Trade in Services, the GATS and Sustainable Development

17 May 2000

Amidst the many disagreements at Seattle, governments largely agreed that mandated negotiations on services should continue as planned under the General Agreement on Trade in Services (GATS). With the commencement of negotiations on trade in services, the GATS and services issues are moving to centre stage for governments and civil society alike. This article reviews some of the main concerns surrounding trade in services and the GATS in the context of sustainable development.
The liberalisation of trade in services and effective use of the GATS presents governments with formidable challenges that are fundamentally different from those faced in goods. Sustainable development concerns intersect with trade in services across a spectrum of issues including economic and social development, and environmental and natural resource concerns. Services trade liberalisation also has implications for the policy-making process itself, potentially involving deeper coordination, greater participation, and changed political strategies in domestic policy and inter-national commitments.
A great deal of services liberalisation has taken place autonomously in recent years, demonstrating significant national commitment to liberalisation strategies, as well as the large potential for growth in this area. This trend has provided a wealth of experience on the benefits and drawbacks of differing approaches to liberalisation including: the potential for growth in vital sectors for national development and for insertion into the global economy; the potential to encourage environmental improvement or to accelerate environmental degradation, depending on the sector liberalised and the regulatory structure; the potential to bring broad distributive benefits in areas that are undercapitalised and underdeveloped or alternately the potential to substitute domestic monopolies with similarly uncompetitive and less accountable foreign firms.
Liberalisation of services trade holds a variety of perceived dangers, such as loss of control over the provision of services and competence of suppliers by governments; the undermining of public services; potential environmental degradation; negative impacts on the culture; undermining national interests by having important infrastructural services under foreign control etc. These often arise from controversies associated with privatisation and domestic deregulation in the past and have led to a significant amount of scepticism and confusion about the possible role of services trade liberalisation under the GATS. At the same time, the importance of services trade and its liberalisation holds the promise of critically needed capital, know how, and technology in areas that are both vital to economic growth and development, and social and environmental improvement.

Services: a sense of scale and importance.

Services play a very large and growing role in almost all economies. For many countries, services represent the largest segment of their economies compared to agriculture, industry and manufacturing. But, service exports were valued at only one quarter of goods exports in 1998.
These figures, however, may underestimate the actual level of trade in services, as many aspects of services trade are not accounted for in national economic statistics.
Considerable growth is occurring in services trade across a range of countries, with low-income countries experiencing a five-fold increase in services exports from 1983 to 1997. Many low and middle-income countries also increased their services exports during this period: a nearly nine-fold increase occurred in East Asia and the Pacific, a four-fold increase in Latin America and a three-fold increase in South Asia. Although services exports nearly doubled in Africa and the Middle East, these regions clearly lagged behind the others. High-income countries services exports increased almost four-fold.

The GATS – Challenges

The GATS provides a multilateral framework of rules for the liberalisation of ‘trade in services’. While many parts of the agreement should be familiar to those who have worked with the GATT, there are important differences between the agreements. The GATS applies to ‘measures’, broadly defined as any kind of governmental measure, affecting trade in all services supplied in any one of the following ways: Cross Border Supply; Consumption Abroad; Commercial Presence; Movement of Natural Persons (Article I:2). Services supplied in the ‘exercise of governmental authority’, as defined by the GATS, are excluded from the scope of the agreement. The bulk of air transport services is also excluded for the time being under the provision of an annex on the sector.
The most important obligations are most favoured nation (MFN) meaning non-discrimination among Member countries; Transparency, or the availability to the public of laws and regulations; Market Access and National Treatment. MFN and Transparency apply to all services covered by the agreement and cannot be qualified. However, Market Access and National Treatment, only apply to chosen sectors, and sometimes with conditions.
The multiple possibilities available to Members in taking market entry commitments make the GATS a complex agreement, but at the same time, a potentially more powerful and flexible one. If done properly, development policy objectives can be pursued and/or supported by the Agreement. The ability to undertake Market Access and National Treatment obligations individually, and independently, allows countries to control the overall level of foreign market presence for different sectors and for different modes of supply. It also allows countries to design regimes that can be more favourable to the operations of national services and suppliers, than to those of foreign ones. This flexibility allows for the tailoring of commitments to the particular needs and policy objectives of each Member.
The significance of GATS commitments is amplified by the fact that the barriers to services trade lie in measures applicable not only to the ‘product’ as in GATT, but also to the provider and the way the service is supplied. As these measures are found primarily in regulations, the GATS more directly impacts domestic regulatory regimes than the General Agreement on Tariffs and Trade (GATT).
Such an impact might call for reform, which in this context may mean deregulation, or ‘re-regulation’, to ensure that the opening of the market achieves its objectives without affecting legitimate policies. Assessing the need for domestic regulatory reform is in itself a challenge due to the host of service sectors to be considered, each one with unique regulatory issues, as well as the larger task of meshing domestic regulations and requirements in a way that makes them compatible and comparable in the framework of the GATS. Such modifications may often require a deeper level of economic and social change as well as a higher level of domestic consent and participation in order to make them effective.
Compounding the complexity of the GATS, and the implications of liberalising under this framework, is the fact that the Agreement is still being developed. WTO Members are currently faced with a multiple challenge including: the finalisation of the GATS framework, i.e. developing disciplines on safeguards, subsidies, government procurement, and on domestic regulation; the negotiation of more specific commitments on a sectoral basis (while needing to devote a significant amount of attention to the determination of their opportunities and policy objectives for undertaking commitments and obtaining concessions from trading partners), and finally, the assessment of the impact of these undertakings on domestic regulation.
Furthermore, there is not a sufficient understanding of the economic, social and environmental impacts of services trade liberalisation or of how policy-making processes and considerations differ from those of the GATT. The lack of reliable and comprehensive data on services trade and of uniform definitions regarding sectors makes it difficult to assess the liberalization achieved under the Agreement. The legal intricacies, resulting in part from the need to adapt the existing international trade principles to the way services are traded and to necessary political compromises, are accompanied by undeveloped jurisprudence. In all of the above considerations, countries with less technical capacity, and less developed services sectors are at a disadvantage.
How Concerns Can Be Addressed through the GATS The GATS structure and flexibility allow Members to address a wide variety of concerns, including those related to sustainable development. In general, there is nothing in the preventing governments from pursuing legitimate regulatory objectives, including those for developmental or environmental purposes.

