55548 DIREC TIONS IN DE VELOPMENT Trade Trade in Services Negotiations A Guide for Developing Countries Sebastián Sáez, Editor Trade in Services Negotiations Trade in Services Negotiations A Guide for Developing Countries Edited by Sebastián Sáez © 2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents List of Contributors ix Foreword xi Acknowledgments xiii Abbreviations xv Chapter 1 The Strategic Development Role of Trade in Services 1 Sebastián Sáez Why This Book? 4 Understanding the Strategic Nature of Liberalization 6 The Strategic Role of International Agreements in Services 11 Notes 14 References 15 Chapter 2 Negotiating Trade in Services: A Practical Guide for Developing Countries 19 Mario Marconini and Pierre Sauvé Introduction 19 v vi Contents Mapping a Strategy for Services in National Development Plans 21 Preparing for Service Negotiations 25 Conducting Service Negotiations 44 Enhancing the Capacity to Supply 63 The Challenge of Aid for Trade in Services 76 Conclusion 81 Notes 81 References 84 Chapter 3 The Negotiation and Management of Regulations in the Trade in Services 87 Sebastián Sáez and Marcel Vaillant Understanding Service Regulations: The Basic Components of SERET 88 Building SERET: The Positive List Approach 101 The Case of PTAs and the Negative List Approach 109 Conclusions 112 Annex 3A Statistics on Service Agreements 113 Notes 115 References 116 Chapter 4 Liberalization in the Trade in Services: A Negotiation Exercise 121 Sebastián Sáez and Anna Lanoszka The Trade Dimension of Logistics Services 123 The Trade Dimension of Health Services 134 Trade in Services: A Negotiation Exercise 147 Annex 4A Health-Related Services 163 Notes 168 References 168 Index 171 Boxes 2.1 The Place of Services in National Development Strategies 24 2.2 The Policy-Making Benefits of Effective Intragovernmental Coordination 28 Contents vii 2.3 Performing a Trade-Related Regulatory Audit in Services 37 2.4 Illustrative Examples of Trade-Related Regulatory Audits 41 2.5 Key Questions during the Preparatory Phase of Service Negotiations 43 2.6 The Doha Round Shift toward Collective Requests 47 2.7 Concerns Arising in Service Negotiations 54 2.8 Examples of Best Practice Capacity Building in Services 59 2.9 Best Practices in Trade-Related Training: Course Design and Delivery 62 2.10 The Implementation Phase of the Service Trade Negotiation Cycle 64 2.11 The Strengths and Weaknesses of Domestic Suppliers 67 2.12 Organizing Service Coalitions in Developing Countries 69 2.13 Providing Market Intelligence to Developing-Country Suppliers: The Trade Facilitation Office, Canada 73 2.14 Strengthening the Supply-Side Capacity of Developing-Country Exporters 75 2.15 Addressing Aid for Trade in Services: The CARIFORUM­European Community Economic Partnership Agreement 78 3.1 Sector Classification 89 3.2 Annex 1: Type of Reservation: United States­Chile Free Trade Agreement 111 Figures 2.1 Checklist for Trade Policy Formulation, Thailand 34 2.2 Negotiating Essentials: Interagency Coordination and External Stakeholder Consultations 35 4.1 Overperformers and Underperformers: Gross National Income per Capita and the Logistics Performance Index 124 Tables 1.1 Analytical Structure for the Description of Service Regulations 9 2.1 Sample List of Exporters and Other Domestic Stakeholders in Selected Service Sectors 31 2.2 Factors to Consider in Formulating a Request or Offer 50 3.1 Reasons, Objectives, and Instruments of Regulation in Selected Service Sectors 90 3.2 Discrimination and Rules 90 viii Contents 3.3 Foreign Suppliers and Types of Impact: Discriminatory and Nondiscriminatory Restrictions 91 3.4 Modes of Supply and the GATS 92 3.5 Schedule of GATS Commitments 93 3.6 Comparative Coverage of Rules in GATT and the GATS, Market Access Modes 94 3.7 PTAs to Achieve Service Liberalization 100 3.8 An Example of a Service Schedule 102 3.9 First Commitment Schedule Downloaded 104 3.10 Pasting the W/120 Code for Each Mode of Supply in the Subsector 106 3.11 Nesting Horizontal Commitments 107 3A.1 Service Trade Agreements by Type, Hub Country, Partner, and WTO Notification Year 113 4.1 Trade in Logistics Services: Examples of Restrictions 127 4.2 Freight Logistics Checklist 132 4.3 Logistics Services: Issues in the Development of Negotiating Positions 135 4.4 The Modes of Trade in the Health Sector 139 4.5 Health Service Trade: Issues to Consider in Developing Negotiating Positions 144 4A.1. Health-Related Services: Relevant Sectors and the Corresponding CPC Classifications 163 List of Contributors About the Editor Sebastián Saéz, Senior Trade Economist, International Trade Department, Poverty Reduction and Economic Management, World Bank. About the Contributors Anna Lanoszka, Professor of International Economic Relations, University of Windsor, Ontario, Canada. Mario Marconini from Manatt Jones Marconini, São Paulo, Brazil. Pierre Sauvé, World Trade Institute, Berne, Switzerland. Marcel Vaillant, Professor International Trade, Economic Department, Universidad de la República, Uruguay. ix Foreword The design and implementation of service trade and investment policies have become high-profile issues for many developing-country govern- ments. Many services are critical inputs in production. The efficiency of the service sectors is an important determinant of the productivity of other industries, whether in manufacturing or agriculture, as well as in other services. Reforms that result in higher quality, lower prices, and greater vari- ety in services are able to generate large welfare gains. However, reforms of service sectors have not always proved successful in attaining social or effi- ciency objectives. Developing countries face significant difficulties in design- ing reforms, in part because of concerns about the realization of regulatory objectives. Service sector policy and regulation are domestic matters. Nonetheless, service policies have effects on the ability of foreign firms to contest mar- kets. The trade in services accounts for over a quarter of global trade flows and has been expanding rapidly in the last two decades because of techno- logical changes. As a result, services are now squarely on the agenda in trade negotiations and trade agreements. Trade negotiations can play a comple- mentary role in promoting beneficial policy reforms, as well as improving market access opportunities for exporters and contributing to the compet- itiveness and trade diversification strategies of countries. But getting it right xi xii Foreword is complex--much more so than in the case of the trade in goods--because of the importance of regulation in services. Service regulation is generally sector specific, implying that sectoral regulators and ministries must be part of the negotiating process. The aim of this book is to help policy makers, especially in the least developed countries, address the complexities of the organization, formu- lation, and implementation of trade-related reforms in the service sector. The book provides a conceptual framework for trade policy making and negotiation and practical tools that may be used to guide negotiations on policies that affect the trade and investment in services. The aim is not to be prescriptive, but to provide practical recommendations and tools that may be applied in the pursuit of negotiations on services, including con- sultations and regulatory audits. Trade policy making in services gives rise to great organizational chal- lenges. Service trade policy making requires the participation of all rele- vant agencies responsible for trade matters, as well as a comprehensive consultation process wherein all stakeholders may provide their views and suggestions. The long-term sustainability and stability of trade policies depend not only on the design of policies, but also on the implementation of these policies. Both design and implementation are partly determined by the quality of the consultation processes used to build consensus on the way to conduct reforms and manage a more open economy. Negotiators often have little basic information regarding existing regula- tions and the purpose of these regulations. This problem is compounded by the difficulty of translating existing regulations into the terminology and concepts used in trade agreements. Different methodological approaches are needed to manage different sets of laws and regulations. This book offers a simple tool to help countries organize information to address these challenges. The book also provides practical examples and negotiation exercises that aim to enhance understanding of ways to use the conceptual framework and related tools. I hope the material, tools, and practical exercises that are presented in this volume will prove a useful resource for policy makers and negotia- tors who are engaged in efforts to expand the coverage of trade agree- ments to trade and investment policies in services. Bernard Hoekman Director, International Trade Department The World Bank Acknowledgments This book is the result of the work undertaken by the World Bank's Poverty Reduction and Economic Management Network, International Trade Department. Thanks are due to the following people: Pierre Sauvé (chapter 1), Julio Berlinski (chapter 1, and inputs on aid for trade), Robert M. Stern of the University of Michigan (peer reviewer for chapter 2), Guillermo Arenas, Arti Grover, and Christian Saborowski (chapter 3), and Nora Carina Dihel and Claudia Nassif (peer reviewers of chapter 4) for their valuable comments and suggestions that helped improve the prelim- inary drafts. In addition, Jean-François Arvis, Norbert Fiess, Pierre Latrille, Charles Kunaka, Jose Guilherme Reis, and Phil Schuler provided valuable comments and ideas on the trade in logistics section (chapter 4). Olivier Cattaneo kindly agreed to include part of his work on health services as background to the respective section of chapter 4. Natalia Ferreira-Coimbra provided valuable collaboration in the development of the database cited in chapter 3 as well as comments and suggestions for a preliminary draft of that chapter. Sebastian Acuña developed the pilot of the services regu- lation management tool presented in chapter 3. This project was supported in part by the governments of Finland, Norway, Sweden, and the United Kingdom through the Multidonor Trust Fund for Trade and Development. Finally, the project and the book would xiii xiv Acknowledgments not have been possible without the continuous support and guidance of the staff of the International Trade Department and its management team, in particular Mona Haddad and Bernard Hoekman. The editor would also like to thank Susan Graham, Stephen McGroarty, and Deb Appel-Barker, from the World Bank's Office of the Publisher for their management of the editorial services, design, produc- tion, and printing of this book. Abbreviations 3PL third-party logistics (supplier) CARIFORUM the Caribbean Community (CARICOM) and the Dominican Republic CPC United Nations Central Product Classification GATS General Agreement on Trade in Services (World Trade Organization) GATT General Agreement on Tariffs and Trade GDP gross domestic product NAFTA North American Free Trade Agreement PTA preferential trade agreement SERET service regulations management tool W/120 services sectoral classification list WTO World Trade Organization Note: All dollar amounts are U.S. dollars (US$) unless otherwise indicated. xv CHAPTER 1 The Strategic Development Role of Trade in Services Sebastián Sáez Trade is normally associated with goods. In the case of goods, trade involves shipping goods from one country to another: crossborder trade. In contrast, in services, trade is possible only via sales through the estab- lishment by the producer of a commercial presence in the country of the customer or if either the customer or producer travels across borders. Usually services are seen as intangible, invisible, and perishable, requiring simultaneous production and consumption. Service activities have been traditionally analyzed from the point of view of their impact on the competitiveness of countries. The increase in the trade in services has attracted the attention of policy makers in the last 20 years. Changes in technology have allowed the rise in the trade in services in sectors outside traditional activities such as transportation, tourism, and financial services. Within this new service trade, the most important services have been business process outsourcing (offshoring), call centers, software and information technology services, education serv- ices, health tourism, and others. In short, services have become a means to diversify the international trade of both goods and services.1 Services play a broad and strategic role in the economy. Low-cost, high-quality services generate economy-wide benefits. Financial services, telecommunication services, and transportation services allow a more 1 2 Sáez efficient allocation of resources, are an input in the production of goods and other services, and, through these, contribute to economic growth and the development of countries. Input services facilitate transactions through space (information technology, communication, and logistics services) or time (financial services) (Hoekman and Mattoo 2008, Francois and Hoekman 2009). The new focus on services arises because services have become increas- ingly tradable, thereby allowing the emergence of new and improved export activities. The trade in services, particularly business services, has become a dynamic component of trade and an alternative in export diver- sification for many developing countries. In 2000­2007, before the finan- cial crisis, the trade in services grew as much as the trade in goods, at an average rate of 12 percent. The trade in business services (such as engi- neering, legal, health, accounting, and management services) grew even more quickly, at 14 percent over the same period. Although developed countries have the lion's share of the trade in services, developing coun- tries have also been able to participate successfully in the trade as service providers. Exports of software and business process services contributed about 33 percent to India's exports and about 7 percent to India's gross domestic product in 2008. Many developing countries of different sizes and in different regions have been successful at diversifying exports through services. Brazil, Costa Rica, and Uruguay export professional services and services related to information technologies; Mexico exports communication and distribution services; and Chile's distribution and transportation services are among the most important in Latin America. Countries in Africa and in the Middle East and North Africa, such as Kenya, Morocco, South Africa, and Tunisia, provide professional services to Europe. Exports of health services are successfully provided by coun- tries in Asia such as India, the Philippines, and Thailand, as well as by countries in Latin America (Brazil) and the Middle East and North Africa (Tunisia). Progress in transportation and communication technologies has allowed the fragmentation of production into tasks that may be per- formed in different locations. The connection among tasks requires an efficient logistics service sector to produce goods. The trade in logistics services provides the connection among tasks performed in different countries. Moreover, the quality of logistics can influence the decisions of firms about which country to locate in, which suppliers to buy from, and which consumer markets to enter (Arvis et al. 2007). The Strategic Development Role of Trade in Services 3 In addition, services play a positive role in development strategies. Ghani (2010) describes the positive correlation among service growth, job creation, poverty reduction, and gender equality in South Asia. All these elements are part of a successful development strategy. Furthermore, the service sector concentrates the most highly educated labor force. These findings tend to confirm the positive impact that a well-conducted reform in the service sector might have on the overall development strat- egy of countries. However, service liberalization remains one of the most complex, chal- lenging, and, sometimes, controversial issues in contemporary trade pol- icy. The trade in services often requires the proximity of supplier and consumer. This proximity burden has been weakened by technological progress. Service provision requires a combination of inputs to overcome the proximity burden. Moreover, in certain sectors, the provision of one service requires the joint provision of other services. This is the case of logistics services or tourism services, in which transportation and commu- nication services are critical for a successful industry (Francois and Hoekman 2009). Unlike the trade in goods, in which liberalization revolves mainly, but not exclusively, around the elimination of tariffs and nontariff barriers at the border, service liberalization requires the elimination of discrimina- tory barriers that affect services and service providers. Also, service liber- alization may require the elimination of nondiscriminatory barriers that restrict trade. In addition, among these latter barriers are nontrade meas- ures aimed at achieving legitimate policy objectives, such as the protec- tion of public order and morals, human life, the environment, access by the poor, safety, and other benefits such as healthy competition and con- sumer protection, that may unnecessarily restrict trade. The distinction between protectionist objectives and legitimate policy objectives remains a difficult and sensitive issue. For example, research on Sub-Saharan Africa has shown that, in some countries, if competition is not increased and if road transport services are not successfully liberalized, transport prices will remain high, service qual- ity will not improve, and road users will not reap all the benefits of costly investments in infrastructure rehabilitation (Theravaninthorn and Raballand 2009). In other instances, research has shown that liberalization does not always produce the expected benefits if complementary regula- tory measures such as improvements in prudential regulation and compe- tition policies are not implemented (Stiglitz and Charlton 2005, Mattoo and Payton 2007). 