The LDC services waiver: Making it work

13 August 2012

The Least Developed Country (LDC) services waiver emerged as one of the few deliverables of the 8th WTO Ministerial in December 2011. After years of negotiation, a last-minute compromise was found which allowed Trade Ministers to harvest what could be presented as an ostensibly pro-development result. While weaknesses remain, the glass is arguably half full: Members are now authorised to grant preferences to services and service providers of LDCs – not only WTO Members, but all LDCs.

A new LDC-only enabling clause for services
The waiver effectively operates as a new “Enabling Clause” for trade in services, with benefits limited to LDCs. So far no services preferences at all were possible, apart from very narrow exceptions to the otherwise all-encompassing MFN principle in GATS article II. The waiver allows for classical market access preferences, and opens up the possibility for allowing others, subject to an application and approval procedure.

Market access privileges allowed, other preferences require authorisation
One long controversial issue was whether only standard “market access” measures of the types described in GATS Article XVI would be covered (“Small Window”), e.g. preferential quotas or an exemption from an economic needs test (ENT), or whether Members would also be allowed to grant privileges, e.g. in the form of preferential national treatment, regulatory arrangements, etc. (“Large Window”). While LDCs and their supporters argued strongly for the Large Window solution, which better targeted actual LDC needs, several Members insisted on keeping the waiver limited to Small Window (market access) measures, arguing that allowing other preferences would mean to risk unforeseeable disturbances. This was arguably unconvincing, as many Members have a long practice of granting exactly such non-market access preferences under their one-off GATS Article II MFN Exemptions.

The waiver as agreed offers a two-tiered solution: (Direct) market access preferences for LDCs are automatically allowed; other, non-market access preferences are not automatically covered. They can, however, be authorised by the Council for Trade in Services (CTS).

Market access preferences illustrated
Members may now without further ado grant LDC services/suppliers exclusive market access in otherwise closed sectors and modes of supply, or provide them with incrementally relaxed market access vis-à-vis other Members. They can, for example (i) allow LDC midwifes to provide services (mode 4) under an LDC-only quota, while not admitting midwifes from other countries; (ii) waive for LDCs the otherwise applicable ENT for restaurant or hotel licenses; (iii) allow LDC contractors to use up to 25 qualified LDC building professionals, while service suppliers from other countries can only bring in up to ten of their own staff; (iv) grant LDC service providers, for example tour operators, the right to maintain a local presence (mode 3) in the form of representative offices while providers from other countries must establish full branches or subsidiaries.

Regulatory and other preferences: only allowed if authorised
Other measures discriminating in favour of LDC services/suppliers can be approved by the CTS. This includes preferences granted through selective (LDC only) national treatment, preferential treatment on the level of domestic regulation, or even subsidies - for example: (i) recognition of qualifications based on practical experience for LDC professionals (vs. requiring formal qualifications); (ii) facilitated licensing procedures for LDC providers (e.g. submitting papers in home language with a summary in the local language instead of full translations); (iii) concessional application fees for LDC applicants for trucking licenses; (iv) an “LDC Helpdesk” to assist in meeting qualification requirements, technical standards or managing licensing procedures; and (v) facilitated vehicle registration for LDC providers of cross-border road transport services.

Even the indicative list above shows that such preferences could make a significant difference to LDC providers. As in goods, where TBT and SPS measures reign supreme, it is often precisely these regulatory issues which pose the greatest obstacles to LDC services exports.

What is an LDC service provider? Rules of origin and the avoidance of free-riding
To avoid free-riding, e.g. by non-LDC providers creating shell companies in LDCs to benefit from waiver preferences, WTO Members had to agree on certain rules of origin.

The adopted formula represents a sensible compromise between the need to avoid unnecessary restrictions and the goal to ensure that value accrues primarily to LDC economies: where LDC investors act through an LDC-incorporated company no further questions are asked. Where non-LDC investors act through an LDC-incorporated company, however, they have to be ready to prove that their LDC company is more than a shell by demonstrating “substantive business operations”. Importantly, however, these operations would not have to happen in the same LDC where the company is incorporated. It would be sufficient if they maintain such operations in any LDC – a solution reflecting LDC demands.

Operationalising the waiver: ideas for the way forward
Two types of obstacles may discourage use of the waiver: the lack of technical clarity of what preferences would be desirable and could be done; and the need to galvanise sufficient political will to implement them. The following offers some initials ideas on steps that may help to overcome these:

· Concretising demands: LDCs, individually and collectively, should pro-actively and systematically identify preferences which would meaningfully benefit their services exports, and translate these into concrete demands to WTO Members, both developed and developing.
· Concretising (potential) offers: All WTO Members should pro-actively consider possibilities for granting preferences to LDCs. Members should be encouraged, through available political channels, to conduct this analysis with an open mind. LDCs and their supporters can help by identifying and communicating feasible measures.
· Securing preferences politically and/or legally: LDCs and their supporters should seek firm commitments wherever possible to enhance predictability and reliability for their service providers, allowing them to take solid investment decisions for the future.

Importantly, nothing stops Members from undertaking legal commitments to grant specific LDC preferences, for example in the form of scheduled commitments within the WTO/GATS, as part of a DDA package or separately. They could also choose other fora. For example, why not agree to grant a certain set of LDC preferences under the upcoming plurilateral trade in services agreement (currently being negotiated amongst a group of OECD and other countries)?  This alone could send important signals regarding the high priority placed on developing services sectors in LDCs.

If legal commitments are not achievable, political commitments may be. One possibility would be to hold a “Signalling Conference” similar to the one held in July 2008 in the context of the DDA. The effect of bringing Members together to “signal” in semi-detailed terms their plans under the waiver would be to create a certain degree of healthy political pressure.

The glass, thus, is half full – LDCs and their supporters can do a lot to make this waiver work, technically and politically. Nothing should stop them from doing so.

Author: Hannes Schloemann,  Trade lawyer and Director of WTI Advisors Ltd. This article is based on a forthcoming study prepared for ILEAP, to be available on http://www.ileap-jeicp.org/.

This article is published under
1 October 2013
During Geneva's WTO Public Forum on "Expanding Trade through Innovation and the Digital" , one session drew special attention to the importance of innovation to Francophone African LDCs (Least...
Share: 
3 October 2013
Trade negotiators have made slow progress in informal talks on amending WTO rules on food stockholding ahead of the global trade body's upcoming ninth ministerial conference in Bali, Indonesia, this...
Share: