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The negotiators identified three areas of rulemaking for follow-up work. The three areas are safeguards, government procurement, and subsidies. Developing appropriate disciplines in these areas will require a careful analysis of the special characteristics of services in general, and of individual services sectors in particular. There are four difficulties in developing substantive rules in these areas: · Uncertainty whether there is a sufficient
problem to warrant the development of a discipline. The existence
of GATT rules in these three areas for trade in goods leads some to
conclude that parallel rules are needed in the GATS for trade in services.
But there is little solid empirical data at this stage to build a
persuasive case. Each of these four factors - uncertainty, measurement and data problems, sectoral differences, and complexity of the four modes - affects the rule making effort in the three issue areas - safeguards, government procurement, and subsidies - somewhat differently. What is common, is the need for more detailed analysis of the issues that are likely to arise in the different sectors. There may also be a need for some empirical experimentation in specific sectors where the need for some discipline is most persuasive. With these caveats in mind, the following comments on each of the three issue areas might provide some further insights into the way forward. Emergency Safeguard Measures. The purpose of a safeguards regime is to facilitate the negotiation of binding commitments by helping governments to overcome uncertainties with respect to the possible future domestic impact of liberalization commitments. By allowing governments to withdraw commitments temporarily when a surge of imports threatens to injure the domestic industry, the existence of an emergency safeguard measure can encourage negotiators to undertake more substantive commitments. There are two basic problems in devising an appropriate safeguard rule for services. The first is that there is very little empirical data to inform the rule-making process. This lack of empirical data may be due to a lack of analytical work in this area. However, there may be a more fundamental reason as well - namely that trade in services is less characterized by surges than goods, and that many domestic regulations which restrict trade in services are less easy to liberalize through a series of marginal changes. Whatever the case, more information about real world situations where safeguard actions were either taken or could have been taken in a practical way would be helpful. It might also be useful to analyze how countries have managed the autonomous liberalization of internal competition of services, and the kind of transitional regulatory safeguards they found it necessary to adopt to manage the internal liberalization of sectors such as telecommunications, retail distribution, transportation, etc. There are two possible interim approaches that could be adopted until the world community has gained more empirical data about the problems faced in managing the liberalization of trade in services. The first approach would be to encourage countries that hesitate to make a commitment to build an escape clause into their national commitment in the form of a reservation. The second approach would be to allow countries to propose specific safeguard measures when the need arises, subject to the approval of the Council on Services. The second problem in devising a rule for safeguards concerns the difficulty in devising an approach that could apply equally to all four modes of importing services. Unlike the GATT market access commitments on goods, the GATS market access commitments on services cover not only cross border trade, but also trade based on local establishment, and movement of either the consumer or the supplier of services. This raises a key question. Should a country be allowed to limit the activities of locally established suppliers when the import disruption is due to cross border trade or vice versa? Should a country in such cases be allowed to limit the temporary entry of service suppliers, or the consumption of services abroad by its own citizens. One of the things that has limited the protective effect of safeguard measures taken on cross border trade in goods is that such measures did not prevent the foreign producers from expanding their investment in the importing country. The protective effect of safeguard measures taken by a number of countries in the steel and automobile industries, for example, were significantly cushioned by foreign investment in these industries. This would suggest that countries should be forced to justify safeguard actions taken with respect to any one mode in terms of the injury or threat of injury that exists from imports in that mode. In other words, safeguard actions should be mode-specific. Subsidies. The rulemaking effort on subsidies breaks down into two components - the possible discipline on subsidies and the nature of an appropriate remedy. Under GATT rules, subsidized imports are subject to countervailing duties, while distortions created in the home market of the subsidizing country or in third markets are subject to the potential remedies available under the dispute settlement system. There are few, if any, instances of direct export subsidies in services. Following the example of the GATT in prohibiting direct export subsidies should therefore not pose an insurmountable problem. The bigger issue concerns domestic subsidies, which tend to be concentrated in a few sectors such as sea, air and land transportation, telecommunications, and in public “goods” such as health, education, and pension systems. This may lead one to conclude that the optimal approach would be to adopt a general subsidies discipline, with a carve out for difficult sectors. The general subsidies discipline could follow the pattern of the GATT Subsidies Code. The sectors carved out from the general code could be covered by sector-specific commitments. With respect to health, education and pensions, it needs to be recognized that most governments consider these activities as public goods that are legitimately subsidized by government. Sector-specific agreements on subsidies in these areas would have to give governments wide room to