4 Sáez Why This Book? This book aims to address some of the challenges that developing coun- tries, especially the least developed countries, face in the design of policies for the trade in services. It also seeks to provide governments with tools to incorporate services more effectively in export strategies--including nego- tiations and cooperation with trading partners--and unilateral reform. One of the challenges addressed in chapter 2 is weak trade policy- making processes. Developing countries must improve the procedures they follow in preparing, adopting, and applying trade policies, including service trade policies. Confronted with generally weak negotiating, regulatory, and imple- mentation capacities, developing countries are often handicapped in their ability to engage meaningfully in service negotiations. To tackle these disadvantages, a methodology is required to identify key policy challenges faced by developing-country trade negotiators, regulatory pol- icy officials, and service suppliers. A list of questions to which negotiators, regulators, and private and civil society stakeholders, as well as donors, should be directing priority attention with a view to identifying potential negotiating, regulatory, or other policy bottlenecks and helping map an appropriate aid for trade response is necessary in organizing a successful liberalization process (this is covered in greater detail in chapter 2). The implementation phase of policy reforms and trade agreements requires investments in sounder regulatory regimes and the establishment of enforcement mechanisms to help countries manage more effectively the process of market opening and mitigate any potential downside risks. In making regulations, governments need to take into account a wide range of factors, of which one consideration may be the economy-wide trade and investment impacts of such regulation. The process of liberaliz- ing service markets may require new or different types of regulatory interventions to ensure that important policy objectives continue to be achieved within the new market structures. A successful strategy requires proper sequencing. In fact, a progressive, orderly, and transparent process allows incumbents to prepare for greater competition, anticipate and mitigate possible distributional downsides, and put in place the proper regulatory framework governing newly com- petitive market conditions. Finally, a coherent strategy in services needs to target the real con- straints that many developing-country exporters face in attempting to supply newly opened markets. Chief among these are raising quality stan- The Strategic Development Role of Trade in Services 5 dards, meeting host country certification requirements, and improving home country trade infrastructure, notably the quality and lowered cost of communication, finance, transportation, and logistics services. Developing countries face serious resource and administrative con- straints on the adequate negotiation of multiple service agreements that will serve their trade interests. The growing importance of the trade in services has translated into the growing prominence of services in trade agreements. Since 1995, all trade agreements involving Japan and the United States have included services. Since the negotiation of the agree- ments with Mexico in 2000, the European Union has also incorporated services in its negotiations with developing countries, and the trade in services has become an integral part of the Economic Partnership Agreements currently under negotiation by the European Union with the countries of the African, Caribbean, and Pacific group (for example, the Economic Partnership Agreement between the European Community and the countries of the Caribbean Community [CARICOM] and the Dominican Republic [the CARIFORUM grouping] that entered into force in November 2008). Yet, developing countries are often not suffi- ciently well equipped to negotiate service agreements and implement commitments adequately, particularly in the context of North-South trade agreements. For many developing countries, the administrative bur- den of handling and negotiating multiple trade agreements has become a serious concern, and this may hamper the opportunities available to these countries to obtain adequate market access for service exports. Chapter 3 of this book provides the methodology to create a country- specific service agreement database that may be implemented on demand. The book develops in detail the methodological framework for the construction of the database and the core elements that will comprise it, including possible technological platforms. The basic content of the database includes service sectors, subsectors, and activities committed or received; the type of reservation (market access, national treatment, or other); the mode of supply and the rele- vant agreements; references to the laws and regulations in which the measures are contained; and descriptions of measures. (Examples to illustrate the content of each item are also provided.) In addition, the classification method used is indicated (the services sectoral classifica- tion list [W/120], Central Product Classification equivalence [if any], or the Extended Balance of Payments Services classification, in accor- dance with the Manual on Statistics of International Trade in Services [UN 2002]). 6 Sáez The public service sector in developing countries is characterized by high turnover in human resources, thus requiring constant invest- ment in training efforts. Traditionally, training activities in the service sector focused on three main aspects: (1) trade rules applicable to the trade in services; (2) descriptions of scheduling mechanisms (positive, negative, and hybrid formulas), including writing commitments; and (3) sectoral negotiations in the service area (for example, financial, telecommunication, and maritime sectors) and modes of supply (for example, movements of natural persons). However, little training has been devoted to the organization, preparation, development, assess- ment, and conclusion of the negotiation process. This training entails simulation exercises that allow negotiators to organize more effec- tively and understand more accurately the negotiation process and assess the impact of negotiations, including the consultation process within the public sector and the private sector and with representa- tives of civil society. The book presents, in chapter 4, a training exercise designed for policy makers, trade negotiators, and trade practitioners working in the area of services. This exercise will help these individuals understand the prepara- tory and negotiating stages of the process leading to the liberalization of the trade in services. As a framework, the exercise uses the General Agreement on Trade in Services. The choice of this framework reflects the importance of this agreement and its relevance for all developing coun- tries, including countries acceding to the World Trade Organization. Moreover, at the regional level, the General Agreement on Trade in Services model has also been adapted as the framework for liberalization. Finally, the European Union uses the General Agreement on Trade in Services as a framework in its negotiations with developing and least developed countries. Because of these applications, the exercise pre- sented in this book has a wider scope and may be easily adapted to dif- ferent contexts (bilateral, regional, or multilateral). Understanding the Strategic Nature of Liberalization One basic starting point is understanding the meaning of liberalization in the trade in services. First, it means allowing the private sector to partici- pate in the provision of services, and, second, it means allowing foreign providers of services to compete on a nondiscriminatory basis with state- owned companies, if there are any, and with the domestic private sector. Furthermore, trade in services means allowing the provision of services The Strategic Development Role of Trade in Services 7 through different modes of supply, that is, crossborder (electronic com- merce), consumption abroad (persons traveling abroad to seek medical treatment, for example), commercial presence (or investment), and the mobility of service suppliers. Alternatively, Francois and Hoekman (2009, 19) define service liber- alization as "a reduction in discrimination against foreign suppliers, tak- ing as given (assuming) that the realization of regulatory objectives is not affected." While the terms service liberalization and service deregulation are used interchangeably, they mean different things. Liberalization means to allow the provision of services by the private sector, to permit foreign owner- ship and to eliminate restrictions that create incentives for an inefficient and nonoptimal provision of services: a competitive or contestable mar- ket. Deregulation means the creation of a new regulatory environment that ensures the provision of services in a market-oriented framework, including rules to prevent restrictions on competition. Service industries are characterized by problems of imperfect and asymmetric information and, in many cases, lack of competition and nat- ural barriers to entry, particularly in sectors with significant network externalities.2 Problems of imperfect and asymmetric information arise if buyers and service providers face difficulties in assessing the standing of providers (professional services) or consumers (financial services). Therefore, regulation is always necessary in sectors in which market fail- ures are prevalent. To ensure that liberalization provides the expected benefits to consumers and the economy in general, complementary poli- cies that address market failures are required. The key issue is the iden- tification of the best regulatory approach for these services. Restrictions on foreign ownership, on market access, or on the operation of service providers seem to be less effective in addressing market failures. A more effective alternative is to establish a sound regulatory infrastructure. Such an infrastructure should provide for a strong and independent reg- ulator and a timely and effective enforcement mechanism to ensure that regulations are followed and that benefits are captured by the intended economic agents. Empirical evidence illustrates the strategic importance of services. Francois and Hoekman (2009) review studies that estimate the results of service liberalization. According to the studies, openness is associated with increased export competitiveness in high-technology manufacturing sec- tors in which services tend to be an important component of total costs. In addition, there is evidence that the increased presence of foreign providers 8 Sáez of services following opening is the most robust service variable affecting total factor productivity in manufacturing firms. Moreover, studies also corroborate the positive relationship between service sector openness and growth in developing countries, as well as, in general, a positive dynamic effect from trade liberalization, regulatory reform in services, and growth. The measurement of the level of protection in services involves a num- ber of complex technical problems. The studies that have been under- taken confirm that, in general, the regime is more open in developed countries than in developing countries. But this is not a uniform result. Developed countries have levels of protection that are similar to the lev- els in developing countries in sectors such as maritime transportation, air transportation, and, in some cases, professional services. Also, studies con- firm differences among developing countries. Thus, the regime is more open in the Latin America and Caribbean region than in other regions, including, in some cases, Eastern Europe and Central Asia. This is also the case if the level of restrictiveness is analyzed from the point of view of the mode of supply. The regimes are more open in the Latin America and Caribbean region and Sub-Saharan Africa than in the countries of the Organisation for Economic Co-operation and Development from the point of view of mode of supply.3 Government Regulation and the Service Trade Service restrictions are, in general, government regulations that are applied to the various modes of service transactions (four modes of sup- ply).4 Thus, for example, regulations may affect the market access and operations of domestic and foreign suppliers of services equally and, in turn, increase the price or the cost of the services involved. According to Deardoff and Stern (2008), "Service barriers are more akin to nontariff barriers than to tariffs, and their impact will depend on how the govern- ment regulation is designed and administered." But barriers are also the consequence of a lack of regulations: for instance, if there is a lack of com- petition or other market failures. Regulations may take many forms. They are usually designed to address the specific nature of the service being regulated. Deardorff and Stern (2008) propose two sets of distinctions that tend to apply across many different services and the measures that affect them: (1) regulations that impact entry and rules of establishment versus regulations that impact the operations of firms following their entry or establishment and (2) regulations that are nondiscriminatory versus regulations that are dis- criminatory (see table 1.1). The Strategic Development Role of Trade in Services 9 Table 1.1 Analytical Structure for the Description of Service Regulations Discrimination Entry, establishment Ongoing operations Nondiscriminatory Licensing procedures Safety, quality, environmental standards, prudential measures in banking Discriminatory Nationality or residency Limitations on operations applicable requirements to foreigners Sources: Author compilation; Deardorff and Stern 2008. In the first case, regulations that restrict or impede the establishment of service providers within a market usually reduce the number of providers and therefore the quantity of the supply at any given price. If the regulations affect the ongoing operations of service providers, they increase costs, causing the providers to supply a given quantity only at a higher price. The distinction is useful mainly in classifying different types of barriers. In the second case, the nondiscriminatory versus discriminatory dis- tinction proposed by Deardorff and Stern determines whether a regula- tion reduces only the number of foreign providers of services (that is, it is discriminatory) or, instead, raises costs and shifts supply among foreign and domestic suppliers alike. However, a regulation that is nondiscrimina- tory but impedes the establishment of new service providers will limit trade and competition by favoring providers already established in the market. Therefore, nondiscrimination is not by itself sufficient to absolve a regulation from being protectionist. Assessing Service Liberalization: A Broader Perspective What are the main effects of the liberalization of the trade in services? A large portion of the benefits of the liberalization of the service trade derives not from allowing providers to seek better market access abroad, but from the increased competitiveness and efficiency created by the liberalization of the domestic market (Nielson and Taglioni 2004). Thus, international trade not only opens up economic opportunities for devel- oping-country exporters, but also provides access to foreign capital and technology that, through enhanced competition and innovation, may offer consumers more choice in terms of quality and price at home (Cattaneo et al. 2010). In assessing the liberalization of the trade in services, one must take account not only of the direct gains to consumers and the industries that are users, but also of the impact that liberalization may have on the devel- opment of other sectors of interest: for instance, gains in terms of the 10 Sáez competitiveness and export of agricultural, manufacturing, or mineral products. Well-regulated and competitive service sectors may lead to a significant boost in the overall competitiveness of economies. In this way, services act as an input that facilitates the trade in goods in general. Designing a Reform Strategy in Service Liberalization The reform of restrictive service regulations remains a highly complex issue for which developing countries require significant support. Indeed, in addressing reforms in the service sector, a policy maker requires a set of policy definitions at the domestic level, as follows: · The desired participation of the state in the service sector and the modality of this participation, that is, as an exclusive service provider; as a service provider in competition with the private sector; by limiting the role of the state to policy designer and regulator, including ensur- ing competition and enforcement; or a combination of all the above · The extent of private sector involvement · The extent of the participation of foreign providers of services · The regulatory framework that will best serve the objectives of the reforms, including the sequence of reforms In some sectors, such as financial, telecommunication, and transporta- tion services, the way reforms are adopted and the sequence of the reforms are critical determinants of the final result. In addition, certain regulatory measures that have been in place for a long time must be care- fully assessed and possibly replaced by other, more appropriate measures, where these are available. Countries must ensure that a sound sequence of reforms is followed. In other sectors, sequencing may be less relevant, but a sound regulatory framework will nonetheless be required to ensure competition and guarantee public goods such as safety and health. International experience shows that countries may follow differ- ent approaches according to policy goals, level of development, and institutional capacity. However, independently of the direction coun- tries decide to take, certain policies must be implemented to ensure that the sector functions properly, as follows: · If the state decides to participate directly as a provider, the corporate governance of state-owned enterprises becomes an important issue. · In addition, a level playing field for all providers must be ensured if competition with the private sector is allowed. In particular, the devel- The Strategic Development Role of Trade in Services 11 opment of the private sector should not be impaired by policies that favor state-owned enterprises. · A regulatory framework must be implemented to prevent conflicts of interest (if the state is both provider and regulator) or capture. In addition, the separation of functions (policy, ownership, regulation), transparency, and due process are required. · Regulation to pursue legitimate policy objectives, particularly social policies such as universal access, must be implemented on a nondiscrim- inatory basis and with a view to avoiding unnecessary barriers to trade. · To ensure long-term sustainability of the sector, a framework for the design, adoption, and implementation of public policies on the service sector must be established whereby all stakeholders may participate. The Strategic Role of International Agreements in Services Because the international tradability of services has increased, countries have incorporated this dimension into their trade policies and trade agree- ments. Therefore, it is important to understand the positive role that trade agreements play in the context of services. First, such agreements collabo- rate in the liberalization process if vested national interests oppose liberal- ization and block initiatives to open access or prevent the establishment of an appropriate regulatory framework. Second, trade agreements create a more stable framework for trade because they are international contracts that may not be changed unilaterally. Therefore, they may also create a path for introducing reforms in a gradual manner and provide rules that cannot be arbitrarily modified. Finally, trade agreements provide political support for the liberalization of the trade in services because they ensure reciprocal market liberalization. Nonetheless, developing countries should exercise caution. If the liber- alization promoted through trade agreements is not adequate, especially from an institutional point of view, this may affect the strength of the domestic regulatory function, especially if the right to regulate--following best international practice--is not adequately preserved. Also, developing countries may assume significant regulatory obligations that may not be appropriate for the reality and level of development of their markets. Finally, trade agreements do not supply the detail required so that a regulatory framework may be established for a well-functioning market. Governments still need to create the regulatory framework necessary to ensure that the benefits of the reforms are captured by all stakeholders. One must keep these basic aspects of liberalization in the service sector 12 Sáez in mind in determining the scope of negotiations and addressing in an appropriate manner any downsides to the effects of trade agreements. The Strategic Nature of Negotiations in the Trade in Services Countries must also learn how to address their concerns and sensitivities, while preserving policy options. This has been done by developed and developing countries in the context of North-North and North-South negotiations. For instance, in the context of the negotiations on the North American Free Trade Agreement, Canada established a cultural excep- tion, whereby cultural industries were excluded from the service and investment provisions of the agreement. Also, during the negotiations, countries