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The General Agreement on Trade in Services (GATS) reached in the Uruguay Round is perhaps the most important single development in the multilateral trading system since the GATT itself came into effect in 1948. It for the first time extends internationally-agreed rules and commitments into a huge and still rapidly growing area of international trade. Conventionally measured trade in services is generally agreed to be equivalent in value to about one-quarter of international trade in goods, not including the proportion of international trade in services within national boundaries. The reachof the GATS rules extends to all forms of international trade in services. This means that the GATS agreement represents a major new factor for a large sector of world economic activity. Here we will briefly look at the GATS agreement itself as well as the eight annexes which set out some supplementary rules and establish the basis for continuing negotiations.
I. The Scope of the Agreement
Part I defines the scope and coverage of the GATS. The agreement covers all internationally-traded services. This includes all the different ways of providing an international service, GATS defines four:
1. Cross-border supply of services. This refers to services supplied from one country to another, e.g. international telephone calls. This mode of service supply emphasizes a clear geographical separation between seller and buyer: only the service itself crosses national frontiers.
2. Consumption abroad. This means consumers or firms making use of a service in another country. Typically, this will involve the consumer traveling to the supplying country, perhaps for tourism or to attend an educational establishment. Like cross-border supply, this is a straightforward form of trade which raises few problems, since it does not require the service supplier to be admitted to the consuming country.
3. Commercial presence. This refers to a foreign company setting up subsidiaries or branches to provide services in another country. Examples would be the establishment of branch offices or agencies to deliver such services as banking, legal advice or communications.This is probably the most important mode of supply of services, and also raises the most difficult issues for host governments and for GATS negotiations.
4. Presence of natural persons . This refers to individuals traveling from their own country to supply services in another. The foreign supplier's office may be staffed entirely by local personnel. However, the supplier may well feel a need to employ some foreign managers or specialists. When this is the case, commercial presence will be found together with the presence of natural persons. The presence of natural persons may also be found alone, with no permanent commercial presence, and the visiting persons involved may be providing services as independent individuals.
II. General Obligations and Disciplines
Part II sets out general obligations and disciplines. These are basic rules that apply to all members and, for the most part, to all services.
1. Disciplines on most-favored-nation treatment. A basic most-favored-nation (MFN) obligation states that each party "shall accord immediately and unconditionally to services and service providers of any other Member treatment no less favorable than that it accords to like services and service providers of any other country". However, it is recognized that MFN treatment may not be passible for every service activity and, therefore, it is envisaged that Members may indicate specific MFN exemptions. Conditions for such exemptions are included as an annex and provide for reviews after five years and a normal limitation of 10 years on their duration. Apart from services specified in individual MFN exemption lists, the only permitted departure from MFN treatment under the GATS is among countries that are members of regional trading arrangements. The agreement also permits any WTO member to enter into an agreement to further liberalize trade in services only with the other countries that are parties to the agreement, provided the agreement has "substantial sectoral coverage", eliminates measures that discriminate against service suppliers of other countries in the group, and prohibits new or more discriminatory measures.
2. Disciplines on transparency. Traders will be badly handicapped in doing business in a foreign country. unless they know what laws and regulations they face. This problem is particularly serious for trade in services, because so many of the relevant government rules are domestic regulations. The GATS requires each member to publish promptly all relevant laws and regulations that affect operation of the agreement. Members must also notify the Council for Trade in Services of new or changed laws, regulations or administrative guidelines that affect trade in services. By the end of 1996, each member should have established an enquiry point to respond to requests from other members for information on these matters. To facilitate the increased participation of developing countries in world services trade, developed countries are to establish contact points to which the service suppliers, not just the governments of developing countries can turn for information about commercial and technicat aspects of the supply of services, professional qualifications required, and the technology available.
3. Disciplines on domestic regulations. Since domestic regulations, not border measures, provide the most significant influence on services trade, provisions spell out that all generally-applied measures that affect trade in service sectors for which a country has made commitments must be applied reasonably, objectively and impartially. There must also be tribunals or other procedures to which service suppliers can apply for a review of administrative decisions affecting their trade. The Council for Trade in Services is called on to develop rules to prevent requirements on qualifications for service suppliers, technical standards or licensing from being unnecessary barriers to trade. The GATS also urges members to recognize the educational or other qualifications of service suppliers of other countries. Qualification requirements are not to be applied in a way that discriminates between countries or constitutes a disguised restriction on trade in services, and should be based wherever appropriate on internationally agreed standards. The agreement contains obligations with respect to recognition requirements (educational background, for instance) for the purpose of securing authorizations, licenses or certification in the services area. It encourages recognition requirements achieved through harmonization and internationally-agreed criteria. Further provisions state that parties are required to ensure that monopolies and exclusive service providers do not abuse their positions. Restrictive business practices should be subject to consultations between parties with a view to their elimination.
4. Disciplines on monopolies, exclusive service and restrictive business practices. A monopoly supplier of a service must not be allowed to act inconsistently with a member's MFN obligations or its specific commitments, nor to abuse its monopoly position. If a country that has made specific commitments to allow supply of a service later grants monopoly rights for that supply, and thus negates or impairs the commitments, it will have to negotiate compensation.