subsidize public services, while leaving room for the provision of privately provided services to those who can afford it. With respect to transportation and telecommunication, any sector specific subsidy agreements would have to deal with two issues - transitional issues related to the adjustment of inefficient national champions in both industries and the subsidization of socially-desirable services such as the provision of telecommunication and transportation services to rural areas, the elderly or the poor, and the use of environmentally-friendly forms of transport. The issue of an appropriate remedy is more complex. For a variety of reasons having to do with the special characteristics of services, it would be difficult to devise a workable countervailing duty. First, the invisible nature of many service imports would make it as impractical to impose a countervailing duty as it would be to impose a tariff on cross border trade. Second, the difficulty associated with identifying the production costs of an individual unit of services would make the imposition of a countervailing duty on the purchase of a specific service a completely arbitrary exercise. A more workable remedy might take the form of the remedies currently available under the dispute settlement system for subsidized competition in the home market of the subsidizing country or in third markets. Government Procurement. The development of a discipline on government procurement will need to address two special characteristics of services. First, government procurement of many services is made on the basis of small contracts that would fall under the thresholds built into the Government Procurement Code for goods. While it would be possible to lower the threshold for services, it may prove too costly to impose the requirements associated with the Code on many small transactions. The second issue is that the procurement of many services, particularly professional services, involves judgment calls about the quality of service. In fact, many professions have discouraged competition and marketing based on price, on the argument that the choice of a professional is all about quality and reputation. Without pandering to that view, an approach to the procurement of professional services would need to address how judgments about professional competence can be factored into objective decisions. There are a number of services where neither scale nor hard to quantify quality judgments are an overriding issue. It would make considerable sense to apply the procurement code to these services. Some prominent examples include transportation services, telecommunication services, construction, and financial services.
As mentioned earlier in the paper, real progress in liberalizing trade in heavily regulated sectors will require parallel domestic regulatory reforms. This might be accomplished in three steps - a discussion of regulatory reform per se, a strengthening of Article VI, and a resumption of sectoral negotiations on the most heavily regulated sectors. A preparatory discussion of regulatory reform should be firmly anchored in a recognition that regulatory reform in the first instance is in the economic interest of the country itself. Regulations which are more costly or more restrictive than necessary to achieve the desired social objectives are a dead loss to a country’s citizens. They raise the cost of living, reduce choices, limit economic growth, and restrict employment opportunities in the most highly productive and therefore most highly paid jobs. The discussion on regulatory reform should have several aims: it should educate regulatory and trade officials on the rationale for regulatory reform, it should help build domestic political support for reform, and it should lay the conceptual groundwork for international sectoral agreements that spell out the groundrules for international trade and competition in key regulated sectors. International discussion can serve a useful educational function by allowing officials responsible for administering regulations to learn from the experiences of officials in other countries, and to benefit from studies carried out by highly qualified professionals employed by international organizations. International discussions can also help educate a country’s voters about the potential economic gains from reform through the wide dissemination of information about such gains. Findings by international bodies that convey broad international consensus on a subject often carry considerable weight in domestic consensus building efforts. Finally, international discussions can help overcome domestic political resistance to reforms that might benefit the country as a whole but disadvantage stakeholders in protected industries. It might be argued that the successful negotiation of the General Agreement on Basic Telecommunication Services (GBT) proves that progress can be made without a discussion of domestic regulatory reform per se. The difficulties experienced in financial services and transportation services, on the other hand, tends to support the utility of a more basic dialogue about the advantages of domestic regulatory reform and trade liberalization in preparation of negotiations leading to substantive trade liberalization and expanded international competition. In the case of financial services, many industry observers recognized belatedly that an educational campaign aimed at explaining the advantages of regulatory reform and trade liberalization of financial services could have facilitated the negotiation of market access commitments by developing countries. The OECD has laid the foundation for a global dialogue on regulatory reform. In 1995 the Japanese government proposed that various OECD Committees analyze the issues related to domestic regulation, with the objective of seeking to crystallize principles for the reform of such regulations. The Japanese government believed that such an effort might assist governments in designing more effective and economically efficient regulations, while also reducing potential barriers to trade. Work undertaken by the OECD since that time has helped to deepen understanding of the issues among its members, and has generated documents that can serve as a useful input into discussions held elsewhere, including in the World Trade Organization.