concurred in excluding social services (education, health, and social security services) and measures that favor minority populations from the scope of the service and investment provisions of the agreement. The European Union has also established exceptions in service negotia- tions. For instance, audiovisual services are not included in the European Union's bilateral trade agreements. Developing countries may also determine the modes of supply that are to be liberalized. A preferable first step in the liberalization of the trade in services may involve allowing foreign providers of services to establish a commercial presence under the same terms and conditions as nationals. Other modes of supply may be liberalized in later stages. There is some evi- dence that a positive relationship exists between the existence of crossbor- der service provision and the existence of the provision of services through commercial presence (Lennon 2007). This means that, in deciding their locations among alternatives, firms assess the investment environment and the ability to provide services through different modes. In developing their negotiating strategies, countries need to be careful to provide a coherent framework consistent with the needs of service providers. A possible option is a gradual liberalization path to prevent short-term market disruptions. For instance, in its negotiations with Canada and the United States on finan- cial services, Mexico designed a mechanism to regulate the pace and char- acteristics of the opening of the market in the sector. Developing countries may also establish exceptions on the basis of domestic policy objectives. Developing countries have the strength to negotiate the terms and conditions under which foreign providers may become established within their territories, including any transition period necessary to eliminate market access restrictions or national treat- ment limitations or any commitment to future liberalization. Developing countries may draw on the many successful (or failed) experiences that The Strategic Development Role of Trade in Services 13 are available in developed and developing countries before choosing a specific approach. International Cooperation as a Complementary Response Is liberalization of the trade in services enough?5 Openness in services is not equivalent to export potential in services. There are some puzzling trends in service exports. Developing countries with a high overall restric- tiveness index in the service sector seem to outperform other developing countries that have relatively more open regimes. Some developing coun- tries that are not ranked among the most open economies have the most restrictive service regimes or unfriendly business environments and have shown relatively better growth in the export of certain services. Gootiiz and Mattoo (2009) show that restrictive regimes have not deterred Asian countries from becoming successful service exporters. This does not mean that liberalization should not be pursued, but that, by itself, it does not provide sufficient momentum to the performance of service exports. Liberalization does not spontaneously create the entrepreneurial drive, skill endowments, and management capabilities required in exporting services. Complementary policies are needed to ensure that investment in infrastructure and education occurs and that the identification of possible market failures such as information gaps, lack of transparency, and inade- quate regulations will be tackled. The developing countries that have succeeded in exporting services have followed distinct strategies. Some countries have relied on tax incen- tives and special regimes; some have taken advantage of specific endow- ments that they found available, such as human skills; and some have followed a wide-ranging liberalization approach. For instance, in Latin America, early reformers, such as Chile and Mexico, have been relatively less successful in the crossborder supply of other commercial services (business and professional services) than developing countries such as Brazil. In fact, in Latin America, the crossborder exports of Chile and Mexico in other commercial services have grown at a less significant rate relative to the corresponding exports in other regions (although both have invested significantly in services abroad). On the other hand, India, which has a high service restrictiveness index and ranks low in the doing business index, is the most attractive global service delivery location according to A. T. Kearney's global services location index (A. T. Kearney 2009). Identifying the reasons for the success or underperformance of devel- oping countries is a challenge because of the lack of data. The availability of human resources and expertise seems to be a key determinant, however. 14 Sáez Aside from the transport and tourism sectors, countries with better human capital endowments tend to be ranked among the most important exporters of services. Variables such as business environment and finan- cial attractiveness seem to correlate less strongly with service perform- ance. According to Nyahoho (2010), the importance of human capital is clear in exports of computer and information services. Export success in areas such as construction services and public works, royalties and license fees, and computer and information services is positively linked to the intensity of research and development. Traditionally, the international community has offered special and dif- ferential treatment as a means to improve developing-country participa- tion in the world economy.6 The rationale behind special and differential treatment revolves around the consideration that the least developed countries lack the resources and the institutions to take advantage of the complex rules of the World Trade Organization; so, the offering of prefer- ential access and aid for trade is intended to compensate these countries. Because services are restricted by regulations, the design, implementation, and evaluation of the market access preferences of developed countries are not easy tasks. Moreover, because services vary in nature, this speci- ficity affects the way they may be handled, as well as the development of the related domestic capacity. This is especially the case in the trade in business services (business and professional services, construction, tourism) and the trade in social services (educational, environmental, health, and social services) compared with the trade in infrastructure services (telecommunication, distribution, energy, financial, and transport services), which are mainly intermediary services. The efforts to install aid for trade and trade facilitation in services involve at least three actions: (1) technical assistance and capacity building to help countries deal with the complexities of service commitments in trade agreements and the provision of training for government officials in the issues involved in commitments and regulations, (2) institutional reform so as to create an institutional and procedural framework for mon- itoring and evaluating the service trade, and (3) assigning priority to the development of infrastructure services and their role in improving the access of goods, which requires specific investment projects. Notes 1. See Newfarmer, Shaw, and Walkenhorst (2009) and Lejárraga and Walkenhorst (2009). Mattoo, Stern, and Zanini (2008) provide a comprehensive analysis of The Strategic Development Role of Trade in Services 15 the main relevant issues in the trade in services. See also Copeland and Mattoo (2008) and Deardorff and Stern (2008). 2. Examples of these service sectors are offered by financial, telecommunication, and transportation services. 3. An analysis of service restrictiveness regimes can be found in Gootiiz and Mattoo (2009). 4. This section is based on Copeland and Mattoo (2008) and Deardorff and Stern (2008). 5. Background material for this subsection has been taken from Saéz (2010). 6. Hoekman and Özden (2005) discuss a survey of the experiences with special and differential treatment. References Arvis, Jean-François, Monica Alina Mustra, John Panzer, Lauri Ojala, and Tapio Naula. 2007. "Connecting to Compete: Trade Logistics in the Global Economy; The Logistics Performance Index and Its Indicators." Report, World Bank, Washington, DC. A. T. Kearney. 2009. "Global Services Location Index (GSLI)." Report. http://www.atkearney.com/index.php/Publications/global-services-location- index-gsli-2009-report.html. Cattaneo, Olivier. 2009. "Tourism as a Strategy to Diversify Exports: Lessons from Mauritius." In Breaking into New Markets: Emerging Lessons for Export Diversification, ed. Richard Newfarmer, William Shaw, and Peter Walkenhorst, 183­96. Washington, DC: World Bank. Cattaneo, Olivier, Michael Engman, Sebastián Sáez, and Robert M. Stern, eds. 2010. International Trade in Services: New Trends and Opportunities for Developing Countries. Washington, DC: World Bank. Copeland, Brian, and Aaditya Mattoo. 2008. "The Basic Economics of Services Trade." In A Handbook of International Trade in Services, ed. Aaditya Mattoo, Robert M. Stern, and Gianni Zanini, 84­129. Washington, DC: World Bank; New York: Oxford University Press. Deardorff, Alan V., and Robert M. Stern. 2008. "Empirical Analysis of Barriers to International Services Transactions and the Consequences of Liberalization." In A Handbook of International Trade in Services, ed. Aaditya Mattoo, Robert M. Stern, and Gianni Zanini, 169­220. Washington, DC: World Bank; New York: Oxford University Press. Francois, Joseph F., and Bernard Hoekman. 2009. "Services Trade and Policy." Economics Working Paper 2009­03 (March), Department of Economics, Johannes Kepler University, Linz, Austria. 16 Sáez Ghani, Ejaz, ed. 2010. The Service Revolution in South Asia. New York: Oxford University Press. Gootiiz, Batshur, and Aaditya Mattoo. 2009. "Services in Doha: What's on the Table?" Policy Research Working Paper 4903, World Bank, Washington, DC. Hoekman, Bernard, and Aaditya Mattoo. 2008. "Services Trade and Growth." In Opening Markets for Trade in Services: Countries and Sectors in Bilateral and WTO Negotiations, ed. Juan A. Marchetti and Martin Roy, 21­58. Geneva: World Trade Organization; New York: Cambridge University Press. Hoekman, Bernard, and Caglar Özden. 2005. "Trade Preferences and Differential Treatment of Developing Countries: A Selective Survey." Policy Research Working Paper 3566, World Bank, Washington, DC. Lejárraga, Iza, and Peter Walkenhorst. 2009. "Fostering Productive Diversification through Tourism." In Breaking into New Markets: Emerging Lessons for Export Diversification, ed. Richard Newfarmer, William Shaw, and Peter Walkenhorst, 197­210. Washington, DC: World Bank. Lennon, Carol. 2007. "Trade in Services: Cross-Border Trade vs. Commercial Presence; Evidence of Complementarity." September, Centre d'Economie de la Sorbonne, Université de Paris 1 and Paris-Jourdan Sciences Economiques, Paris. Mattoo, Aaditya. 2009. "Exporting Services." In Breaking into New Markets: Emerging Lessons for Export Diversification, ed. Richard Newfarmer, William Shaw, and Peter Walkenhorst, 161­82. Washington, DC: World Bank. Mattoo, Aaditya, and Lucy Payton, eds. 2007. Services Trade and Development: The Experience of Zambia. Washington, DC: World Bank. Mattoo, Aaditya, Robert M. Stern, and Gianni Zanini, eds. 2008. A Handbook of International Trade in Services. Washington, DC: World Bank; New York: Oxford University Press. Newfarmer, Richard, William Shaw, and Peter Walkenhorst, eds. 2009. Breaking into New Markets: Emerging Lessons for Export Diversification. Washington, DC: World Bank. Nordås, Hildegunn Kyvik, and Henk Kox. 2009. "Quantifying Regulatory Barriers to Services Trade." OECD Trade Policy Working Paper 85, Trade Committee, Trade and Agriculture Directorate, Organisation for Economic Co-operation and Development, Paris. Nyahoho, Emmanuel. 2010. "Determinants of Comparative Advantage in the International Trade of Services: An Empirical Study of the Hecksher-Ohlin Approach." Global Economy Journal 10 (1), Article 3. Sáez, Sebastián. 2010. "The Increasing Importance of Developing Countries in Trade in Services." Prem Notes 152. World Bank, Washington, DC. The Strategic Development Role of Trade in Services 17 Stiglitz, Joseph E., and Andrew Henry Charlton. 2005. Fair Trade for All: How Trade Can Promote Development. New York: Oxford University Press. Te Velde, Dirk Willem. 2005. "Revitalising Services Negotiations at the WTO: Can Technical Assistance Help?" Paper, Overseas Development Institute, London. Theravaninthorn, Supee, and Gaël Raballand. 2009. Transport Prices and Costs in Africa: A Review of the Main International Corridors. Directions in Development Series. Washington, DC: World Bank. UN (United Nations). 2002. Manual on Statistics of International Trade in Services. Statistical Papers, Series M, 86, ST/ESA/STAT/SER.M/86. New York: Statistics Division, Department of Economic and Social Affairs, United Nations. World Bank. 2009. "Services Trade for Development: The Old and the New." Unpublished paper, International Trade Department, World Bank, Washington, DC. CHAPTER 2 Negotiating Trade in Services: A Practical Guide for Developing Countries Mario Marconini and Pierre Sauvé Introduction Arguments in favor of open service markets are increasingly being heard worldwide. This applies particularly to key enabling sectors, such as financial services, telecommunications, and transportation, that con- tribute centrally to a nation's overall economic development. The diffi- culties of opening service markets to foreign competition are also becoming more evident. Broad and complex policies, regulatory instru- ments, institutions, and constituencies, domestic and foreign, public and private, are involved. Considerable care must be taken in assessing the nature, pace, and sequencing of regulatory reform and liberalization to enhance a nation's economic growth and development. Despite the experience gained through more than two decades of bilateral, multilateral, and international negotiations, the trade in serv- ices still ranks among the most complex topics in trade diplomacy. The complexity arises from a number of factors, including (1) the intangible nature of service sector activity and the corresponding difficulty of measuring and assessing the sector's contribution to production and exchange and the economic consequences of alternative policy choices, 19 20 Marconini and Sauvé (2) the considerable diversity of activities in the sector, (3) the chal- lenge of the factor mobility (capital and labor) in service transactions, and (4) the ubiquity (and diversity) of the market failures affecting service transactions and, because of the failures, the intensity of regula- tory activity. The centrality of the intermediation functions of service industries and the consequent impact of services on competitive performance suggest that the benefits of liberalization in the service trade and in investment in services would be far-reaching. Numerous studies have documented the potential magnitude of these benefits, which is typically considered to exceed the magnitude of the benefits emanating from the opening of trade in agricultural and manufacturing products (see Hoekman 2006, Hoekman and Mattoo 2008). However, the benefits of procompetitive reform in service markets have tended to be realized through unilateral efforts at the domestic level rather than through collective action at the negotiating table at the World Trade Organization (WTO) or under pref- erential trade agreements (PTAs). The WTO's Doha Development Agenda negotiations have encoun- tered difficulties and have not yet been concluded. Part of the problem can be traced to the fact that the negotiations have focused (perhaps excessively) on trade-offs between agricultural market access and nona- gricultural market access. At the same time, there is little doubt that the slow progress in the discussions on services has been caused by the chal- lenges faced by a majority of WTO members in mastering the regulatory intricacies of the service sector and in devising a proper role for services in national development strategies. Lacking a road map and confronted with generally weak negotiating, regulatory, and implementation capacities, the developing-country mem- bers of the WTO are often especially handicapped in their ability to engage meaningfully in service negotiations. The difficulties regularly translate into cautious negotiating stances and levels of bound commit- ments. The development potential of the service trade and of the nego- tiations in the sector thereby fails to be properly harnessed. Addressing these various challenges through targeted technical assistance and capac- ity strengthening must therefore be part of the solution. Building on the work of Feketekuty (2008), we seek, in this chapter, to provide a practical checklist to help service negotiators, officials in min- istries and regulatory agencies, and broad stakeholder communities (includ- ing those inside the World Bank and in aid agencies) to gain a better sense Negotiating Trade in Services: A Practical Guide for Developing Countries 21 of the key moments in the life cycle of service negotiations. These moments might be described as follows: · Mapping a strategy for services in national development plans · Preparing for service negotiations, that is, developing an informed negotiating strategy or identifying the capacity needs required to do so, setting up the proper channels of communication with key stake- holders, and conducting a trade-related regulatory audit · Conducting a service negotiation, that is, acquiring a voice in debates on outstanding rule-making challenges in the service trade by pursu- ing offensive (as opposed to defensive) interests, devising strategies to deal with defensive concerns, analyzing the negotiating requests of trade partners, formulating one's own requests and offers, and partici- pating in collective requests and offers · Implementing negotiated outcomes, that is, addressing regulatory capacities and weaknesses and identifying implementation bottlenecks · Supplying newly opened markets with competitive services that com- ply with international standards, that is, addressing the supply-side constraints on the ability to take advantage of the outcome of trade negotiations, including aid for trade in services The next section focuses on mapping a strategy for services in national development plans. The subsequent section is devoted to preparing for service negotiations; the following section to conducting service negotia- tions; the section thereafter to enhancing the capacity to supply; and the penultimate section to aid for trade in services. Conclusions are contained in the final section. There are numerous boxes and two tables that pro- vide illustrative examples of the many key points that need to be consid- ered, especially in emerging market economies and in developing countries, in planning, implementing, and evaluating a program of service negotiations. Mapping a Strategy for Services in National Development Plans In embarking on service negotiations, governments must clarify the broad policy objectives they wish to achieve at the domestic level. This implies determining the extent to which such agreements are used as an anchor for ongoing policy reforms or as precursors of future reforms, notably through a precommitment to market opening. The purpose is to gain a 22 Marconini and Sauvé sense of the likely opportunity costs flowing from various approaches to liberalization and policy bindings under service agreements, including the choice not to make new or improved binding commitments, thereby pre- serving policy space. The heterogeneity and intangible nature of services pose challenges to service negotiators. Governments tend to consider services in a piece- meal, segmented manner that often reflects the particular characteristics of individual sectors rather than the role