Services and EPA: a difficult but vital relationship

22 October 2009

The Economic Partnership Agreement (EPA) negotiations intend to foster the gradual integration of the ACP countries into the global economy on the basis of an open, transparent, and predictable framework for goods and services. So far, a full and comprehensive EPA including services has been concluded with the Caribbean countries, while negotiations on this topic continue with all other African and Pacific partners. These EPA services negotiations have been attracting much attention, especially from civil society, and are often subject to criticism. However, the scope of these negotiations and the impact of the liberalisation of trade in services that could derive from them are often poorly understood. This article attempts to explore some key features of services liberalisation within the context of the EPAs and explain why services should be treated as a priority by the EU's ACP partners in these negotiations.
 
Why include services in the EPA negotiations?
 
As a starting point for the inclusion of services in the EPA negotiations, there is firstly the acknowledgment that services have become the backbone of the economy. Beyond being an economic activity on its own, services also support the competitiveness of the agriculture and manufacturing industries, which are dependant on services for their output (the most obvious examples being transport, banking, telecommunication, accountancy, and research and development – all of which are key inputs for industrial or agricultural production). Additionally, in most developing countries, services represent more than 50 percent of Gross National Income. Considering the centrality of services to economic growth and competitiveness, one can hardly envisage building a deep and comprehensive trade relationship without including services.
 
Secondly, many advantages can derive from services liberalisation. Trade in services leads to a greater transfer of know-how and management, especially when foreign services suppliers establish themselves in the host country and hire locals. Services liberalisation also benefits the consumer by providing wider choice at a lower price through increased competition. Moreover, services liberalisation will boost trade itself, as you cannot trade efficiently without a competitive distribution, transport, telecoms and banking industry. And the 2009 UN Conference on Trade and Development's Economic Development in Africa report rightly underlined the significance of the sector. “Services are an important source of export earnings for a large number of African economies and a factor of their competitiveness,” the report reads. “Yet the development of service industries may require financial, human and technological resources that are not available locally".
 
Thirdly, in this context, trade agreements covering services have a specific added-value. These agreements will provide ACP countries with greater access to the European market. Finally, services agreements, especially when introducing some regulatory common principles, will increase legal certainty and predictability, both of which are key factors in stimulating foreign direct investment.
 
Trade in services: what it is and what it is not
 
Much has been said about the implications of services liberalisation through trade agreements. A frequent allegation is that the so-called ’policy space‘ of governments would be adversely affected by services liberalisation, as would be the capacity of sovereign states to provide public services such as education, health or access to water.
 
To address this concern, one should first clarify what countries are actually committing to in a trade agreement covering services. When undertaking services commitments, countries are free to select the individual sectors for which they wish to liberalise market access and/or national treatment. In the context of the EPAs, despite them being negotiated on a regional basis, this remains valid and commitments are taken on an individual basis, respectful of each country's level of development and public policy priorities.
 
This is further enhanced by following a ’positive list‘ approach, thus inscribing only those sectors that are being liberalised in the agreement (in the so-called "schedules of commitments") by each respective country that is part of the agreement. For each country and each of the sectors it has chosen to liberalise, the commitment indicates the level of market access and national treatment that is granted to foreign services suppliers. Each commitment can therefore be proportionate, reflecting the specific situation in each country for every sector.
 
For example, construction services are treated very differently by Caribbean countries in the framework of the EC-Cariforum EPA. The Dominican Republic and Jamaica have taken commitments for construction services but have limited them to hotels in excess of 100 rooms, thereby helping to preserve small local businesses. Antigua and Barbuda added a joint venture requirement, whereas Suriname introduced a transition period until 2013. As these examples demonstrate, possibilities of variations in commitments are unlimited.
 
Secondly, liberalisation of trade in services does not equal deregulation. Indeed, liberalisation of trade in services as understood in the framework of the EPA negotiations is precisely defined and strictly limited to the concepts of market access and national treatment as defined by the GATS. Beyond those elements of market access and national treatment (which can be – as described above – only partially committed by a country), each party to a services agreement remains free to enact domestic regulation as it sees fit. For example, a commitment on market access for telecommunication services creates the obligation for the given country to accept the establishment of foreign services suppliers under the conditions set out in its schedules of commitments (with or without capital limitation, within a limited number of licences, etc). However, this commitment does not create any obligation with regard to regulatory questions such as universal service (regarding both its scope, definition and financing) or licensing procedures.
 
Equally, liberalisation of architectural services does not prevent a country from defining the professional requirements and diplomas necessary for providing such services. Finally, it must be stressed that services supplied in the exercise of governmental authority as well as subsidies are excluded from the scope of the services part of the EPAs, thereby leaving that area of public policy untouched. Services liberalisation therefore provides a powerful and flexible tool to enhance trade while preserving a country's ability to regulate its market and pursue national policy objectives.  
 
Investment: a challenge for the negotiations
 
The EU proposed to its ACP partners to extend the negotiations to include investment as it is related to the establishment of an economic activity. Establishment is already covered by the GATS through the so-called "mode 3," which is the mode of supply of services that implies the establishment of the services provider in the country where the service is provided (i.e. a bank establishes a subsidiary in a foreign country). Starting from there, the EU proposes to extend the very same concept to non-services sectors – such as manufacturing, agriculture, or forestry – which would cover the establishment for those economic activities in the EPA. Indeed, if a services agreement can cover services incidental to manufacturing, why not include the establishment of manufacturing activities?
 
The EU's proposal concentrates on ’productive investments‘ (or foreign direct investment) linked with the maintenance or the creation of a real economic activity and does not cover portfolio investments. In the proposed framework, investment commitments would be subject to the caveats explained above and applicable to services. This would therefore inject the necessary flexibility to commitments for investment in non-services sectors.
 
Although this subject has attracted much attention and has been dropped from the multilateral agenda, the approach proposed by the EU demonstrates a strong development component. The combination of services and non-services sectors under the heading ’establishment‘ constitutes probably the tool with the greatest development potential. Indeed, creating an open, transparent and predictable environment that delivers enhanced legal certainty would reduce the current perceived risk to invest in many of the ACP economies. It would boost investor confidence and lead to increased investment flows, both North-South and South-South.
 
Regional integration as a prerequisite?
 
Regional integration is of paramount importance for Africa's development, which is the reason why EPAs are intended to consolidate regional integration initiatives within the ACP countries. In the services area, liberalisation commitments enshrined in a trade and development agreement can contribute to regional integration. Indeed, the EU proposed that services commitments ACP countries take vis-à-vis the EU are also taken vis-à-vis their regional partners. Enhancing the provision of services in key sectors such as transport between neighbours is essential, especially for landlocked countries. At the same time, the pre-existence of a fully integrated regional market in services is not necessary to enter into or to pursue negotiations with the EU – since commitments are taken on a country-by-country basis – and should not constitute a barrier or an excuse to those negotiations. EPAs can be a stepping stone for fostering regional integration rather than a stumbling block and should not be postponed until regional integration has been completed.
 
Conclusion
 
Services liberalisation as well as more open frameworks for investment can make a strong contribution to development. We should not let misconception or misunderstanding stand in the way of an agreement covering services. Far from acting as a straightjacket on countries' policy space, the EU's approach is flexible and allows services liberalisation to be tailored to each country's needs and national policy objectives, thus boosting domestic reform efforts and the regional integration process among regional partners of the ACP countries.
 
Fabien Gehl is an official in the Directorate-General of External Trade at the European Commission and is in charge of the coordination of EPA negotiations on services. Views and opinions expressed in this article are solely those of the author.

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