Article VI of the GATS provides a basic framework for minimizing the disatortions of trade created by domestic regulation. A strengthening of this article could go a long way in facilitating real market access liberalization by commiting countries to the reform of regulations that impede market-oriented competition. Article VI now provides (a) that regulations be administered in a reasonable, objective and impartial manner, (b) that countries establish procedures for the review of regulations at the request of service suppliers, and © that regulations be based on objective and transparent criteria, not be more burdensome than necessary to ensure the quality of the service, and in the case of licensing procedures, not in themselves, restrict the supply of the service. These provisions could be strengthened in a number of ways. Article VI could expand on the scope of GATS Article I on transparency by requiring members to explicitly state the public policy objectives served by a regulation. This would facilitate any examination of whether the regulation is “more burdensome than necessary to ensure the quality of the service,” as provided in Article VI (4) (b). A revision of Article Vi could also clarify that the words “quality of service” in VI (4) (b) refer not only to the reliability of the service from the perspective of an individual consumer, but that they also encompass the reliability of the service from the broader social perspective - covering the full range of commonly accepted social objectives. This broader interpretation of the term quality of service is consistent with the overall thrust of Article VI, but is not necessarily clear if the sentence involved is taken by itself, outside the broader context of Article VI as a whole. . Article VI could also contain a new provision that would encourage members to limit the scope of a regulation to what is necessary to achieve the objective served by the regulation. This would be fully consistent with the spirit of the requirement that regulations not be more burdensome than necessary to ensure the quality of service, and would amplify that rule. Countries would be encouraged to regulate only those activities that have a direct bearing on the regulatory objective, and not seek to regulate ancillary activities carried out by the same firm. Such a provision, for example, would encourage countries to focus their regulation of infrastructure services on the terms of access to physical infrastructures such as pipelines and electric transmission lines, giving competitive suppliers of services provided over the network equal access to the network . It would no longer be necessary to regulate the services distributed through the network, because market competition would establish both an optimal price and quality of service. Article VI could also include a general restatement of the competitive safeguards built into the Telecommunications Annex and the Agreement on Basic Telecommunications (GBT). Such a provision would help assure that monopoly providers of essential services would not abuse their monopoly position by either charging unreasonable fees or by giving themselves preferential access to essential services in the competitive provision of downstream products. This provision could apply not only to “transport services” provided over electric conduits or pipelines, but also to a variety of other monopoly inputs such as water. Another addition to Article VI could encourage countries to adopt performance oriented regulations, rather than regulations that directly seek to establish bureaucratic control over the specific activities carried out by enterprises. Such a provision would parallel a similar provision embedded in the GATT Code on Technical Barriers to Trade, and would also be fully consistent with and amplify GATS Article VI (4) (a) which requires regulations to be based on objective and transparent criteria. Another possible addition could encourage member countries to use market-based incentives and disincentives to achieve regulatory objectives, where that is feasible and appropriate. Market based regulations tend to achieve desired social objectives with greater economic efficiency than directive regulations that seek to control the behavior of market participants. For example, it would be far more efficient in economic terms to allocate scarce resources such as landing slots through an auction than through a system of licensing that benefits incumbents. Finally, Article VI could encourage self-regulation by industry where that satisfies the achievement of the desired social objective. At the same time, it should require member governments in such cases to ensure that compulsory private regulatory or standards-making activities be open to all service providers, including foreign service providers.