of services in the economy. This tendency may be seen in the generally disorganized way in which many governments tackle service issues. Few governments have ministries of services, while most, if not all, have numerous sectoral ministries dealing with individual service sectors. These may include financial services through a ministry of finance or a ministry of the economy, telecommu- nications services through a ministry of communications (which might also cover postal services, broadcasting, and audiovisual services), a min- istry of transportation, and so forth. Many service-related issues also involve more than one ministry or government agency. This is the case in regard to the movement of natural persons and the trade in professional services, which, in many countries, is the shared responsibility of min- istries of external relations, justice, education, and immigration. Developing a clear strategy for services therefore poses, for most gov- ernments, genuine institutional challenges in that no single agency takes a holistic view of services and their interlinked contribution to the development and growth process. Accordingly, any attempt to devise a service sector road map or strategic blueprint must start with the estab- lishment of a cross-sectoral, multi-issue steering committee and the des- ignation of a specific ministry, secretariat, agency, or person within the government to carry out a coordinating function, identify the key ele- ments in a service road map, and oversee implementation. The coordina- tion function is not trivial because it cuts across bureaucratic competencies (regulatory turf) and may create tensions between sectoral and economy-wide perspectives. Considering the economy-wide implications of service sector reform, reform should be coordinated or derive a clear delegation of power from the highest levels of government (for example, the office of the presidency or the prime minister). Sectoral ministries naturally focus on the design and implementation of the policies that are optimal for each sector under their jurisdiction. The establishment of a national development strategy, however, requires that services be thought of in economy-wide terms. Governments should identify growth and development bottlenecks in the Negotiating Trade in Services: A Practical Guide for Developing Countries 23 economy and direct policy efforts at eliminating the bottlenecks and deciding the role, if any, to be assigned to trade and investment policies in this process. One approach is to address productive chains (activities) or clusters (location) given that these concepts encompass several sectors. This takes into account the interface between services and the industries to which they provide critical inputs, with a view to evaluating the role of service sector policy in the broader context. For instance, if, for a particu- lar supply chain, the main problem is logistics and transportation, this implies a particular set of solutions that involves a range of service sectors. If, in contrast, the main bottleneck is access to imported components, the issue points to trade in goods and the workings of a country's traditional (goods-related) foreign-trade regime. In other instances, the binding con- straint may concern the supply of skilled workers, pointing to the need for enhanced efforts in education and training and the possible scope for attracting foreign investment in higher or specialized education services. With an economy-wide map available, governments are able to prior- itize service-related policy responses. In each case, governments must determine if the best solution to a particular problem involves technical support (financial and otherwise), strengthened regulation, enhanced efforts at investment promotion, targeted efforts at trade and investment liberalization, or greater transparency and certainty in domestic policy making. Unlike other sectors of the economy, services involve a host of national policy objectives, such as prudential regulation, universal access, the preservation of cultural diversity, and the maintenance of high pro- fessional standards. These objectives must be clearly defined and fac- tored into the analysis. The boundaries between public and private interests may also have to be properly delineated, especially in the con- text of the public-private partnerships that are increasingly common in service sectors such as infrastructure and transportation. Finally, the boundary of state sovereignty comes into play in service policy discus- sions to the extent that service negotiations encompass liberalization in foreign investment. Liberalization in foreign investment includes the possibility of foreign presence and foreign involvement in sensitive sectors. Any approach to service policy in national development strategies should focus on the pace and manner in which a country wishes to become integrated into the world economy. The revolution in communi- cations and information technologies and the compression in time and dis- tance that has occurred in its wake have transformed the world into a 24 Marconini and Sauvé rapidly moving, interconnected community. This can greatly facilitate the scope for plugging into regional or global supply chains, and it allows coun- tries to leapfrog over many technological constraints on development. But it also requires quick responses to emerging social and economic problems. The costs and benefits of opening up and integrating more fully into pro- duction networks need to be measured, alongside the cost of not opening up or of opening at a different pace or through different means.1 The effects of various policy choices on employment and restructuring, the possible impacts on national champions, and other strategic considerations must therefore be properly identified and measured. The checklist in box 2.1 arises from the above considerations with respect to whether, how, and in what manner services and service sector policy (including trade policy in services) are situated in national devel- opment strategies. Box 2.1 The Place of Services in National Development Strategies · What is the institutional setting for dealing with services within the government? · Is there an authority, agency, or ministry responsible for coordinating service sector strategies? · Is the coordinating authority, agency, or ministry capable of making and executing decisions? · Are services being dealt with adequately from a sectoral perspective? Are there sufficient and well-functioning ministries or agencies devoted to the various services? · Are services an integral part of the decision-making process in the establish- ment of national development strategies? · Are national development strategies based on economy-wide considerations? · Are the priorities established for the service sector (including the role assigned to trade and investment policy) based on economy-wide considera- tions, in addition to sector-specific concerns? · Are distinctions made regarding the horizontal versus sectoral priorities for services? · Are priorities clear in terms of the support, regulation, or policy making for services and the relationship of services to the overall economy? (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 25 Box 2.1 (continued) · Do specific national policy objectives for services clash with broader objectives for national development? · How far should the government intervene in the economic realm in general and in the service sector in particular? · Is the service sector sufficiently internationalized? How internationalized should it be according to national development objectives? What role should be assigned to trade and investment policy relative to autonomous liberalization in this regard? · Has a cost-benefit analysis been undertaken with respect to the opening up of the economy in general and the opening up of the service economy in particular? · Has a cost-benefit analysis been undertaken with respect to the nonliberaliza- tion of the economy? How clear are the government and key stakeholders about the opportunity costs of various liberalization scenarios? Preparing for Service Negotiations The multiple challenges that the liberalization of the service trade entails should not be underestimated, particularly in light of the limited admin- istrative and negotiating capacities of many developing countries. A gov- ernment must gather significant knowledge before it is able to submit sensible liberalization requests to key trading partners and make informed market-opening offers. In addition to establishing the proper channels of communication with key stakeholders inside and outside the govern- ment, as well as preparing a full inventory of relevant measures to ensure that there is an adequate understanding of the regulatory regime and its possible shortcomings (see below), governments must identify the oppor- tunities and challenges experienced by exporters; determine the capacity- building needs of negotiators, ministries, and regulatory agencies; and assess the likely economic and social impacts of various liberalization sce- narios. These are difficult tasks even for developed-country governments, the human and financial resources of which are typically far greater than those of developing countries. Much of the capacity-building effort in services has tended to focus on helping developing-country negotiators and policy officials master the legal provisions of service agreements such as the General Agreement on 26 Marconini and Sauvé Trade in Services (GATS). For many least developed countries and small and vulnerable economies, as well as a number of countries seeking admission to the WTO, this is an important responsibility, especially because their expertise in trade is relatively weak or is embodied in only a few officials in ministries of trade and foreign affairs. Regulatory agen- cies and other ministries usually have even less capacity. Short-term train- ing directed at overcoming these knowledge gaps can be useful in many countries, and regional and international organizations are involved in delivering this type of trade-related technical assistance.2 Regional organ- izations typically focus their assistance on preferential liberalization initiatives, whereas international organizations (with the exception of the WTO) tend to focus on multilateral and preferential liberalization endeavors. More pressing needs in trade-related technical assistance are the needs to acquire the analytical tools to determine a country's readiness to lib- eralize; develop government-wide negotiating strategies; assess the gen- der, poverty reduction, and human health impacts of service market opening; and help providers of domestic services take full advantage of the market access opportunities arising from regional and multilateral liberalization efforts. Meeting these needs is conducive to harnessing the pro-development potential of service liberalization beyond the GATS and the intricacies of trade agreements covering services. Sustained tech- nical assistance and training efforts directed at these issues have not yet materialized. The issues deserve immediate attention. For the most part, this entails the documentation (in the form of country-, region-, and sector- specific case studies) and dissemination of knowledge on best practices in developed and developing countries. North-South and South-South learning are equally important channels. The diversity of expertise is more easily achieved through international organizations than through bilateral donors in the Organisation for Economic Co-operation and Development. Negotiating without a Proper Service Road Map The preparations for international negotiations should occur after national development strategies have been established. This is often not the case because countries become involved in negotiating processes without having determined national policy positions. For this reason, many developing countries are not ready politically or administratively to respond to complex regulatory and policy issues that arise in service nego- tiations. This is particularly the situation if negotiations involve more Negotiating Trade in Services: A Practical Guide for Developing Countries 27 mature partner countries that are likely to bargain on the basis of well- informed demands. In developing countries, international negotiations often become a leading driver of domestic economic reforms, requiring the formulation of policy positions in areas in which a domestic consensus for change has not yet taken root or in which domestic regulatory conditions are insuffi- ciently evolved. Moreover, in many developing countries, an appropriate level of regulation and regulatory capacity has not emerged, although the countries are confronted, in the context of asymmetrical negotiations, with the need to adopt, adapt, update, or reform regulatory regimes. The lack of experience with regulatory reform renders the search for policy responses more difficult. This problem is aggravated by the speed of inter- national negotiations, which usually proceed at a pace that is more rapid than the desirable or feasible pace of domestic political change. Preparing for international negotiations is thus an exercise in adapta- tion and approximation. While governments should decide what they want to achieve before they negotiate, there is typically little time for such an assessment. Often, the only option is to identify objectives during the negotiating process. These governments must clarify and, eventually, rectify a poor regulatory situation and map out a proper sequence for internal regulatory reform and external liberalization. The position a country takes in negotiations, however, should reflect an equilibrium between the demands of trading partners and what is acceptable based on domestic politics. Intergovernmental Coordination and Multistakeholder Consultations In preparing for service negotiations, as in the establishment of a national development strategy in services, an important first step is the creation of a credible, transparent, and efficient coordination process for the negoti- ations. In trade negotiations, the coordination function often resides with the ministry of foreign affairs, the ministry of trade, or both, and these are also the ministries usually responsible for conducting the negotiations. Intragovernmental coordination is among the most crucial negotiating inputs; it is so important that, alone, it may determine the effectiveness of the country's participation in international negotiations. A govern- ment's negotiating position would be severely damaged if different min- istries and agencies make contradictory pronouncements about the same negotiating points or if trading partners become confused about the entity responsible for the country's negotiations. 28 Marconini and Sauvé The main objective of coordination is the establishment of a national position on each service-related issue in specific negotiations. A secondary objective is the achievement of consistency and coherence in the manage- ment of the external trade environment by the government. Coordinating agencies must master the government's positions across forums and nego- tiating settings (for example, WTO versus PTAs). In coordinating GATS negotiations, for example, government representatives must be kept mind- ful of the positions taken and the interests pursued in other negotiating forums so they are able to maintain coherence. This applies to the sched- uled commitments governing access to a country's service market, as well as to positions on rules and principles that may vary across agreements or negotiating processes, that is, positive versus negative lists and sectors or dis- ciplines that may be covered in PTAs, but not at the WTO level. Examples include digital trade, e-commerce, and the government procurement of services. Box 2.2 highlights some of the policy-making benefits likely to derive from effective intragovernmental coordination in the service trade. Box 2.2 The Policy-Making Benefits of Effective Intragovernmental Coordination Given the regulatory intensity of many service activities and the range of sectors involved, proper coordination across various government agencies is critical. Pro- moting an effective process of intragovernmental coordination is likely to gener- ate positive policy-making externalities. These include the following. The creation of a range of government positions. Service negotiations are information intensive. Coordination is essential to the development of negotiating positions based on a thorough assessment of national priorities and to ensuring that negotiators are well informed of all the factors influencing the domestic serv- ice market. In countries with federal systems, coordination may also be important in guaranteeing that federal negotiators are adequately prepared in terms of their knowledge and their mandate to address the questions of trading partners about subnational measures. The creation of an information base on measures affecting the trade in services. A key substantive obligation flowing from most trade agreements cover- ing services is to provide trading partners with accurate information on the domestic (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 29 Box 2.2 (continued) regulatory environment affecting the trade in services. Meeting this transparency obligation can be assisted through the creation and maintenance of a central inventory or focal point and a database of the various regulatory measures. The analysis of the effects of measures in helping achieve economic or social policy goals. Governments at all levels must periodically review the effec- tiveness of domestic policies and regulations in achieving the underlying eco- nomic and social policy objectives. This may include an analysis of the trade or investment effects of regulatory measures. Governments must be aware of the impact of service trade disciplines on regulatory conduct in sectors in which commitments are scheduled, including in terms of notification requirements. In developing policy initiatives, all levels of government must take into account cur- rent service trade commitments, consider incorporating international standards where applicable, and meet notification requirements and disciplines on regulatory conduct. The avoidance of duplication in domestic stakeholder and intragovernmen- tal consultations. To retain the cooperation of service firms, especially small service firms, one must avoid unnecessary surveys. If a particular government entity has to consult with the firms under its direct mandate, the consultation should be coordinated with the trade ministry so that the consultation covers any service-related issues, thereby avoiding the need to resurvey the firms about the trade in services. Given the multitude of subsectors and measures involved in the service trade, it is important to establish a balance between the engagement of intragovernmental partners on issues of mutual concern and avoiding inundat- ing key departments and agencies with too much information or too many requests for input. The establishment of regular lines of communication among individuals may play a significant role in permitting issues to be addressed quickly without creating unnecessary processes. The maintenance of contributions to ongoing impact assessments of service trade liberalization. In most countries, the data used in impact analyses are the responsibility of the national statistics agency. However, the task is challenging, and the recourse to anecdotal information may be useful. First, service trade agree- ments address the issue of the flow of services, while data collection is typically focused on populations of service industries. Second, service trade agreements (continued) 30 Marconini and Sauvé Box 2.2 (continued) cover the four modes of service supply, while data collection is typically focused on crossborder trade (Modes 1 and 4), a limited portion of in-country trade such