulatory authorities. In the communications area, for example, the only power delegated to the president by the Congress is the right to determine the placement of submarine telephone cables from abroad. All other regulatory decisions have been in the hands of the independent regulatory agencies. Economic analysts and policymakers who thought about international services in the past thus largely thought of services in terms of interconnected national systems for delivering various services internationally: a cooperative arrangement among national postal administrations for delivering the mail internationally, cooperative arrangements among national phone companies that made it possible to make international phone calls, international agreements among airlines that made it possible to transfer tickets and baggage when making connections between national and foreign airlines, international agreements among governments on air traffic rules for planes flying international routes, and cooperative arrangements among banks in different countries that made it possible to transfer money efficiently from one country to another. An analytical and policy model of international services that puts the emphasis on the system for delivering services internationally has considerable validity. It puts the analytical or policy focus on the capacity of the system to deliver reliable service on a predictable basis. A systemic approach also provides a conceptual basis for deciding what services should be provided by the monopolies that dominate the national delivery of services in many areas such as postal delivery, communications, and transportation. Since monopolies are in a position to exploit the public, most governments have considered it appropriate and desirable to take over the management of the monopolies or to regulate their activities in the public interest. At an international level, this has led to the natural conclusion that the appropriate basis for organizing services provided by monopolies or quasi-monopolies is to divide the market between the national monopolies. Moreover, it has been argued that international services sold by domestic monopolies should not be viewed as internationally traded services, but rather as just another type of service provided domestic customers. A regulatory approach to the international delivery of services has an inherent weakness in losing sight of the increased efficiency or improvement in quality that could be generated by potential competition. By removing the possible entry of new, competitive suppliers, a government removes a powerful incentive and source of pressure on managers to search out new ways of producing services more efficiently and supplying the services that business users and consumers would like to buy. In a period when the technology for producing and delivering services is changing rapidly, as it has in recent years, the loss of innovation due to the absence of potential competition is particularly costly to an economy. A regulatory, system-oriented model also does not bring out the possibility that some countries might do a better job, for whatever reason, in performing certain services, or might be able to produce such services at a lower cost. The English might do a better job in economic journalism, the Americans in writing economic textbooks, the Greeks in shipping, the French in designing clothes and hair styles, the Italians in designing fast cars, and the Swiss in providing a safe place to put your money. A trade policy approach is not likely to prove very effective in addressing systemic issues concerning the operation of delivery networks in services. The trade policy framework is not structured to address such issues; the rules of the trading system are not designed to deal with issues such as the capacity of a network to deliver a reliable stream of services, and trade rules have never proved to be very effective in dealing with monopolies. A strong case can therefore be made for a complementary relationship in areas such as telecommunications and transportation between international agreements negotiated in a regulatory context and international agreements negotiated in a trade context. Both trade policy and regulatory policy have a contribution to make to the smooth and efficient functioning of the world economy. 2 International negotiations carried out by trade officials, in a trade policy context, thus should supplement and complement international negotiations carried out by officials responsible for related policy areas. In order to assure a harmonious and complementary relationship, trade agreements that deal with the trade effects of regulatory decisions will have to be negotiated with the participation of regulatory officials or at the very least on the basis of close consultations with such officials. In many cases these negotiations are likely to be carried out by officials from the regulatory departments who have been detailed to the trade negotiations. Regulatory officials will need to continue the negotiation of international agreements in their sphere of responsibility, and international organizations with sectoral responsibilities, such as the International Civil Aviation Organization (ICAO) and the International Telecommunications Union (ITU), will need to continue to play a major role in their respective spheres. The negotiation of trade agreements will not reduce either the need or the scope of efforts to update and extend regulatory agreements in sectors such as telecommunications and aviation, and in functional areas such as international monetary policy and immigration policy. Officials from finance ministries will need to continue to address the full range of issues concerning the international movement of money, the regulation of international banking activities, and issues arising from foreign exchange controls imposed by other governments. Consular and immigration officials will need to continue to address the full range of issues related to the movement of people, including visa issues. Officials responsible for the regulation of individual sectors such as communications or aviation will need to continue to pursue negotiations that have a regulatory focus. The process of meshing trade and regulatory policies and responsibilities will not always be easy, and the struggle over bureaucratic turf is likely to make the negotiations within the individual national governments even tougher than the negotiations among countries. That internal bureaucratic struggle, however, is not a mere inconvenience that should be avoided as a wasteful exercise, since it is part of the whole rationale for pursuing trade negotiations. The objective is to place greater emphasis on the efficiency gains that can come from international competition and specialization in services, and this will require a reordering of priorities in national regulatory policies. The struggle over bureaucratic turf ultimately is over policy priorities, and that is the gut issue in any trade negotiations in services. The overlap in responsibilities that will result from trade negotiations will be inconvenient not only for some of the officials involved, but also for those in business management who complain that they do not know who is in charge. Managers are often puzzled and frustrated by the division of responsibilities between trade policy officials and officials responsible for other functional and sectoral areas of policy. A sharing of responsibilities is unavoidable, however, because a government has many different objectives that are assigned to different government departments. Officials in each department and bureau have their assigned area of responsibility and expertise for a given area of policy. Real world problems do not neatly fall into one policy area or another. Each policy measure raises issues in a number of policy areas simultaneously, and just as there are no clear areas of demarcation between one policy objective and another, there can be no clear areas of demarcation between the responsibilities of officials in one department and another.
Application of the trade policy framework to trade in services provides the means for pursuing the economic gains from expanded trade predicted by the application of classical trade theory to services. While barriers to trade in services are more difficult to identify and to remove because they tend to be embedded in domestic regulations, the concepts and techniques trade policy officials have used to deal with nontariff barriers to trade in goods can be adapted to deal with barriers to trade in services.
1. An excellent discussion of the basic concept underlying
the GATT is contained in a book written by Clair Wilcox in 1949, entitled
A Charter for World Trade. Wilcox is one of the officials in the U.S.
State Department who played a key role in the formation of the GATT. |