In some heavily regulated sectors, some degree of international rulemaking on a sectoral basis is inevitable, particularly where the regulations specifically limit competition or competitive entry, or where the regulations set high performance standards for service providers. Countries with regulations that permit open entry and competition are concerned about market accesss conditions in countries that limit competition. Countries with strict performance standards are reluctant to grant open entry to foreign firms that are not required to maintain adequate performance standards by their own governments. International trade and competition in these sectors therefore may require some degree of international understanding on the allowable forms and extent of competition, and of the minimum performance standards that should be met. It would be a mistake, however, for the WTO to establish highly detailed regulations. It needs to take to heart the principle of subsidiarity, and avoid excessive rule making. As was the case with respect to the GATT treatment of standards, the WTO should focus on establishing legally binding obligations centered on some key principles and procedures, while leaving much of the substantive detail to other international organizations, national governments, and voluntary private bodies to implement. This calls for a judicious blend of legally binding obligations on key principles, voluntary guidelines that could serve as reference points for international regulatory norms, and references to standards and work carried out in other public and private organizations. An overview parer such as this cannot go too deeply into the content of individul sectoral agreements. However, the following discussion might provide some useful ideas on how one might move forward in key sectors. Financial Services. The GATS agreement contains an Annex on Financial Services, which primarily deals with prudential issues. The key objective of the financial services negotiations currently under way is to obtain a sufficient number of market access commitments by the most advanced developing countries to meet the minimum requirements of countries that have taken an MFN exemption in this sector, principally the United States. Many developing countries have a wide array of restrictions on both cross border transactions and on the participation of foreign financial institutions in local financial markets. Whatever the outcome of these negotiations, it will represent the beginning, rather than the end of negotiations in this sector. In order to achieve the ultimate objective of open international trade and competition in financial services, two things will have to happen. First, most developing countries, and many developed countries, will have to reform their domestic regulations. Second, the financial authorities in these countries will need to expand international cooperation on issues related to the prudential supervision of financial institutions under their jurisdiction. In general, the challenge of regulatory reform is to shift the nature of regulation from a system under which the financial authorities exercise supervision by authorizing specific types of transactions by financial institutions to a system under which they exercise supervision by monitoring the overall financial condition of financial institutions. Short of an overhaul of regulatory systems, the liberalization of trade involves a negotiation over the number of licenses issued to foreign financial institutions, and the authorized volume of activity under such licenses. To get beyond a piecemeal negotiation over individual licenses or quotas will require ultimately a more comprehensive reform of financial regulations in many member countries and expanded international cooperation on fiduciary issues. Cooperation on fiduciary issues is becoming increasingly necessary as a result of the high degree of international integration of financial markets. Financial markets, more than other markets, have become globalized, and it is this high degree of globalization that leads countries to hesitate in opening up their financial systems more fully to international market forces. The Annex on Financial Services recognizes that the treatment accorded to financial services from another member can take into account the degree to which the prudential measures taken in that country satisfy its own prudential standards. The Annex also explicitly provides for the negotiation of bilateral and plurilateral agreements on the recognition of another country’s prudential measures for internationally traded financial services. The need for more in depth negotiations is likely to arise earlier rather than later, because the internet provides an increasingly usable vehicle for supplying financial services across the border directly to individual consumers. Until the advent of the internet, cross border trade in financial services was a practical reality only for large corporations with an extensive international presence. The commercialization of the internet promises to change that, and make it feasible for small businesses and households to buy foreign securities, to borrow or deposit money in foreign banks, or to take out insurance policies over the net. While most governments have mechanisms for exercising control over some of these transactions, for example by stating that only insurance policies obtained from authorized firms will satisfy compulsory insurance requirements, many of these transactions will be beyond the ability of governments to control in a practical way. Progress on the liberalization of trade in financial services may well also depend on a deeper understanding of the domestic advantages of liberalization by some of the more advanced developing countries. Some of the more important advantages that could be cited, for example, include (a) improved access by national firms to international capital markets, thus reducing their cost of capital and expanding their potential pool of capital, (b) improved rates of return on funds invested by pension funds, thus reducing future claims on government funding, © diversification of risk insured by domestic insurance carriers. Beyond an analysis of the advantages of regulatory reform in financial services, a dialogue on domestic reform might also focus on the appropriate regulatory tools for discharging the fiduciary responsibilities of government. Contrary to widespread impressions by many developing country governments, regulatory reform and trade liberalization in financial services need not result in unsound financial conditions. Transportation. Negotiations on all forms of transportation are likely to make more progress in the future if the negotiations were reorganized in terms of the different user communities. The current approach, which is to organize negotiations on the basis of sea, air and land transportation strengthens the hand of suppliers and regulators who would like to leave these sectors protected by restrictive national regulations. A user-oriented approach to negotiations on trade in transportation services would focus the negotiations around each of the following four user communities: (1) global corporations who need to ship parts, components and assembled goods among their various facilities, (2) tour operators who provide organized leisure