as tourism or education services (Mode 2), and a little foreign affili- ate trade (Mode 3). Third, a particular service may also be exported by goods manufacturers and firms in related service industries; simply surveying a par- ticular service industry may therefore not always offer an accurate picture of export activity. Statistics on the trade in goods cover services that are exported by manufacturers, including services that are bundled with goods (for exam- ple, maintenance or training agreements) and stand-alone services sold by manufacturers to foreigners (for example, financial services and consulting services). Bundled services sold to foreigners must be distinguished from domestic service transactions that are embedded in exported goods and, so, are not service exports. It is helpful to alert the various parts of government that participate in data collection to the relevant issues and data requirements in proper assessment. Source: OECD 2002. Various options are available to governments in structuring internal policy dialogues and decision-making processes in the service trade. One approach of a number of WTO members is the creation of dedicated working groups in the ministry of trade or commerce to coordinate trade negotiations. Depending on the available resources, a ministry might set up a single group for services or several working groups to cover related service sectors (for example, one group on recreation, sports, entertain- ment, and tourism; another on transport, distribution, and communica- tions; and so on). Governments with limited resources may focus on creating groups for selected service sectors, although this may raise prob- lems because service sectors are highly interrelated. Working groups might also be considered for issues that are relevant across a range of sec- tors, such as Mode 4 and labor force development, or opportunities for crossborder trade and e-trade in services. Group participants may self- select based on the relevance of issues to their responsibilities. For exam- ple, immigration authorities would have a clear interest in being involved in Mode 4 discussions; telecommunications authorities would have less of an interest. Negotiating Trade in Services: A Practical Guide for Developing Countries 31 While governments alone must assume responsibility for carrying out the trade negotiating strategy, the coordination effort must include all key external stakeholders, including the private sector and civil society. The task is challenging because multistakeholder consultations often involve a variety of potentially conflicting interests, ranging from mercantilist export interests to concerns over consumer protection or the preservation of cultural heritage. Although governments sometimes regard the consul- tative process as unduly onerous and a potential constraint on their decision-making prerogatives, the backing of the key constituencies may be necessary in the ratification and implementation of the negotiated out- comes.3 Table 2.1 indicates the main private and public stakeholders that might be included in the consultations on various service sectors. Table 2.1 Sample List of Exporters and Other Domestic Stakeholders in Selected Service Sectors GATS sector Exporters Other stakeholders Business services Small and large national firms Professional service associations that sell according to each Professional licensing registrars mode Service industry associations Subsidiaries of transnational Real estate boards corporations (Mode 3) Convention boards Governmental agencies National research councils Nonprofit organizations Unions Communication As above Service industry associations services Telecommunications regulators National film boards National news services Unions Producers in other sectors that consume the services Construction As above Construction associations and related Engineering associations engineering Architectural associations services Housing authorities Environmental impact agencies Oversight authorities on safety standards Unions Producers in other sectors that consume the services (continued) 32 Marconini and Sauvé Table 2.1 Sample List of Exporters and Other Domestic Stakeholders in Selected Service Sectors (continued) GATS sector Exporters Other stakeholders Distribution As above Retailer associations services Wholesaler associations Importer associations Franchise associations Duty-free shops Unions Education and As above Teacher unions training services Associations of private educational institutions Associations of community colleges Career guidance associations Student associations Environmental As above Environmental service associations services Trade unions Environmental nongovernmental organizations Producers in other sectors that consume the services Consumer groups Financial services As above Banker associations Broker associations Insurance associations Central banks, finance ministries Security exchanges, stock markets Securities regulators Unions Producers in other sectors that consume the services Health-related As above Hospital associations services and Outpatient clinic associations social services Health advocates Social welfare advocates Unions Recreational, As above Major sports team managers cultural, National museums entertainment, National libraries and archives and sporting National performing arts groups services Coalitions of domestic filmmakers Council for the arts Unions (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 33 Table 2.1 Sample List of Exporters and Other Domestic Stakeholders in Selected Service Sectors (continued) GATS sector Exporters Other stakeholders Tourism and As above Travel agency associations travel- Tour guide associations related services Hotel associations Restaurant associations Parks authorities Environmental impact agencies Unions Transportation As above Airport authorities services Air traffic controller associations Port authorities Vehicle licensing authorities Unions Producers in other sectors that consume the services Other (energy Utility companies Utility regulators services) Energy trading companies Industry associations (including in other sectors that consume the services) User, consumer advocates Environmental nongovernmental organizations Unions Source: OECD 2002. Effective consultation is an ongoing, two-way process, that is, stake- holders provide initial input and receive initial feedback, then comment on negotiating alternatives, and receive feedback on the negotiations as they progress. If the consultation is only a one-way process, exporter stakeholders may lose interest, and critics or groups with a defensive or rent-protecting agenda may gain disproportionate influence. Figure 2.1 shows the policy-decision matrix used by the Ministry of Commerce in Thailand to prepare for the various negotiations in which the ministry participates. The matrix reveals the government's recogni- tion that policy decisions must rest on sound analytical inputs and an extensive consultation process within and outside government to ensure that Thailand pursues coordinated and coherent objectives across various negotiating forums. Public consultations should generally aim to bring together stakehold- ers with differing views so that individual groups are exposed to all factors 34 Marconini and Sauvé Figure 2.1 Checklist for Trade Policy Formulation, Thailand existing commitments Japan India ASEAN AFAS FTA and China AIA strategic AEC partnership WTO 3 2 others 1 existing policy policy 9 decision yes or no domestic laws formulation making 4 policy private framework sector 5 7 govern- 8 ment liberalization 6 internal academic plan/policies academic preparatory studies studies NGO (liberalization and (position) development) stakeholder consultation background studies Source: Vonkhorporn 2008. Note: ASEAN = Association of Southeast Asian Nations. AFAS = ASEAN Framework Agreement on Services. AIA = ASEAN investment area. AEC = ASEAN Economic Community. FTA = free trade agreement. NGO = nongovernmental organization. that the government must take into account and balance in the negotiating process. It may also be helpful to confront domestic service exporters with the interests of consumers, producers, service importers, and public inter- est groups in public debates. The economic and political consequences of trade and investment liberalization in the service trade and the related regulatory reform issues should thereby be clarified. Such debates may help address misunderstandings in the public policy discourse over liber- alization and reform issues. The mix of stakeholders should therefore be broad and representa- tive, even though this may make debate more controversial. The mix may also have to show a balance between the subnational and the national, depending on the weight of institutions in each case. A balance must also be realized between institutions that are more horizontal (for example, a chamber of commerce representing several sectoral interests) and institutions that are more narrowly sectoral (for example, a banking federation or professional service associations). However, as in government, it is still relatively rare for the private sector, particularly in developing Negotiating Trade in Services: A Practical Guide for Developing Countries 35 countries, to be organized around all-inclusive coalitions or other types of groups dealing with services. Given the key intermediary role many services play throughout the economy, it will be helpful to reach out to consumer communities (including in the agricultural, mining, and man- ufacturing sectors) rather than focusing solely on the negotiating prefer- ences of service producers.4 Building up the capacity of consumer advocacy organizations or supporting the creation of such organizations may be useful in promoting procompetitive, consumer-friendly out- comes in policy design. An especially sensitive issue is the balance to be struck in consulta- tions among business associations, trade unions, and nongovernmental actors (including nongovernmental organizations). Nongovernmental actors, in particular, tend to take vocal positions on significant trade issues in services, often question the benefits of liberalization, and caution against the liberalization of services that provide public goods such as education, health care, water distribution, cultural industries, and others. Drawing on the experience of Thailand's Ministry of Commerce, figure 2.2 illustrates the sorts of interagency and external stakeholder consultations needed to make service negotiations successful. Figure 2.2 Negotiating Essentials: Interagency Coordination and External Stakeholder Consultations consumers academia pri va NGOs asso te ciat sta ion individual keh companies o governmen federation ld t agenc er y of industries affected chamber companies of commerce finance transport bank association neg o tiat others... or health others... Source: Vonkhorporn 2008. Note: NGOs = nongovernmental organizations. 36 Marconini and Sauvé Conducting a Trade-Related Regulatory Audit Because the currency of service negotiations is domestic regulation, much of the preparatory work must focus on the domestic regulatory regime and its relevance in a trade policy context: how it is framed, what objectives are pursued and with what degree of efficiency, whether domestic regulatory requirements are rooted in international standards or international best practice, whether domestic rules and administrative procedures are user-friendly, how and by whom domes- tic regulations are applied, whether domestic regulatory regimes are trade- and investment-friendly, and whether domestic regulatory objectives can be attained in ways that are less restrictive on trade and investment.5 An inventory audit of domestic regulatory measures affecting services and the trade in services should be compiled on the basis of existing leg- islation and regulations. This internal exercise strengthens interagency coordination and promotes a healthy dialogue among the officials involved in domestic and external policy matters, while also favoring a culture of regulatory reform and regulatory impact assessment. Thus, a trade-related audit may be useful even in the absence of international negotiations. Trade and investment negotiations offer excellent opportunities for engaging in such an exercise. This, in turn, helps to address the need for investments in trade-related capacity among regulatory officials who may have limited knowledge or experience of international agreements, trade law, and negotiating processes. It may also enhance knowledge among trade officials who may not have a full under- standing of the underlying law and economics of sectoral regulatory challenges. Performing an audit of all service-related regulations may be daunt- ing, particularly if the exercise exceeds the scope of the measures sub- ject to service trade negotiations (box 2.3). Enhancing the ability of government officials to gain a fuller understanding of trade law is there- fore important for properly identifying and describing the nature of the domestic regulatory conduct that may be expected to arise from inter- national trade discussions and distinguish this from more purely domes- tic matters of nondiscriminatory conduct. Regulatory officials tend to view their work as primarily domestic. Yet, the advent of trade disci- plines on services in the GATS and in PTAs has revealed that much of what regulators consider domestic lies within the perimeter of trade and investment negotiations. Negotiating Trade in Services: A Practical Guide for Developing Countries 37 Box 2.3 Performing a Trade-Related Regulatory Audit in Services The two-way interaction afforded by the request-offer process on which serv- ice negotiations typically rest can be useful if it underpins attempts to bench- mark a country's domestic service regulations with the regulations of the country's main trading partners and if it identifies the means to achieve greater policy convergence or shifts toward best (often procompetitive) reg- ulatory practices. This benchmarking and the related need (in response to requests from trading partners) to identify more precisely the policies and measures that may or may not be addressed in the negotiations may also allow a useful policy dialogue to take place among trade officials, sectoral regulators, and officials in other government agencies and departments, as well as key stakeholders in business and civil society. Such two-way policy interaction may also be an important means of answering the central issue of the policy objectives developing countries ultimately wish to pursue in their GATS and PTA negotiations domestically and in foreign markets. The ques- tions that may arise in a domestic dialogue aimed at informing the request- offer process include the following: · What is the policy objective pursued by the relevant regulatory measure? · Is the policy objective pursued by the specific measure consistent with overall government policy? · How transparent is the regulatory measure and the process to adopt it? · Are private sector stakeholders, domestic and foreign, consulted prior to the enactment of new policy measures? · When was the policy measure, law, or regulation enacted? · When was the measure last invoked? · Is the measure periodically reviewed? · Is the government satisfied that the policy objective is being achieved, and has it developed a framework to assess the effectiveness of the regulatory regime? · Can the policy measure be achieved through other means or in a manner that might lessen the restrictive impact on trade or investment? Performing an audit of a country's regulatory regime in the context of negotia- tions on the service trade and investment liberalization may thus generate positive policy spillovers in domestic regulatory conduct and design and contribute to strengthening the consultations within and outside the government on services. (continued) 38 Marconini and Sauvé Box 2.3 (continued) Among the reasons governments might be interested in engaging in a trade- related regulatory audit are the following: · Ensuring that key regulatory objectives are met in the most efficient manner (that is, in the manner that is least wasteful of scarce public resources), including prudential, consumer protection, or social policy objectives · Identifying antiquated or inefficient regulations and adopting or converging toward international best practices; in financial services, for instance, this may allow the benchmarking of the degree to which domestic prudential standards and regulations approximate agreed international norms such as the norms of the Bank for International Settlements, the International Organization of Securi- ties Commissions, and the International Association of Insurance Supervisors · Encouraging, where feasible, the adoption of regulations that facilitate market access (procompetitive) · Building trust within the government (that is, encouraging a whole-government approach to domestic regulation) through dialogue among trade negotiators, ministries, and sectoral regulators · Deepening dialogue with key external stakeholders, including local and regional governments; producers, users, and consumers; nongovernmental organizations; and the academic community; in some cases, gaining a better understanding of the reasons for the need to maintain potentially trade- and investment-restrictive measures A useful starting point for such an audit is the preparation of a list of noncon- forming measures--that is, the equivalent of a negative list of measures, which, absent their inscription in reservation lists, would breach the key liberalizing provisions in trade agreements (national treatment, market access [quantitative restrictions], local presence requirements, and most favored nation treat- ment)--and to describe comprehensively (1) the sectoral nature of the listed nonconforming measures (for definitional purposes), (2) the level of govern- ment at which these measures are applied (that is, municipal, subnational, or national), (3) the legal anchoring of the measures (that is, the full citation of the relevant law or regulation), and (4) the precise nature of the nonconformity of the measures.a These audits were pioneered during the preparation of the negative lists of nonconforming measures defining the legally binding commitments of the (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 39 Box 2.3 (continued) parties under the North American Free Trade Agreement.b A trade-related regula- tory audit may be put to several uses, as follows: · The provision of a comprehensive overview of the trade- and investment- restrictive components of a country's regulatory regime · The identification of regulations needing reform or elimination (which may then yield useful negotiating currency) · The confirmation of the legitimacy of trade- or investment-restrictive regulations · The addition of greater clarity to the hierarchy of trade- and investment- restrictive measures (for example, understanding the type of restrictive meas- ure that is most likely to be considered by trading partners as unfriendly to market access); this may encompass nondiscriminatory measures, particularly quantitative restrictions (that is, market access measures), including pruden- tial measures · The identification of measures that may be scheduled in trade agreements (that is, in making new or improved negotiating offers) · The anticipation of negotiating requests by partner countries and the assess- ment of the scope for opening up, reforming, or not altering regulations The negative list­based regulatory audit depicted above focuses policy attention on measures that are either overtly discriminatory (in the case of measures violating the national treatment and most favored nation provisions of trade agreements) or that overtly constrain the level of market competition allowed (in the case of market access or nondiscriminatory quantitative restrictions). A trade-related regulatory audit conducted along