5. Disciplines on exceptions. The agreement permits members in serious balance-of-payments difficulties (or threatened by such difficulties) to restrict trade in services for which it has undertaken commitments. Developing countries, or countries in transition, may use such restrictions to maintain a level of reserves adequate for their development or transition programs. However, such restrictions must not discriminate among members, cause unnecessary damage to the interests of other members or be more restrictive than necessary in the circumstances, and must be temporary and phased out as the situation improves.
The agreement also contains both general exceptions and security exceptions provisions which are similar to Articles XX and XXI of the GATT.
6. Disciplines on safeguards and subsidies. On safeguards, Article X in Part II provides that multilateral negotiations on the question of emergency safeguard measures, based on the principle of non-discrimination, shall be completed by the beginning of 1998. (This deadline was extended later to 2002.) Until then, a member may modify or withdraw a specific commitment, in spite of the normal rule that such commitments cannot be changed for three years, if it can show the Council for Trade in Services that the action is necessary.
Article XV provides that negotiations shall take place also on subsidies affecting services, and on the possible need for countervailing duties. No date is set in the Article for these negotiations. The Article recognizes that subsidies can distort trade in services, but says that the negotiations should recognize the role of subsidies in developing countries. It provides that a member adversely affected by another member's subsidy may request consultations, and that the request "shall be accorded sympathetic consideration".
III. Rules Governing the Schedule of Commitments
Part III sets out the rules which have shaped each WTO member's individual commitments to admit foreign suppliers of services to its market. Its two main articles deal with market access and national treatment. Both set out requirements that apply only to scheduled sectors.
1. Market access. Article XVI starts by staling that each member is to give no less favorable treatment to the services and service suppliers of other members than is provided in its schedule of commitments. This provision makes it clear that service commitments resemble those in a GATT schedule at least in one very important respect: they are bindings which set out the minimum, or worst permissible, treatment of the foreign service or its supplier, and of course in no way prevent better treatment from being given in practice.
It also sets out six forms of measures affecting free market access that may not be applied to the foreign service or its supplier unless their use is clearly provided for in the schedule. They are:
·limitations on the number of service suppliers;
·limitations on the total value of services transactions or assets;
·limitations on the total number of service operations or the total quantity of service output;
·limitations on the number of persons that may be employed in a particular sector or by a particular supplier;
·measures that restrict or require supply of the service through spe- cific types of legal entity or joint venture; and
·percentage limitations on the participation of foreign capital, or limitations on the total value of foreign investment.
2. National treatment. Article XVII deals with national treatment very similar to those of the national treatment rule in GATT's Article III. It states that in the sectors covered by its schedule, each member shall give treatment to foreign services and service suppliers no less favorable than it gives to its own services and suppliers. It may be difficult to understand why the right to national treatment is restricted under the GATS to services for which commitments have been undertaken, whereas under the GATT it applies to all goods. The reason lies in the nature of trade in services. Universal national treatment for goods is possible, without creating free trade, because the entry of foreign goods into a national market can still be controlled by import duties, quantitative restrictions and other border measures. By contrast, a foreign supplier of most services, particularly if those services are supplied by commercial or personal presence in the importing country's market, will in practice enjoy virtually free access to that market if given national treatment.
The GATS also says that members may also negotiate additional commitments (not additional restrictions) with respect to other measures affecting trade in services, such as those on required qualifications, standards and licensing.
3. Modifying or withdrawing commitments in schedules. Part IV provides rules for modifying or withdrawing commitments in schedules. Circumstances may well arise in which a government may wish to take back something it has given in past negotiations. It can do so, but only at a price, and after due notice. As far as notice is concerned, no commitment can be modified or withdrawn until at least three years after it entered into force. At least three months' notice must be given of the proposed change. The price to be paid will be a readjustment of the balance of advantage in commitments with any WTO member affected by the change. This will normally be settled by negotiation. If all goes well, agreement will be reached on new commitments to offset those being withdrawn, so that the general level of commitments between the countries concerned is no less favorable to trade than 'before. In the event that the negotiations do not lead to agreement, a country which believes it has a right to compensation may take the matter to arbitration.
The most important element in this part is the provision that, starting not later than January 2000, WTO members shall enter into "successive rounds of negotiations with a view to achieving a progressively higher level of liberalization" of trade in services. Moreover, in setting the guidelines for future negotiations, the Council for Trade in Services will decide how to handle two issues of great concern to developing countries. One is the question of how countries should be given negotiating credit for efforts they may have undertaken to open up their markets to foreign service suppliers since the previous round of multilateral negotiations. The other concerns the special treatment to be given to least-developed countries. Part V of the agreement contains institutional provisions, including consultation and dispute settlement and the establishment of a Council on Services. The responsibilities of the Council are set out in a Ministerial Decision.
IV. Annexes to the GATS
There are eight annexes attached to the GATS, namely annex on Article II exemptions, annex on the movement of natural persons, annex on air transport, annex on financial services, second annex on financial services, annex on telecommunications, annex on negotiation on basic telecommunications, and annex on negotiation on maritime transport services.