Development

Service sectors such as health, education, transportation, energy, financial and telecommunications are critical infrastructural services in nearly all countries, often with significant levels of government intervention, either as regulators or as providers of the services. Several concerns arise in relation to the proposed liberalisation of trade in these sectors. Chief among them is the fear that liberalization of trade in services will reduce the ability of governments to provide public service or will make government provision less economically viable. In this respect, it is important to bear in mind that the Agreement on Trade in Services excludes from its application ‘services supplied in the exercise of governmental authority’. The GATS defines these as ‘any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers’. In sectors covered by the Agreement, liberalisation does not necessarily mean the extinction of public services as is evident if one considers the range of ‘public services’, such as education, that have been provided for quite some time in parallel by public and private actors. Universal service requirements are also possible under the Agreement. For example, governments normally impose universal service obligations on at least one and sometimes all privately owned telecom operators; they may also impose universal service requirements to ensure that education or health care are accessible to the whole population.
Incompatibility might arise if the measures to pursue them are discriminatory, but even this can be resolved in advance when taking specific commitments in the sectors by introducing reservations, for instance under national treatment. It is important to assess these concerns in light of the realities of the market and bear in mind that public suppliers might be addressing the needs of segments of the population that are different from those targeted by private operators.
Further concerns include cultural differences; standards of service; stability and control over institutions; and competition policy issues. While these types of concerns must be addressed in domestic policy, the Agreement recognizes the need for regulation to achieve legitimate objectives including protection of consumers, quality of the service, competence of suppliers and integrity of the market.
Competition concerns have, for instance, been addressed for the basic telecommunications sector separately in a negotiated instrument called the Reference Paper. Among other things, the reference paper addresses issues such as prevention of anti-competitive practices; ensuring interconnection; independence of regulator, universal service requirements neutral to competition conditions etc. The aim of these is to ensure that market access and national treatment commitments are not counteracted by non- competitive practices. Thus, it imposes disciplines that ensure that governments put regimes in place that can achieve their policy goals without adversely affecting commitments.