these lines may not provide a full reading of all nondiscriminatory measures that are unduly burdensome or that act as disguised restrictions on trade and investment and for which trade dis- ciplines are being sought under the GATS article VI:4 work program. Identifying such measures is inherently more difficult and requires considerably more dia- logue among trade negotiators, ministries, and sectoral regulators and greater technical competence than the expertise available in many trade ministries. Despite these caveats, a trade-related regulatory audit that maps restrictive governmental measures affecting trade and investment in services can yield important gains in transparency and help anticipate the red lines in negotia- tions and bottlenecks in implementation.c The technical homework and regula- tory dialogue that flow from such an exercise can also promote a culture of (continued) 40 Marconini and Sauvé Box 2.3 (continued) procompetitive regulatory reform. Conducting an audit is a useful means to prepare for service negotiations, to master the sectoral intricacies and the tech- nical details that are the currency of service negotiations conducted along request-offer lines, to give service providers a one-stop inventory of the restric- tive measures maintained at home (and in the markets of key trading partners to the extent that such efforts are reciprocated or mandated by trade agree- ments), and to afford negotiators a complete road map of measures to target and prioritize in negotiations. None of the above is readily achievable without precise information on the regulatory status quo. Source: Sauvé 2008. a. In the Canadian context, the compilation of the list of nonconforming measures maintained at the federal level was carried out over four months by a small group of young officials chosen for their expertise in law. The group was under the supervision of a member of the service negotiating team. The supervisor provided the group with a methodology to produce comparable reservations across all service sectors. Once the inventory was completed in draft form, the trade negotiating team met with ministries and sectoral regulatory agencies. The team asked them to verify the accuracy of the information that had been collated. Then, during a second phase, it engaged in a policy dialogue on the rationale behind the restrictive measures identified, the possibility (or not) of achieving these objectives through other means (including through nondiscriminatory meas- ures), and the scope for removing (or not) the nonconforming measures or progressively reducing the level of nonconformity within the context of the negotiations on the North American Free Trade Agreement. A similar dialogue was carried out with private sector representatives, who were asked about the scope for modifying or eliminating the restrictive measures maintained at the domestic level. b. Such lists of nonconforming measures are found in PTAs that are modeled on the North American Free Trade Agreement and that pursue a negative list­based approach to liberalization. A number of more recent PTAs, notably those negotiated by Japan, have sought to embed negative lists solely for transparency purposes. In this case, the legally binding commitments on services of the respective parties are governed by the hybrid scheduling approach found in the GATS. This approach adds the voluntary, positive selection of sectors, subsectors, and modes of supply used to schedule the commitments to the negative listing of limitations to national treatment and market access maintained in scheduled sectors, subsectors and modes of supply. Unlike the GATS, in which parties are free to determine the level of their positive bindings, the Japanese PTAs feature an obligation to lock positively listed commitments into the regulatory status quo. This approach has been replicated, most recently, in the Economic Partnership Agreement entered into by the member states of the European Community and the countries of the Caribbean Community (CARICOM) and the Dominican Republic (the CARIFORUM grouping) (see box 2.15). c. The red lines are the points beyond which negotiators are not prepared to engage or commit. Box 2.4 provides concrete illustrations of the information a regulatory trade audit typically generates. The list closely tracks the information required to produce a negative list of nonconforming trade and invest- ment measures. Negotiating Trade in Services: A Practical Guide for Developing Countries 41 Box 2.4 Illustrative Examples of Trade-Related Regulatory Audits 1. Singapore­United States Free Trade Agreement: Singapore's schedule Sector: Financial services Subsector: Banking services Type of reservation: Market access and national treatment Level of government: National Measures: Banking Act, Cap. 19; MAS Notice 619 (Singapore) Description: Only a maximum of 20 new wholesale bank licenses will be granted by the Monetary Authority of Singapore between June 30, 2001 and June 30, 2003. Quantitative limits on the number of wholesale bank licenses will be removed for U.S. banks three years after the date of entry into force of the agreement. Wholesale banks are not permitted to (a) accept fixed deposits in Singapore dollars of less than S$250,000; (b) offer savings accounts; (c) oper- ate interest-bearing current accounts in Singapore dollars for natural persons who are Singapore residents; (d) issue bonds and negotiable certificates of deposit in Singapore dollars unless the requirements pertaining to the mini- mum maturity period, the minimum denomination, or the class of investors contained in the Guidelines for Operation of Wholesale Banks issued by the Monetary Authority of Singapore are complied with. 2. Japan-Philippines Economic Partnership Agreement: Japan's schedule Sector: Financial services Subsector: Banking services Industry classification: JSIC 612 (banks, except the Central Bank); 621 (financial institutions for small businesses) Type of reservation: Market access and national treatment Level of government: Central government Measures: Deposit insurance law (Law No. 34 of 1971), article 2 (Japan) Description: The deposit insurance system only covers financial institutions that have head offices within the jurisdiction of Japan. 3. North American Free Trade Agreement: Mexico's reservation list (annex I) Sector: Communications Subsector: Entertainment services (cinema) Industry classification: CMAP 941103-private exhibition of films (continued) 42 Marconini and Sauvé Box 2.4 (continued) Type of reservation: National treatment (article 1202); performance requirements (article 1106) Level of government: Federal Measures: Ley de la Industria Cinematográfica; Reglamento de la Ley de la Industria Cinematográfica (Mexico) Description: Thirty percent of the screen time of every theater, assessed on an annual basis, may be reserved for films produced by Mexican persons residing either within or outside the territory of Mexico. Governments responsible for coordinating the preparatory work for negotiations should aim to gather an inventory of measures that will enable them to seek answers to at least a few basic policy issues, as follows: · Whether the existing regulation or regulatory regime is adequate and acceptable or whether it needs changing · Whether changes may be contemplated within the time frame of ongoing international negotiations · Whether regulatory changes may be offered in international negotiations These elements are important for several reasons. First, offers in service negotiations may require the binding of existing regulatory situations, and countries should avoid scheduling legally binding measures that domestic regulators do not find adequate or fully developed. Second, the changes in domestic regulations that may be needed or that may be contemplated for internal or domestic politi- cal reasons may constitute valuable offers in the negotiations if they tend to improve on the conditions for market access or national treatment. It makes sense to promote formal changes and offer them while there is still an opportunity to obtain reciprocal concessions from major trading partners. Box 2.5 indicates some of the key questions that arise during the preparatory phase of service negotiations. Negotiating Trade in Services: A Practical Guide for Developing Countries 43 Box 2.5 Key Questions during the Preparatory Phase of Service Negotiations · Is there a sectoral or national development strategy for services that should be taken into account during the preparations for negotiations? · Has thought been given to the place of reform in the development of the domestic service market and the relationship of reform to the international trade negotiations at hand? · Is the coordinating authority, agency, or ministry in place and ready to operate? · Have capacity-building needs been identified with respect to the overall approach to liberalization and trade agreements, that is, the readiness to liber- alize, the strategies to be adopted in negotiating liberalization, and the advan- tages to be obtained from negotiations, particularly in terms of access to foreign markets? · Are the other external priorities in related international forums clear to all partic- ipants in the preparatory process, for example, the positions and commitments taken in the context of bilateral agreements? · Is there a reasonable understanding among those participating and, in particu- lar, within the coordinating entity on the measures in international trade agree- ments that affect the trade in services? · Do those coordinating the work need more capacity building in matters relat- ing to international trade agreements? · In the case of sectoral ministries and agencies, what is the most effective way to pursue the capacity-building exercise? · Does an inventory of the measures affecting the trade in services already exist at the horizontal or sectoral level? Beyond its use in trade negotiations, is the information gathered in such inventories being used to underpin a domestic dialogue with key regulatory agencies and external stakeholders and to promote regulatory review and reform processes? · Once an inventory of regulatory measures has been carried out, what is the basis for determining whether regulatory requirements are adequate, accept- able, or in need of change? · In instances in which regulatory changes appear necessary, can or should the changes be contemplated within the time frame of ongoing international negotiations? (continued) 44 Marconini and Sauvé Box 2.5 (continued) · If so, could or should these changes be presented as part of the offer the coun- try is making in the negotiations? · In the case of all measures, what are the criteria for choosing the measures to be applied, the modes of supply, and the sectors to be offered as bound, partially bound, or unbound in the negotiations? · Has a clear distinction been established between defensive and offensive interests in the negotiations? How does the government establish the red lines for its negotiators? · Are offensive interests able to take advantage of the negotiations, or is there a need for additional capacity building, particularly in private sector supply? · Have studies on the export market been conducted within the government or by the private sector? · Has all relevant information (public, private, international, and so on) on export interests been compiled, analyzed, and circulated among participants in the preparations? · How significant are the voices of consumer and user groups in the formulation of service sector policy? Should technical assistance be directed at nurturing or sustaining the development of these voices? · Has the coordinating entity managed to organize the necessary consultative process with all relevant stakeholders in the public and private sectors, includ- ing trade unions and nongovernmental organizations? · Is the consultation process with stakeholders sufficiently broad to be repre- sentative? · Does the decision-making process seek to achieve a balance among sectoral, individual corporate, and economy-wide objectives (both offensive and defensive)? Conducting Service Negotiations Service negotiations tend to be complex affairs, as are the sectors involved. A first concern of governments in conducting service negoti- ations is to organize a coordinated approach to the talks and identify key issues that require attention early. Because service negotiations involve important, but highly heterogeneous sectors, the composition of the delegations for negotiations is crucial. This is especially true given the budgetary constraints most developing countries face. Thus, Negotiating Trade in Services: A Practical Guide for Developing Countries 45 because sector-specific expertise cannot be maintained in Geneva, there must be minute monitoring of the negotiating process and a competent means of communicating information to capital cities to keep the rele- vant officials updated so they may intervene. Service negotiations essentially involve the mastery of two key issues, rule making and market opening, both of which (especially market open- ing) must be based on constant coordination and consultation with key stakeholders inside and outside government. Making Rules for the Service Trade The initial emphasis in service negotiations is often on rule making, a phase of negotiations that may encompass diverse issues, old and new. These typically range from the approach in scheduling commitments (that is, a top-down approach using a negative list, a bottom-up approach using a hybrid list, or a combination of the two) to questions of scope and defi- nition and to the unfinished rule-making agenda of the GATS (that is, domestic regulation, emergency safeguards, government procurement, and subsidies), which is, for the most part, an unmet challenge in PTAs as well. Rule-making discussions also typically feature frontier issues, includ- ing whether and how to address e-commerce and digital trade in service negotiations; whether and how to address cultural cooperation (with or without legally binding commitments to market access); whether and how to ring-fence sectors, such as public health and education, in which concerns about specific items related to public goods may predominate; the need to design procompetitive regulatory provisions to open up trade and investment in network industries; the need for competition policy complements to market opening in sectors prone to market dom- inance and anticompetitive conduct; the specific treatment of invest- ment in service industries (a central challenge in PTAs featuring comprehensive investment chapters); how best to enhance the treat- ment of labor mobility; agreeing on operational modalities for aid for trade in services; and so on. Many developing-country governments regard themselves essentially as rule-takers in trade negotiations, including in services. They thus take a relatively passive stance in discussions on rule-making issues. This ten- dency may be more pronounced at the PTA level, particularly if the nego- tiations are conducted along North-South lines and if developed-country governments, as often occurs, come to the negotiating table with a prede- termined platform of rules and substantive obligations and only limited scope for negotiation, modification, and innovation. 46 Marconini and Sauvé Yet, while the negotiating asymmetries are an unfortunate fact of life in trade diplomacy, developing countries have a major stake in crafting the rules governing the service trade. For this reason, they need to exhibit a proactive stance in talks and strive to identify, formulate, and defend their proposals in areas of priority interest. At the WTO level, as well as in regional negotiations, they must also reach out more to other developing countries to pool scarce negotiating resources and build coali- tions to support specific issues (particularly Mode 4 trade, e-commerce and crossborder supply, emergency safeguards, and special and differen- tial treatment). Developing countries should participate especially in the discussions on the interface between domestic regulation and external liberaliza- tion, the GATS article VI:4 work program. This is so because strength- ened regulatory disciplines may promote sounder governance and greater transparency in domestic markets, with the attendant signaling externalities. Stronger disciplines in domestic regulation can also pro- vide an effective means of challenging the regulatory practices in for- eign markets that are needlessly burdensome or serve as disguised restrictions on trade. Technical assistance and efforts in capacity building targeted at help- ing developing-country negotiators acquire a greater voice in service rule making may be particularly useful. The broad pool of former service negotiators, particularly in leading developing countries, should be har- nessed to this end. This might be accomplished through the establish- ment of a roster of experts that the World Bank or regional development banks could administer. Developing-country governments might also out- source part or all of the crafting of rule-making proposals to nongovern- mental and policy research organizations that have developed considerable technical expertise in services. Opening Service Markets While the rule-making agenda in services remains significant and is important to all members of the trade community, much of the attention in service negotiations is devoted to market opening and specific liberal- ization commitments. Unlike discussions on nonagricultural market access or on agriculture, service negotiations have largely eschewed formulas (linear or nonlinear), coefficients, and thresholds for negotiations (box 2.6). This reflects the difficulty of quantifying nontariff (that is, regulatory) barriers to trade and investment. Absent formula-based approaches, governments continue to Negotiating Trade in Services: A Practical Guide for Developing Countries 47 Box 2.6 The Doha Round Shift toward Collective Requests For lack of a credible alternative and drawing on mercantilist reflexes honed in goods (that is, tariff ) negotiations, the bilateral request-offer approach was adopted in the Uruguay Round as the dominant negotiating method for opening up service markets.a Concern over the limited progress, time-consuming nature, and information- intensive asymmetries implicit in this approach led to a decision by the trade min- isters at the December 2005 WTO ministerial meeting in Hong Kong, China to supplement, where practicable, bilateral request-offer discussions by plurilateral negotiations, the results of which would then be extended to all WTO members on a most favored nation basis. This approach involves groups of WTO members-- akin to the numerous "friends groups" already existing under the GATS--that propose negotiating objectives in a sector or a cluster of sectors. At first, the shift toward plurilateral (or collective) discussions revealed a paradox- ical aversion of developing countries toward alternatives to the current bilateral approach, even though the bilateral approach is more taxing on developing coun- tries than on developed countries. This is mainly because of the considerable resources and time required by bilateral request-offer discussions, the limited num- ber of service experts available for bilateral discussions in Geneva and in capital cities, the negotiating imbalances that flow from the limited ability of most developing countries to formulate their own requests, the significant asymmetries in the infor- mation relevant to negotiations that is available to policy officials, and the more lim- ited stakeholder consultations, private sector engagement, and presence abroad of service suppliers. All these factors tend to interact to produce least common denom- inator, precaution-induced outcomes at the negotiating table. This complicates attempts to marshal corporate interest in multilateral negotiations and tends to shift incentives toward bilateral or neighborhood responses