travel, (3) business users of express parcel and courier services, (4) users of scheduled public transport services. An organization of the negotiations along these four categories of users would make it easier to identify the requirements of users and to come up with provisions that will meet user requirements, and would force transportation companies to face up the needs of their customers. It would change the politics of the negotiations by making it easier for the different user communities to identify their common interests and to organize themselves politically, with the objective of breaking down national regulatory barriers to international competition. The global corporation has special requirements for assuring a high degree of reliability and control over the transportation of parts and components between facilities located in different parts of the world. Depending on its needs, the corporation may need to be able to exercise control to assure timely delivery to meet just in time inventory control requirements, or they may need to assure customized handling of particular types of cargoes. They may also wish to have an ability to track the shipment of individual parts and components, in order to empower them to reroute shipments if particular routes are blocked by strikes or natural disasters. In effect, these corporations need to be able to set up virtual transportation networks, or to entrust the management of such virtual networks to a global transportation manager. In either case, the corporation has to have some leeway to construct a network by linking together owned or leased facilities and modes of transport. There is a close analogy with the need of these global corporations for control over their telecommunications with their various facilities around the world. Recognition of their telecommunications needs led to the negotiation of the user oriented GATS Telecommunications Annex. The Annex gives them the ability to lease and interconnect lines, and to use these lines freely for the transfer of information. A similar approach covering all modes of transport and warehousing facilities would generate similar benefits. The second major, and politically powerful user community is represented by leisure travel. This community not only involves consumers of organized travel services, but also travel operators and the extensive network of travel agents. Charter services are already relatively free of many of the regulatory controls on scheduled public transportation, and it would not be a large step to negotiate an agreement providing for international competition in this area of transportation. Such an agreement would appeal to the public at large, and could be sold by every country as a measure to promote tourism, a financially attractive industry for most developing as well as developed countries. The third group of users are business users of express package delivery and courier services. This is a highly competitive, international industry has developed in response to user needs. Resistance to the growth of the industry has come largely from the postal monopolies, and most regulatory restrictions are designed to protect these monopolies. An across the board approach to the problems faced by competitive providers of these services might prove more productive than the current piecemeal approach, and might enable these companies to better serve consumer needs. Negotiations to liberalize international competition in scheduled public transportation will be the most is clear from what is happening in the market place that the provider difficult. Nevertheless, events in the market place are reshaping the industry. National airlines are reconstituting themselves into transnational transport companies through mergers, alliances, interllining agreements and other forms of cooperation. At some point the need for a new set of groundrules for international competition among these mega companies will become obvious. Professional Services. Efforts to create some sectoral guidelines for the liberalization of trade in professional services have focused on the development of a model agreement for accounting services. These negotiations are still under way, with an end of 1997 target date. The basic goal of these negotiations is to expand on the provisions contained in Article VI (4) of the GATS. Negotiators are focusing, in particular, on three criteria built into this provision, namely that regulations be based on objective and transparent criteria, that they not be more burdensome than necessary to ensure the quality of the service, and that any licensing procedure in itself not restrict the supply of the service. The basic issue for governments in accounting, as in other professional services, is to ensure the professional competence of the individual service provider, to monitor professional performance, and to discipline any lapses of professionalism. From a trade point of view the key issues are whether the standards and procedures adopted by individual governments constitute unreasonable barriers to trade. This can be the case if the standards or procedures established for evaluating the qualifications of an unnecessarily discriminate against foreign practitioners, or unnecessarily restrict entry by both domestic and foreign applicants, serving to restrict entry into the field rather than ensuring professional competence. In most cases the qualifications, regulations and procedures established for the licensing of a country’s own professionals cannot be directly transferred to the licensing of foreign professionals - foreigners do not necessarily enter as apprentices, they may not have acquired a local educational degree, their professional experience abroad may or may not be directly relevant, and the fact that they may not permanently reside within the country may require alternative approaches for disciplining unprofessional behavior. The establishment of a separate set of regulations and procedures for qualifying and licensing foreign professionals may thus actually facilitate trade. In fact, Article VI (6) directs members to establish procedures to verify the competence of professionals from other member countries, thus implicitly recognizing the need for a specific procedure to license foreign practitioners.. The issue from a trade point of view is whether the qualifications, regulations and procedures established for foreign professionals are equivalent in their regulatory effect and not more burdensome than the procedures and standards imposed on a country’s own professionals. Any rulemaking under the GATS needs to establish some basic principles concerning the objectivity and equivalence of the qualifications and the procedures established for licensing foreign professionals. They should not get into substantive details, which are better addressed through bilateral agreements (as provided for in Article VII of the GATS) or international standards developed through appropriate international professional associations, (as provided for in Article VI (5)(b) of the GATS). Nondiscriminatory standards and procedures for ensuring the professional competence and professional performance of accountants can over time become barriers to entry if they are used to limit entry into the profession, thus raising the income of current members. The second issue from a trade