Developing Countries

In relation to the challenges faced by developing countries, GATS Articles IV and XIX are perhaps the most important provisions. Article IV establishes an obligation to facilitate the increased participation of developing countries in services trade, through the negotiation of specific commitments that promote the strengthening of their domestic services capacity, improving access to information networks and distribution channels, and the liberalisation of sectors of export interest to them. While some claim that Article IV has never been effectively operationalised, because existing commitments do not respond to what the article calls for, others would argue that the only ‘obligation’ is to negotiate sectoral market access and national treatment concessions.
Article XIX is complementary to Article IV. It provides for special flexibility for developing countries in terms of the pace of their liberalisation and also affirms the respect for national policy objectives. Most importantly, it opens the door for developing countries to pursue the objectives of Article IV through conditioning access to their markets. This tool to ensure that foreign services and suppliers contribute to development efforts conducted domestically, has been scarcely used, and has consisted so far of requiring training of national employees. Some During the High-level Segment of CSD-8 last May, ten countries spoke on the issue of sustainability assessments of trade policy, a relatively new set of methodologies to understand the relations between trade policy and sustainable development.
Eight delegations made particular reference to a dialogue held on 6-8 March in Quito, Ecuador, where around 100 experts from 30 countries discussed the concept, purpose and usefulness of
sustainability assessments. Ecuador, host country of the event, said that the meeting proved that constructive, multisectoral dialogue is possible on a complex issue such as trade and sustainable development. The Brazilian delegation, in turn, characterised the meeting as a contribution to building trust on this topic, while the delegation of Germany underlined that common ground was found in the course of the discussion.
The dialogue, chaired by the governments of Ecuador and the Netherlands and organised by WWF-International and Fundación Futuro Latinoamericano, was an opportunity to take stock of the debate on the need for sustainability assessments and their possible nature through an open exchange of views among diverse actors, including government officials, researchers, international organisations and NGOs. In particular, the meeting provided a propitious environment for clearly articulating concerns around this topic, as well as possible ways to surmount them. The meeting demonstrated two important facts. One, there is a wide variety of approaches to assessing the sustainability implications of trade policies, a diversity that was welcome and encouraged. Two, institutions in developing countries have elaborated methodologies and conducted case studies, which compare favorably against similar initiatives in OECD countries.
The meeting made clear that there is interest in sustainability assessments as tools to facilitate the consideration of economic growth and social and environmental variables in trade policy making, but it also revealed deep concerns about their potential use as instruments of conditionality in international economic relations.
As these assessments are untested tools, their usefulness, relevance and, more importantly, purposes need to be further explored. In this regard, several case studies and analyses presented at the meeting provided illustrative examples.
In general, the concerns expressed can be divided in two types. On the one hand, there are political concerns about the implementation of sustainability assessments internationally. There were no objections to sustainability assessments conducted nationally. On the other hand are the concerns regarding the methodological approaches. In particular, the point was raised about limiting the assessments to trade policy when a sustainability assessment, to be such, should address other issues, perhaps more important than trade, in international economic relations, such as financial relations and structural barriers to development.
The meeting made some inroads into ways to overcome these concerns. Building experience at the national and sectoral levels and seeking partnerships that tap existing capacities in developing countries are examples. Participants also identified illustrative guidelines to improve the way methodologies could address social, economic and environmental aspects of international trade.

Contact: Nicolás Lucas, Fundación Futuro Latinoamericano (ffla@interactive.net.ec) or Mireille Perrin, WWF International (mperrin@wwfnet.org)

On 10 May, the European Patent Office revoked a patent jointly granted to the US Department of Agriculture and W.R. Grace for a fungicide based on the Indian neem tree. Five years ago, the
European Parliament’s Green Party, Dr Vandana Shiva of the Research Foundation for Science, Technology and Ecology, and the International Federation of Organic Agriculture Movements launched a campaign aimed at revoking patents based on false claims of innovation in cases where the specific characteristics of the product source have in fact been part of local knowledge for centuries. With regard to the neem tree, for instance, countless generations of Indians have used neem seed extracts to make insect repellents, medicines and other specific products.
The patent was revoked because the existence of such ‘prior art invalidated the patent holders’ claim of a discovery or innovative step in developing the neem-based fungicide. The fact that most countries’ patent laws ignore prior art, which often only exists in oral form and age-old traditional practices, has led to what many consider to be biopiracy regarding the South’s rich biological resources and traditional knowledge (about 90 other patents have been granted around the world for products and processes involving the neem tree alone). The US Patent Office was brought to cancel a patent for turmeric, when the Indian government showed that the plant had been used in traditional medicine for centuries.
The WTO TRIPs Council is currently considering ways to protect traditional knowledge in the context of the Article 27.3(b) review regarding patenting requirements for life forms.
In related news, the Indian government on 15 May introduced to the Parliament a new Biological Diversity Bill, which would allow free access to Indian nationals to genetic resources for all but commercial purposes. The bill proposes the establishment of a National Biodiversity Authority, which would need to approve all applications for intellectual property rights either within or outside India for inventions based on research or information linked to a resource obtained from India.
EU to Maintain Hormone Beef Ban The European Union announced on 24 May that it would not lift the import ban on hormone-treated beef after the Scientific Committee on Public Health-related Veterinary Measures confirmed that no new scientific evidence existed that would reverse its earlier conclusion that one of the incriminated hormones (17B-oestradiol) should be considered a complete carcinogen’. An interim report with similar findings was roundly criticised by US and Canadian authorities in May 1999 (Bridges Year 3 No.4, page 5).
According to the European Commission, the Scientific Committee reviewed the most recent reports and literature concerning the hormones and concluded that these contained no new elements.
The Commission now proposes to definitely ban 17B-oestradiol and its steroid derivatives in animal husbandry, and prolong the ‘temporary’ ban in force since 1989 on the other five hormones while complete scientific information is being sought.
In July 1999, the WTO authorised Canada and the US to impose trade sanctions on EU exports, worth C$11.3 million and US$116.8 million respectively, after a compliance panel found that the European Union had not complied with the WTO ruling that the ban was being maintained without adequate scientific evidence.
Would argue that this tool has not been used because many development objectives can be met without resort to scheduling special conditions; others that this minimal use could be attributed
in part to unawareness of the tool as such and also to the demanding nature of the preparatory process for a multilateral negotiation in services.