through PTAs. Plurilateral approaches are likely to economize on the scarcest commodities-- time and human resources--and afford developing countries significant economies of scale in negotiating efforts. Avoiding the sector-by-sector and country-by-country bartering of commitments may substantially reduce the transaction costs of negotiations. These approaches also offer a useful means for developing countries to pool their resources in pursuit of common objectives and join forces with other country groupings (developed and developing) to help build useful reform coalitions in talks. (continued) 48 Marconini and Sauvé Box 2.6 (continued) A credible case may thus exist for complementing the current bilateral request-offer approach--still relevant for countries with highly specific offensive or defensive interests--through collective approaches. a. The bulk of the Uruguay Round was taken up by the development of a framework of disciplines and rules for the service trade. Considerably less time was spent on market access in the talks, and no specific attention was paid to alternative methods of conducting negotiations on access in service markets. conduct negotiations by focusing on the exchange of commitments on market access and national treatment on the basis of sectors and modes of supply, with occasional reliance on GATS article XVIII (additional commitments). This article relates to precommitting or phasing in future market opening, allowing for a smoother transition to greater market openness, and the related structural adjustment challenges. Opening service markets typically involves many policy parameters and layers of impediments, some of which may be overlapping. Many of these impediments are narrowly sectoral and relate to a host of regulatory measures that may affect the quality and certainty of the access to and presence in service markets. Many other policy parameters may not be sector specific, but relate to more generic or horizontal policy measures (for example, investment and labor mobility). Still other policy measures may lie wholly outside what is often considered the central focus of serv- ice negotiations (for example, issues related to standards, competition policy, and access to government procurement markets). An important question confronting governments in request-offer negotiations concerns the level of ambition in the scheduling of legally binding commitments under service agreements. The choice of what to make binding is likely to have important implications for domestic eco- nomic performance and regulatory conduct. For instance, the impact of de novo liberalization on competition (that is, implying the elimination or progressive reduction of existing restrictions to trade or investment in services), the response of foreign direct investors, domestic incumbents, employment levels, and the design of domestic regulatory regimes is likely to differ significantly from the potential impact flowing from a decision to bind the regulatory status quo (that is, freezing the current level of policy restrictiveness) or to bind at a level below the regulatory status quo (which the GATS and GATS-like agreements allow). Negotiating Trade in Services: A Practical Guide for Developing Countries 49 In deciding the type of access to request or offer, a government must typically address three core issues: the benefits to be achieved, the polit- ical concerns and downsides, and the required regulatory framework or regulatory reform efforts. Table 2.2 lists important policy considerations likely to influence the formulation of negotiating requests and offers. Given the perceived shortcomings in regulatory regimes and external competitiveness, developing countries tend to focus negotiating energy on defensive interests, that is, the protection of the home market from for- eign competition through limited offers on market opening. This gener- ates a cost in unrealized offensive interests in terms of key export markets. One reason for this negotiating stance lies in the pronounced asymmetries in service negotiations arising because of the capacity and informational deficits that are often more substantial in poorer countries.6 These deficits revolve around the genuine difficulties most developing country governments experience in collecting information on the regula- tory barriers that are maintained in foreign markets and that hamper the growth of home-country suppliers. A second reason for the negotiating stance stems from the sensitivities in offering foreign interests enhanced access to a home market or in allowing foreign services and foreign sup- pliers of services an equal regulatory footing with domestic competitors. A third reason for defensive posturing resides in the difficult demands that developed countries often make at the negotiating table, forcing their negotiating partners to focus on the responses. A fourth reason is the fact that offer lists deal with host-country regulations. In this case, precision is an imperative because governments are keen to avoid situations in which imprecise offers (and, thus, prospective commitments) sow the seeds of future trade disputes, demands for compensation, or retaliatory measures. The informational deficits that burden developing-country governments during service negotiations aggravate these problems and reinforce the tendency of these countries to exhibit considerable precaution in under- taking new or enhanced commitments in the service trade. Despite these challenges, the past few years have witnessed a sea change in the level of engagement by developing countries in service negotiations across sectors. This new landscape attests to the growing realization that developing countries possess comparative advantages in the supply of many services, particularly services that make intensive use of labor.7 It also attests to the widening agreement that the offers in negotiations help secure enhanced access to imports (including imports of capital), particularly imports of key infrastructural services, and the economy-wide benefits likely to derive from such access. As in the case 50 Table 2.2 Factors to Consider in Formulating a Request or Offer Group Possible benefits Concerns to be addressed, including through regulatory reform Country, economy · More efficient use of resources · Determine the impact on domestic economic performance and the in general · More foreign investment attracted regulatory conduct of various levels of policy binding (for example, · Expanded job opportunities, reduced drain below the status quo, status quo, precommitment to future on human resources liberalization) · Enhanced labor force skills · Ensure quality services · Increased foreign exchange earnings · Ensure adequate infrastructure for business activities · Increased tax revenues · Assess the impact of market opening on the scope for achieving · Economic diversification universal service supply and access objectives, particularly for the · Increased service efficiency poor and geographically disadvantaged · Increased technology transfer · Improve environmental stewardship and address the possible · Increased economic growth throughout adverse environmental impacts arising from liberalization the economy · Ensure the ability to regulate according to the best international practices where feasible and enforce regulatory regimes adequately · Restrict the scope for illegal activities · Maintain a stable political and economic environment · Maintain adequate means to discipline the potential anticompetitive conduct of dominant firms (domestic and foreign) · Assess whether competition policy can play a larger role in disciplining market conduct after liberalization? · Ensure adequate tax revenue for the government · Ensure adequate resources to address labor force retraining needs, particularly among employees in state-owned enterprises Consumers · Lower prices for services (leading to a higher · Assess the impact of market opening on the scope for achieving standard of living, greater purchasing power) universal service supply and access objectives, particularly for the · Higher-quality service (including convenience, poor and geographically disadvantaged responsiveness, timeliness) · Ensure the adequacy, reliability, and quality of public services · Greater choice, new service offerings · Safeguard consumer rights and provide a redress for complaints · Ensure sensitivity to local needs Business services · Lower costs of doing business, increased profitability · Allow local firms to recoup initial investments · Ready availability of capital, reduced cost of funds · Encourage reinvestment in improved services · Greater ability to own and dispose of assets · Ensure the growth of local enterprises · Fewer foreign exchange limits, greater ability · Ensure the acceptance of locally produced services to repatriate profits · Encourage the adoption of and compliance with international standards · Infusion of new technologies and innovation · Ensure the availability of appropriately skilled workers · Greater adherence to international standards · Ensure the disclosure of financial information by foreign firms · Enhanced scope for mergers and strategic alliances · Ensure financing at competitive rates · Remove red tape, increase transparency of · Ensure effective professional (service industry) associations domestic regulatory requirements · Access to skilled labor and expertise (locally and abroad) · Access to larger markets · Access to cheaper service inputs, thereby increasing efficiency and competitiveness Source: OECD 2002. 51 52 Marconini and Sauvé of the trade in goods, the principal gains from the trade in services-- those most likely to enhance national welfare--relate to the possibilities offered by trade for importing a broader array of less expensive or higher-quality products than is available on the domestic market and for exposing domestic suppliers to greater competition in an orderly, adjustment-promoting manner, as well as for attracting foreign investment in key sectors. Service negotiations represent a unique opportunity for countries at all levels of development to secure more favorable terms of access to foreign service markets that reliance on unilateral reform alone is not able to pro- vide. The preparations needed to put together informed requests can also benefit from the regulatory inventories and capacity-building efforts described above. But additional matters must be addressed if a country is to assemble development-enhancing requests. Request lists are offensive (as opposed to defensive). They focus on sectors, subsectors, and modes of supply relative to which the requesting countries are asking partner countries progressively to remove or lessen access-impairing regulatory measures. The main motivation behind request lists is the promotion of the export interests of the leading service providers of the requesting country. The content of a country's request list should therefore be based on an assessment of these interests, which is absent in the approach many developing countries take to the negotiations. In theory, nothing prevents a country from asking for commitments in all sectors included under service agreements. The reason such an out- come normally does not arise in practice is that countries are often reluc- tant to formulate requests in areas where they may not be in a position to offer reciprocal concessions. This may explain why relatively few developing countries took part in the collective requests formulated after the WTO Ministerial Conference held in Hong Kong, China, in December 2005. Putting together targeted negotiating requests requires detailed infor- mation about the measures that are hindering access to the markets of key trading partners. The breadth of the service trade and the diversity of the sectors involved render information-gathering a large and complex task with which many developing countries, even larger ones, experience recurring difficulties. The difficulties are compounded if the channels of communication with key stakeholders (that is, chambers of commerce, service firms already active in world markets, firms in active prospecting mode, embassies in key foreign markets, and so on) are inadequate. This Negotiating Trade in Services: A Practical Guide for Developing Countries 53 highlights the potential payoff of targeted trade-related technical assis- tance aimed at providing developing-country suppliers with economic intelligence on the conditions and opportunities for access to, for exam- ple, export markets, distribution channels, information on product stan- dards, and business-to-business dialoguing and networking. The ultimate strategy in service negotiations and the position papers, offers, requests, and other relevant documents needed to implement the strategy must also reflect awareness of matters unrelated to services. Trade negotiations are typically organized as a single undertaking, whereby nothing is agreed until everything has been agreed. Thus, service negotia- tions are often, if not always, part of a larger context that includes all sectors of an economy.8 As the Doha negotiations have made clear, nego- tiations on agriculture and industrial products exert a huge impact on the nature and pace of the negotiations on services, including what is being demanded, what is being offered, the overall approach to the negotia- tions, and even the outstanding rules and principles that may also be under negotiation. In addition to the concerns relating to the service sec- tor, a negotiating strategy for services must therefore reflect an awareness of the limits and opportunities emerging from other elements of the sin- gle undertaking under negotiation. This draws attention to the need for policy coordination among the ministries and members of a country's trade negotiating team. The range of pertinent concerns that arises in carrying out service negotiations is outlined in box 2.7. Implementing Negotiated Outcomes The agreements emerging from the Uruguay Round established a broad set of obligations for developing economies that went well beyond the traditional border measures of the General Agreement on Tariffs and Trade and included disciplines with a far wider development impact. This is clear in services, with their coverage of sectors such as finance, telecom- munications, and transportation that possess critical economy-wide, infra- structural properties, as well as sectors in which a host of public policy concerns and sensitivities arise, such as health care, education, environ- mental, and audiovisual services. While trade-related capacity building has contributed to the ability of developing economies to formulate and negotiate national strategies in trade, this does not necessarily mean that they are able to implement trade agreements, nor does it guarantee the availability of the resources required to cover the significant recurring costs that new trade rules in 54 Marconini and Sauvé Box 2.7 Concerns Arising in Service Negotiations · Has the government identified the specific rule-making issues to which it intends to attach priority in service negotiations? · How adequate are the negotiating skills of the country's trade and regulatory officials, particularly their capacity to take an active part in discussions on rule- making issues in service negotiations? · Has the government considered teaming up with other WTO members or regional partners to formulate proposals and negotiate on selected rule- making issues? · Has the government considered how to cooperate with various international organizations, bilateral donors, or expert nongovernmental organizations in formulating negotiating proposals on rule-making, market-opening, or devel- opment issues? · Has the government considered the pros and cons of participating in collective requests and offers on rule-making, thematic, or sectoral issues so as to over- come resource constraints and achieve scale economies in negotiations? · What role is the government assigning to article XVIII (additional commitments) of the GATS (and PTA equivalents) in sequencing liberalization undertakings (precommitting to opening) or in addressing sector-specific complements of market opening (government procurement, emergency safeguards, issues related to labor mobility, and so on)? · What criteria does the government apply to choose among measures, modes of supply, and the sectors that are to be offered as bound, partially bound, or unbound in negotiations? · Has a clear distinction been established between the defensive and offensive interests in the negotiations? · Are the country's negotiating red lines clearly established, and does a process exist to revisit these in light of developments within and outside service negotiations? · Have export interests been identified so as to contribute to the elaboration of a realistic request list? · How does the government compile information on the foreign barriers affecting the country's service suppliers? · Has a mock request list been drawn up on the basis of existing information? (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 55 Box 2.7 (continued) · What procedure does the ministry responsible for service negotiations use to seek input from key stakeholders in responding to the requests for market opening formulated by trading partners? · Do consultations focus primarily on targeted sectors and key domestic sup- pliers, or is an attempt made to weigh the economy-wide implications of acceding to negotiating requests? · Does the government weigh the pros and cons of binding less than the status quo, notably, in terms of the signals such a decision may send regarding the country's investment and regulatory climate? · To what extent is the government's negotiating stance in services, notably, as regards the evolution of liberalization offers, informed by and coordinated with the state of play of negotiations in nonservice sectors? highly regulated sectors typically generate. These costs may be associated with a range of initiatives, from strengthening regulatory agencies to the establishment of independent regulatory agencies in telecommunications or energy. The administrative and financial burdens of complying with WTO obligations tend to be particularly acute in WTO-acceding economies, especially the least developed economies, because accession is almost certain to involve far-reaching commitments to substantive legal and institutional reforms. Moreover, the costs linked with the implementa- tion of WTO agreements or PTAs do not revolve solely around legal compliance. The costs also encompass the ancillary measures and costs that must be covered to obtain and support effectively the benefits deriv- ing from implementation and liberalization. These costs and capacity- building requirements vary according to domestic circumstances; in resource-constrained environments, they may, at times, need to be assessed against competing and more compelling domestic priorities. Addressing Regulatory Weaknesses One area in which trade-related technical assistance can make a decisive contribution in services is in strengthening regulatory agencies in devel- oping countries. Regulatory institutions are costly and require staff with sophisticated legal and economic skills. As the current financial crisis in 56 Marconini and Sauvé developed-country markets reminds us, sound domestic regulation is critical to realizing the benefits of open service markets and in responding to potential downsides. To engage meaningfully in service negotiations, a government must be confident in its ability to manage the regulatory, sectoral, and economy- wide implications of liberalization. In assessing its capacities in the production and exchange of services, it must confront any competitive weaknesses that result from its regulatory regime. Onerous regulatory requirements may prevent a country's enterprises in a particular sector from increasing the economic efficiency of their operations or from intro- ducing new, more competitive services