point of view, therefore, is whether a country’s regulations for the licensing of professionals are appropriate means for achieving legitimate social objectives, and whether they are not more cumbersome or restrictive than necessary to achieve that objective. The best method of ensuring that professional licensing and qualification standards and procedures are not hidden devices to restrict competition is to require full transparency of both the regulatory objectives and the regulations. The rules should also stipulate that regulations achieve their stated objectives in the least burdensome manner. Transparency will enable everyone to test whether the objectives are legitimate and whether the regulations involved provide the least burdensome and least trade distorting method of accomplishing the objective. It may also be helpful to establish a link to established international standards in the field, by encouraging members to make use of applicable international standards. In most professions, international professional bodies have emerged for the development of model standards or norms. The GATT Code on Technical Barriers to Trade adopts a similar approach by encouraging countries to adopt international standards where they meet the desired level of performance. Retail Distribution. The retail distribution sector has not been targeted for sectoral negotiations. Many countries have made market access commitments in this sector. The reason why it might nevertheless be useful to initiate sectoral discussions in this area and to develop a sectoral annex is because this sector is of strategic importance to the operation of the international trading system as a whole. Commitments on market access do not have much meaning if goods cannot be distributed at the retail level, and in highly concentrated industries new foreign suppliers may find it difficult to distribute their goods through retail channels dominated by the domestic industry. At the same time, many countries have laws that make it difficult to establish large retail outlets as a means of protecting small retailers in an area, yet it is precisely large retail outlets that are most likely to be a channel for the distribution of competitive products from abroad. An agreement that clearly establishes the rights of outside suppliers to establish and invest in retail outlets is likely to be a critical component of a well functioning trading system. Electronic Commerce. The internet is rapidly becoming not only a new medium for exchanging messages and sharing information, but also a channel for selling and buying information-based products and services across the globe. Both businesses and individual households are getting connected to the net, and using it for everything from electronic banking to electronic shopping. The potential opportunities created by the commercialization of the internet are enormous. It empowers small entrepreneurs located in out of the way places from the arctic circle to Patagonia to offer information products for sale to a world-wide group of consumers that is rapidly growing. It establishes the basis for a highly competitive market in which small producers can reach distant customers at relatively low cost. The regulatory challenges posed by the internet are equally large, since the internet transcends the limitations of geographic space and territorial jurisdictions. The Telecommunications Annex to the GATS, and the subsequent agreement on Basic Telecommunication Services provide a solid foundation for the development of a stable trade regime for electronic commerce. What is required is an interpretation that clarifies the application of these agreements to electronic commerce based on the internet, and expands on the principles included in the Annex. The internet clearly falls within the definition of telecommunications services covered by the Annex. The only argument some countries might make is that the internet was not widely used by the general public when the Annex was adopted, and that its widespread use now has created what is essentially a new service. To remove that uncertainty, it would be useful to negotiate an explicit recognition that the Annex applies to the internet. The provisions of the Telecommunications Annex could usefully be enhanced by adding a neutrality principle, which in effect would state that the use of the internet for a transactions should not alter the application of the regulations or taxes that would apply if the transaction were carried out by other means, e.g. orally or in writing, or if the information product that is being purchased or sold were transferred in another format, e.g., in the form of a book, a tape, or a disk. This would constitute a useful elaboration of the principle already contained in the Annex, which is that member countries place no condition on access to and use of public telecommunications by service suppliers in so far as such services are covered by commitments in the country’s national schedule. A third provision might confirm the status quo with respect to the nonapplication of tariffs to information products and services traded over the internet. Under current agreement and practice, no duty is assessed on the intellectual content of information products. Where duties are imposed on books or tapes, the duty is generally assessed on the value of the physical medium, but not the value of the content. Application of the neutrality principle would maintain that practice, despite the absence of a dutiable physical medium. Beyond these basic principles, governments will need to address numerous regulatory issues concerning the recognition of electronic contracts and digital signatures, payment mechanisms, the allocation of liability, privacy and content issues. For the most part, these issues will be best handled outside the trade area in other private and governmental institutions. Issues Related to the Institutional Architecture A number of issues may need to be considered with respect to the constitutional architecture of the GATS. The most commonly raised constitutional issues concern the absence of an across the board national treatment commitment in the GATS, and the scheduling of exceptions to the MFN principle in particular sectors. Both of these issues, however, are transitional issues that will be self-correcting,
Cross-border trade in services is not easily controlled at the border since the actual cross border flow is invisible. Barriers to services instead involve the discriminatory application of domestic regulatory measures. The application of national treatment therefore is equivalent to committing countries to abandon all barriers that favor domestic providers (though countries would still be able to keep regulations that protect incumbent firms from new domestic or foreign competitors. Most critics recognized the need for exceptions to national treatment, but would have preferred that countries be required to enumerate exceptions to national treatment, rather than to assume the absence of a national treatment obligation unless a country schedules a positive commitment. This is self-correcting, however, because the national treatment provision in the GATS automatically applies to any sector in which a country schedules a commitment, and is binding unless the country enters a reservation in its national schedule.