Environment

The environmental challenges related to the liberalisation of trade in services are not dealt with explicitly in the GATS except for Article XIV (General Exceptions) and the Decision on Trade in Services and the Environment. While it is widely recognised that important environmental considerations are relevant in the context of services trade liberalisation, WTO Members have not felt a need for more in-depth discussions on the issue nor for specific provisions relating to the environment in the GATS.
Measures for environmental considerations are not prevented by the Agreement on Trade in Services, as is the case for any other domestic regulation for legitimate objectives, and do not need to be inconsistent with sectoral specific commitments either. In case of inconsistencies, the general exceptions and/or reservations regarding measures inconsistent with market access or national treatment obligations might be sufficient to resolve the matter.
Article XIV(b) on General Exceptions in the GATS is structured similarly to Article XX(b) of the GATT (i.e. ‘necessary to protect human, animal or plant life or health’). Article XIV does not contain the equivalent of GATT Article XX(g) as it was deemed unnecessary during negotiations ‘since no additional cover would be obtained beyond that already contained in GATT.
However, it was agreed that this connection would be explored further along with other subjects.
The Decision on Trade in Services and the Environment [acknowledges] that measures necessary to protect the environment may conflict with the provisions of the [GATS]. It goes on to say that it is not clear whether additional provisions are necessary to resolve possible conflicts beyond what is carried in Article XIV (b). Study of this issue was assigned to the Committee on Trade and Environment (CTE) with the task of determining whether any changes should be introduced in Article XIV and to make further recommendations on the relationship between Trade in Services and the Environment in relation to sustainable development. This work has remained on the CTE agenda with little progress, and currently focuses on benefits of trade in environmental services, barely touching on questions related to the adequacy of Article XIV.
Although no significant discussion has taken place on the need for additional environmental mechanisms under the Agreement, some approaches are emerging. In relation to tourism services, it has been proposed to develop an annex for the sector, including provisions to ensure that liberalisation of environmental services is consistent with sustainable development of the sector.
Furthermore, it is conceivable that MEA objectives could be pursued, for example, by requiring suppliers originating from countries with higher environmental standards to live up to those standards in host countries which are still in the process of defining their own environmental strategies. This kind of mechanism could be compatible with GATS commitments through the inclusion of deviations from national treatment to cover higher standards of environmental protection for foreign suppliers, for example.

Conclusion

Services and trade in services are growing rapidly in developed and developing countries. As an instrument for services trade liberalisation, with deep domestic implications, the GATS is likely to attract more scrutiny. As such, continued liberalisation is likely to require considerably higher levels of public support in order to effect meaningful change. These efforts will need to overcome the scepticism surrounding previous privatisation and deregulation initiatives, which should be de-linked from services trade liberalisation and foreign involvement in domestic economies under the GATS.
The GATS allows great flexibility in accommodating national goals if WTO Members are able to meet the challenges posed domestically and multilaterally. To the extent that governments are able to take on new commitments under the GATS, with clear objectives domestically and internationally and the necessary regulatory systems in place, the GATS could work as a mechanism for sustainable development.
While the GATS is well supported by WTO Members and many recognise the opportunities in services trade liberalisation, they face a formidable challenge in advancing work. Services trade liberalisation is not well understood and the GATS is complex and relatively unexplored compared to the GATT. Furthermore, governments face a fundamentally different challenge in liberalising under the GATS; domestic regulatory reform is often necessary to achieve the lowering of services trade barriers. There is not a right formula to consider and answer the universe of issues; the’right approach‘ has to be determined through consideration of each country’s objectives on a case-by-case basis. In order to make meaningful and lasting progress governments will have to identify more clearly domestic development strategies and they will need to do this in consultation, and with the support of, broader segments of their own societies.

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