Two of the most important and permanent annexes, those on Article II exemptions and on the movement of natural persons, have already been discussed in conjunction with the GATS provisions on most-favored-nation treatment and presence of natural persons. The others concern four specific sectors of trade in services: air transport, financial services, telecommunications and maritime transport services.
1. Annex on the Movement of Natural Persons. This annex concerns the movement of labor. It permits parties to negotiate specific commitments applying to the movement of people providing services under the agreement. It requires that people covered by a specific commitment shall be allowed to provide the service in accordance with the terms of the commitment. Nevertheless, the agreement would not apply to measures affecting employment, citizenship, residence or employment on a permanent basis.
2. Annex on Air Transport Services. International air transport services are for the most part governed by arrangements negotiated under the Chicago Convention. The annex specifically excludes this complex network of bilateral agreements on air traffic rights from the new services rules. In consequence, the GATS, as far as the air transport sector is concerned, applies at present only to aircraft repair and maintenance services, the selling and marketing of air transport services (a function defined as not including the pricing or conditions of transport services) , and computer reservation systems.
The WTO dispute settlement procedures can be invoked only in respect of obligations specifically assumed by members, and only after any bilateral or other procedures have been exhausted. A provision for periodic reviews of developments in the air transport sector, to be undertaken at least once in every five years, leaves the door open for a possible future extension of GATS commitments in the sector.
3. Annex on Financial Services and the Second Annex on Financial Services. In negotiating the GATS, it was generally recognized that the very important sector of financial services would need some special treatments. Governments everywhere feel the need to regulate banks, insurance companies and other providers of finance or financial information closely. One reason is that a country's economic growth and development are linked to the stability of its financial institutions. The other is that users of financial services need protection against providers of these services who lack sufficient financial backing or are badly managed or dishonest. The main GATS Annex on Financial Services is designed to meet these needs.
"Services supplied in the exercise of governmental authority", the activities of central banks or other authorities carrying out monetary or exchange rate policies are excluded from the coverage of the GATS. The exclusion of foreign service suppliers also extends to activities which form part of statutory social security or public retirement plans, or other activities that are carried out by a public entity for the account or using the financial resources of the government, provided domestic non-governmental financial suppliers are also not allowed to take part in these activities.
The central provision of the annex is what is generally known as the "prudential carve-out", an exception from the GATS rules designed to ensure that governments can protect the financial system and its users. "Notwithstanding any other provisions" of the GATS, WTO members are free to take prudential measures to protect investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Yet this exception cannot be used as an escape route from obligations under the agreement. The remainder of the annex Identifies sixteen forms of financial services covered by its special rules, and descriles them in considerable detail.
Governments believed that broader commitments could be achieved if negotiations lasted a little longer, up to the end of June 1995, so they agreed in the Second Annex on Financial Services that, until then, members could maintain some measures that were inconsistent with the MFN requirement, without formally listing these measures as MFN exemptions, and would be free to change scheduled commitments on financial services.
4. Annex on Telecommunications and Annex on Negotiations on Basic Telecommunications. Telecommunications is a service sector which in itself is exceptionally large and dynamic and, at the same time, vital to the delivery of many other services. The annex on telecommunications establishes the right to make use of public telecommunications networks and services. Each member is required to ensure that all service suppliers seeking to take advantage of any commitments included in its GATS schedule are allowed access to, and use of, public basic telecommunications "on reasonable and nondiscriminatory terms". "Non-discriminatory" is defined to mean not only that the foreign service supplier will receive MFN and national treatment but will also be able to use the telecommunications network or service on terms and conditions as good as those enjoyed by any other user in like circumstances. Rights under the annex apply to all available public services such as telephone, telegraph, telex and data transmission, but not to the transmission of radio or television programming.
The annex spells out in detail the implications of the basic right of access and use. The annex allows developing countries to place some limitations on access and use if this is necessary in order to strengthen their telecommunications capacity, but any such limitations have to be specified in their GATS schedules. Other provisions call for technical cooperation with developing countries. In the Uruguay Round, many countries made commitments to permit the supply of what are defined as "value-added" telecommunications services that is, services which make use of telecommunications networks, for instance electronic mail services and on-line data retrieval services. In general, however, they did not make commitments on the supply of ''basic telecommunications", the networks and other services that allow telephone messages and other traffic to be transmitted. Negotiations to liberalize basic telecommunications were taken up after the Round, with the aim of completion in April 1996. An Annex on Negotiations on Basic Telecommunications played a similar role for these negotiations as the Second Annex on Financial Services did for the 1994-1995 negotiations: it postponed the need to specify exceptions to MFN treatment for basic telecommunications until the negotiations were over.
5. Annex on Negotiations on Maritime Transport Services. This annex is another which allowed negotiations to continue after the end of the Uruguay Round to liberalize the supply of services in maritime transport. It closely resembles that on negotiations on basic telecommunications. There is also a similar Ministerial Decision which specified arrangements for the maritime transport services negotiations, to be concluded by June 1996.
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