Under the GATS, countries are allowed to enter reservations to MFN in individual sectors at the time they adopt the agreement. Countries are expected to remove these reservations, however, as a sufficient number of countries agree to a balanced package of reciprocal market access commitments in these sectors. This has already happened with respect to basic telecommunications. As satisfactory agreements emerge in other heavily regulated sectors such as financial services and transportation, this problem too should be eliminated.
The more interesting constitutional question arises with respect to the relationship between the GATS and the GATT on issues that span both goods and services. The issue of how to handle cross-cutting issues has already arisen with respect to government procurement, in the follow-up to the decision at the Singapore Ministerial to pursue a new initiative to establish transparency in government procurement beyond the entities currently covered by the Code. The issue of the relationship between GATT and GATS rules is likely to arise in a more pronounced way with respect to possible future WTO negotiations on an investment agreement. The aim of advocates of such an agreement is to develop a set of binding disciplines that would apply to all investments, unless a country entered a reservation for a particular service or activity. The question is, would it make sense to have different rules for investment in service producing industries as against investment in goods producing industries. Can one even distinguish between goods and services producing firms when an increasing number of manufacturing firms also produce services? A similar issue could arise if member countries were to conclude that any commitments on the movement of natural persons should apply not only to persons engaged in the supply of services, but also to persons engaged in the supply of goods. Once disciplines on investment cover both goods and services it will be difficult to make this distinction in any case. Another area where an issue of overlapping disciplines might emerge is restrictive business practices. There are three possible approaches that could be taken with respect to disciplines that apply to both goods and services. The first would be to maintain a complete legal separation between services and goods by carrying out separate negotiations under each umbrella, even if the issues are essentially the same. The second approach would be to maintain the legal distinction between the two agreements, but to combine the negotiations of common issues into a single negotiation and to insert the resulting language separately into both agreements in parallel. The third approach would be to carve cross-cutting disciplines out of both the GATT and the GATS, and to place them under a combined umbrella. The third approach may well be the approach that should be taken, for a number of reasons. First, the distinction between goods and services is already a difficult to make in many cases. For example, the information that is contained in goods such as books, records, tapes or computer chips can be transmitted electronically, and in that alternative format would be difficult to treat as a good. Yet to apply different rules, deepening on whether information was sold as a book or as an electronic transmission would not make any sense Some have proposed to solve this problem by treating both the book and the electronic transmission of the information contained in a book as information products, subject to similar rules. This only raises new issues, such as whether the rules on goods or services should apply, and how one might distinguish between a book of architectural drawings and an architectural service. It has been suggested that a product is an off the shelf product sold as a commodity, while a service is a customized information supplied to a specific customer, which only raises different questions. Disciplines concerning the treatment of enterprises as against the goods and services they produce create even more complex issues, because increasingly the same enterprises are engaged in both. An investment code that resulted in rights for the producer of a good would immediately raise the question o whether a particular enterprise which produces both goods and services should be treated as one or the other where different investment rules apply. The second reason for developing a common set of disciplines is that over time trade in goods is increasingly taking on the characteristics of trade in services. As that happens, the need for different disciplines in goods and services will gradually disappear, and it should then be possible progressively to integrate the disciplines in the two areas into a common discipline. By splitting off individual disciplines that can apply equally to both goods and services, the transition could be managed as a step by step process. The gradual erosion of the distinction between goods and services is due to both the effects of globalization and the increasing technological complexity of many goods. Manufacturing companies, as is true of services companies, increasingly have to be able to establish themselves in the importing market and to move technical, managerial and marketing personnel in and out of such markets. The need for disciplines on investment and the movement of natural persons thus is increasingly valid for both types of activities. The more important impact of globalization, however, is the impact it is having on the whole structure of traditional trade measures, which are based on the assumption that products have a clear national identity. Trade measures such as tariffs, safeguards, anti-dumping duties and countervailing duties are imposed on the full value of a product entering a market, regardless of the national origin of its components and parts, and even if most of the value originated in the importing country. Countries have tried to get around the increasing illogic of this practice by circumventing it with various devices such as duty draw backs, free trade zones, etc., but each of these devices are complex and difficult to administer. The alternative response has been to eliminate duties altogether through sectoral free trade agreements or across the board regional free trade agreements. In the context of such agreements the distinction between goods and services tends to disappear.
Since future negotiation in trade in services will
inevitably be more intrusive in the internal affairs of countries,
the work in the WTO will have to become increasingly more transparent
in order to meet public concerns about a democratic deficit in the
WTO. Much useful progress has been made in reaching out to the public
through an expanded dissemination of information about WTO activities,
through expanded contacts with private interest groups, and through
the activities of issues coalitions among WTO members. More will have
to be done in the future to assure skeptics that the WTO is not a
secret conspiracy to rob them of their democratic rights. Concluding Thoughts The liberalization of barriers to international trade
and investment in services can contribute to growth in two ways. First,
negotiations on international trade in services can spur the removal
of barriers to internal competition within individual countries, thus
removing internal constraints to the achievement of greater economic
efficiency in the production of services, and the removal of infrastructure
bottlenecks. Second, such negotiations can lead to the removal of
barriers to external competition in services, making available the
gains from increased trade - expanded markets for competitively produced
services, domestic gains in productivity as domestic producers respond
to the foreign competition, and lower prices for consumers. The gainers
will be business users of services, as well as household consumers. Domestic political support for such reform efforts can be bolstered by focusing on the needs and interests of the users of services, and on the contribution that the right kind of reforms can make to good governance - namely improving the quality, objectivity and professionalism of government regulatory bodies and reducing the opportunities for bribery and corruption. As the WTO seeks to define a role in the area of regulatory reform in services, it needs to take to heart the principle of subsidiarity, and avoid excessive rule making. As in past efforts in areas such as standards, the WTO should focus on establishing legally binding obligations centered on some key principle and procedures, while leaving much of the substantive detail to other international organizations, national governments, and voluntary private bodies to implement. This calls for a judicious blend of legally binding obligations, voluntary guidelines, and references to standards and work carried out in other public and private entities. Since future negotiation in trade in services will inevitably be more intrusive in the internal affairs of countries, the work in the WTO will have to become increasingly more transparent in order to meet public concerns about a democratic deficit in the WTO. Much useful progress has been made in reaching out to the public through an expanded dissemination of information about WTO activities, through expanded contacts with private interest groups, and through the activities of issues coalitions among WTO members. More will have to be done in the future to assure skeptics that the WTO is not a secret conspiracy to rob them of their democratic rights. -------------------------------------------------------
Hoekman, Bernard. 1995. “Tentative First Steps: An Assessment of the Uruguay Round Agreement on Services.” in The Uruguay Round and the Developing Economies. Will Martin and Alan Winters, (eds.) Washington,D.C. : The World Bank. Hoekman, Bernard and Kostecki, Michel. The Political Economy of the World Trading System. Chapter 5 :”Trade in Services.” Sauve, Pierre. 1995. “A First Look at Investment in the Final Act of the Uruguay Round”. Journal of World Trade. Sauve, Pierre. 1997. “Preparing for Services 2000: Buy Ten Commandments, Get One Free.” In CSI Reports: The Service Econbomy. November 1997. Washington, D.C.: Coalition of Service Industries. Snape, Richard H. and Bosworth,Malcolm. 1996. “Advancing Services Negotiations”, in The World Trading System: Challenges Ahead, Jeffrey J. Schott (ed). Washington, D.C.: Institute for International Economics. World Trade Organization. 1994. The Results of the
Uruguay Round of Multilateral Trade Negotiations: The Legal Texts |