and marketing techniques. Many service sectors are highly regulated as a consequence of policy objectives. Examples are consumer protection, equitable or universal access to services in health care and education, environmental protection, and, in the case of financial services, the protection of depositors and the maintenance of financial stability. This regulation forms an essential part of good governance and a functioning market economy. Accordingly, both the GATS and preferential service agreements recognize the right of countries to regulate and introduce new regulations on the supply of services so as to meet national policy objectives. Trade liberalization in services may intersect with domestic regulation in two main ways. First, in making regulations, governments must take into account many factors, one of which may be the economy-wide trade and investment impacts of the regulation. Information on the potential economic, trade, and investment costs may assist governments in finding most efficient regulatory tools for achieving desired policy objectives. There are likely to be positive effects in terms of democratic governance from the more efficient and transparent design, implementation, and enforcement of domestic regulations. Second, the process of liberalizing service markets may require new or different types of regulatory interventions, for example, to ensure that the expected benefits of liberalization are realized (for instance, that liberal- ization results in a genuinely competitive market) or that important policy objectives are achieved within the new market structures (for instance, universal service obligations). Procompetitive regulatory reform need not be an exercise in regula- tory disarmament. It is precisely because service sector liberalization often requires significant new regulation that governments, particularly those with weak regulatory capacities, may be loath to undertake far- reaching liberalization commitments in the context of trade agreements. Negotiating Trade in Services: A Practical Guide for Developing Countries 57 Nonetheless, as the discussion on the desirability of performing a trade- related regulatory audit suggests (see box 2.3), the process and culture of the regulatory reform and review that trade negotiations may help to pro- mote involve key issues, including, but not limited to, the following: · The purpose or policy objective of the regulation: for example, consumer or environmental protection, prudential protection, ensuring compe- tition or equitable and universal access to a service, reducing income and regional disparities · The effectiveness and efficiency of the regulation: factors to consider may include the reasonableness, objectivity, and transparency of the regu- lation; whether the regulation is proportional to the objective being pursued; whether the regulation is linked to or rooted in international standards · Implementation of the regulation: for example, are there transparent and impartial procedures for implementing the regulation? Can natural and juridical persons affected by the regulation provide input prior to the adoption of the regulation? Do natural and juridical persons nega- tively affected by the regulation have any recourse through appeal? Do the relevant ministries or government agencies have the skills, financial resources, and political legitimacy to carry out their regu- latory and implementation responsibilities? These points are merely indicative. Countries may not consider the points important, or they may assign importance to other factors. Weighing the value of each factor, while essential for effective liberalization that serves national objectives, including development or equity objectives, can be a challenging process, particularly in developing countries with limited administrative capacity. Many countries require significant technical assis- tance in regulatory capacity building and in training and assistance in the implementation of commitments after market opening. In engaging in service negotiations, governments must have some idea of the desirable duration of the transition toward greater market openness. Liberalization cannot be achieved overnight, particularly in service mar- kets; it is typically best pursued in a progressive, orderly, and transparent manner. This allows incumbents to prepare for greater competition, antic- ipate the possible distributional downside, and put in place a proper regu- latory framework. The complexity and slow pace of domestic regulatory reform in many service markets imply that countries prefer a sequenced approach to 58 Marconini and Sauvé market opening. Proper sequencing can help overcome the concerns of providers of domestic services about the greater competitive challenges. Recourse to progressive liberalization may also buy time for regulatory authorities to acquire the expertise to regulate more open domestic mar- kets and to anticipate and manage the new market risks that the open- ness may entail. There is little doubt that adopting and implementing sounder regula- tions are key to a better overall performance in services. Often, regulations trigger positive externalities through facilitated trade and investment, an improved investment climate, and procompetitive regulatory stances. This is why, in services, efforts directed at assisting developing countries to adopt best practice regulatory regimes and to benchmark the regula- tory regimes according to international standards may be of considerable benefit. It appears desirable, if one considers how to serve the service-related aid for trade needs of developing countries, to distinguish countries by income level. This typically represents a sound proxy for regulatory sophistication and absorptive capacity in services. Least developed countries are likely to be better served by regional and multilateral development agencies with a greater local presence, tighter ongoing monitoring, and a finer appreciation of the country- or region-specific institutional and human resource constraints. Nonetheless, countries with more advanced regulatory and implementation capacities are likely to have a keener interest in best practice regulation and in learning from other emerging countries and developed-country counterparts in areas of mutual regulatory interest. Greater efforts must be directed at providing opportunities for developing-country officials to train in programs on trade and sectoral regulation in leading institutions of higher education and in relevant international organizations with sectoral expertise.9 Other options include capacity-building activities that embed donor country expertise within regulatory agencies in recipient countries, as well as the pairing of local institutions and leading universities or policy research institutions. Examples of such training and regulatory strength- ening are the European Union­China Trade Project and the International Trade Assistance Project in Indonesia, which is funded by the U.S. Agency for International Development (box 2.8). Trade and investment liberal- ization is hardly without distributional consequences. The gains and losses arising from a change in the domestic conditions of competition affect groups in society, and a careful assessment must take account of the Negotiating Trade in Services: A Practical Guide for Developing Countries 59 Box 2.8 Examples of Best Practice Capacity Building in Services The European Union­China Trade Project. Between March 2005 and December 2008, China and the European Union carried out a range of bilateral activities in the trade in services, including the following: · In China, 14 conferences and seminars were held on topics such as financial services; state treasury management; the environment, climate change, and financial services; professional licensing in legal services; the development of the information technology and communication industry; measures to develop China's insurance and financial markets; civil aviation; and competition policy challenges in service industries. · Also in China, 12 studies were carried out on subjects such as domestic regu- lation, outsourcing financial services, insurance market openness, insurance supervision, policies in mergers and acquisitions in banking services, urban planning and commercial centers, air transportation and the GATS, deregula- tion of the aviation sector, the effects of liberalization in retail distribution services, and the travel industry. · Seven tours by Chinese delegations in the European Union examined the reg- ulation of foreign legal consultants, bankruptcy regulations for financial institu- tions, payment and settlement systems, the regulation of legal services, and service statistics. · Chinese internship programs were hosted in various European institutions con- cerned with trade, economics, and regulatory matters. Several best practice lessons in services emerge from the design of the Euro- pean Union­China Trade Project. The project is focusing policy research attention on the second generation of implementation challenges arising following WTO accession. For the most part, this entails working in close proximity with key reg- ulatory agencies, ministries, and China's Ministry of Commerce in ensuring that the implementing legislation in China is consistent with WTO provisions and the country's accession commitments. The presence of a team of experts (around 15 professionals), both Chinese and European, in Beijing greatly facilitates this task and is creating sectoral knowledge and indigenous capacity in project man- agement, while favoring greater responsiveness to client needs. The project has hired the former deputy head of the mission of China to the WTO during the clos- ing phase of the accession negotiations. A person of such high rank is valuable in (continued) 60 Marconini and Sauvé Box 2.8 (continued) working closely with the Chinese bureaucracy. The project team is in regular consultation with the representatives in Beijing of the European Commission and typically involves commission staff, whether residing in Beijing or traveling from Brussels, in project seminars, conferences, and other activities in China. The inter- action has also facilitated the exchange of policy messages between the two partners. Foreign and local experts drawn from leading Chinese universities and research institutions have been associated in project technical studies on regula- tory and sectoral issues. A similar approach has been used in organizing seminars at which the findings of research are discussed among experts from China and abroad. Another best practice component of the European Union­China Trade Project is the project's emphasis on training. Each year for the past three years, the proj- ect has funded the participation of two or three Ministry of Commerce staff to fol- low the year-long Masters of International Law and Economics Program at the World Trade Institute in Bern, one of the world's leading centers of policy research and advanced training in trade regulation. Moreover, mindful of the need to secure regulatory compliance among Chinese subnational (provincial) governments, the project has also funded the participation of local officials in a five-week summer academy held each year at the World Trade Institute. In 2007­08, more than 30 officials in provincial governments benefited from advanced training during the summer academy. The Indonesia Trade Assistance Project. The US$13.5 million, four-year Indone- sia Trade Assistance Project was funded and implemented by the U.S. Agency for International Development in 2004­08. The project delivery was outsourced to Chemonics International, leading U.S. development consultants with wide experi- ence in trade-related technical assistance and capacity building. The project focused training efforts on legal support, economic research, pub- lic outreach, organizational development, and information technology. Delivered by a team of U.S. and local experts working at the Indonesian Department of Trade, it aimed to improve the capacity of the department to analyze and imple- ment trade reforms that would lead to increased exports, a more attractive invest- ment climate, and expanded employment opportunities for Indonesians. The project funded and oversaw the development of a one-year Master's Program in Trade Policy and Negotiations at the country's leading university, (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 61 Box 2.8 (continued) Universitas Indonesia. The program is directed partly toward Department of Trade staff. A full-term (15-week) course on trade in services was developed to this end. A measure of the effectiveness of a locally anchored capacity-building project of this type is the activities the project supported. These included capacity strengthening among Department of Trade staff; a workshop series on economic research and trade policy analysis; a trade research lecture series; mentoring in economic research and trade policy analysis; briefing sessions for Department of Trade staff by project economists; the strengthening of the links between the Department of Trade and Indonesia's leading universities and research institu- tions working on trade issues; funding, development, and delivery by project staff and local academics of a one-year Master's Program in Economics in International Trade Policy, in association with the law and economics faculties at Universitas Indonesia; specialized training for Department of Trade lawyers and the legal staff in relevant departments and regulatory agencies; the launch, in 2009, of a new Master's Program on International Trade Law at Universitas Indonesia; outreach activities with law schools in the greater Jakarta area; publication of a textbook on WTO law in Indonesian; upgrades in the information technology facilities and staff of the Department of Trade; and the promotion of a public-private dialogue on the WTO and Indonesia's regional trade policy. Sources: Cardno 2009; Chemonics International 2008. impact of liberalization on vulnerable groups (including the workers in state-owned enterprises likely to face greater postliberalization dislocation), as well as the interests of poor, small, and geographically remote firms, all of which may experience more limited access to finance. Another candidate for enhanced assistance in the implementation phase is thus the design of reforms that factor in the distributional impacts of liberalization on population segments (rural versus urban, for- mal versus informal, men versus women and children) and improve the access of these people to essential services. These services range from san- itation to transportation, telecommunications, small-scale finance, educa- tion, and health care. While most of the policy challenges lie outside the realm of trade negotiations, finding the correct solutions can help build support for the opening of markets. However, implementing these poli- cies in an economically sound manner may present numerous problems 62 Marconini and Sauvé for weak bureaucracies, and many developing countries require support and time in addressing the difficulties. Much of the delivery of trade-related technical assistance, including in the service trade, involves short training activities. Effective course design, delivery, and, above all, attention to the context are critical ingre- dients. Box 2.9 highlights several best practices in trade-related technical assistance design and delivery drawn from Australia's recent experience in Indonesia. Box 2.9 Best Practices in Trade-Related Training: Course Design and Delivery Best practices may be employed in delivering technical training to government officials through the typical short-term course formats within which the bulk of trade-related technical assistance in services is delivered. The purpose of the training is to ensure that the skills and capabilities of staff in the trade ministries, line ministries, or regulatory agencies concerned with trade negotiations and implementation matters are durably upgraded. The two main areas on which effective training resides are course design and course delivery. Courses that are effectively designed have the following main characteristics: · They are tied to the ministry's strategic vision, mission statements, and main functions. · They are conducted in a location free of office distractions. Training courses of less than a week may take place in the capital, but all training should occur out- side the office. Longer-term training should be located far enough away to pre- vent staff from being called back to their offices. · They provide participants with training materials that are specifically tailored to the country's problems and the ministry's needs. · They are carried out in coordination with other providers of training to the min- istry to avoid overlaps or substantive inconsistencies. · They target the most suitable participants, that is, those for whom the training is directly relevant. While most training tends to be aimed at junior or new professional staff, the training needs of more senior managers often require attention because of the expertise of the latter, the greater pressures they face (especially if trade expertise is (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 63 Box 2.9 (continued) scarce and concentrated among a few managers), and the reluctance of senior managers to engage in training activities. Training courses among senior staff should be short, involve fewer people, and allow close interaction with the invited experts. Training that is effectively delivered has the following main characteristics: · It requires participants to produce outputs relevant to supporting the ministry in achieving its mission statement and strategic vision. An example would be a paper or briefing note for the minister. · It provides an interactive format to offer more opportunities for transferring knowledge; examples would be case studies, practical exercises, and group ses- sions. It requires participants to be active because this is the best way to ensure the transfer of knowledge. · It is delivered as a series of courses that incrementally build up the skills and capabilities of participants. This allows participants to apply their newly acquired knowledge in the office after each training session. · It is pitched at a level that is appropriate for the participants. · It is delivered in the local language, or, if the training is delivered in a foreign lan- guage by international experts, all training materials should be translated into the local language. Source: AusAID 2007. Box 2.10 contains questions that emerge about the implementation phase of the trade negotiation cycle in services. Enhancing the Capacity to Supply The last pillar of a coherent negotiating package in services should target the constraints that many developing-country exporters face in supplying newly opened markets. Despite the success stories in sectors such as energy, business-process outsourcing, construction, and environmental services, there are too few documented examples of developing-country companies significantly involved in the export trade. There are several explanations for this. Thus, most service firms are small, including firms in the countries of the Organisation for Economic Co-operation and Development. Small service suppliers typically have limited human resources to build referral networks, find partners abroad, identify market opportunities, and research the regulatory conditions in 64 Marconini and Sauvé Box 2.10 The Implementation Phase of the Service Trade Negotiation Cycle · Do proposed new or improved commitments reflect an assessment of the implementation costs (including recurring costs) related to regulatory enforce- ment activities? · Has a proper assessment been made of the capacity-strengthening needs of regulatory agencies prior to scheduling new or improved commitments? · Has the government given thought to formulating requests for capacity- strengthening as a precondition or quid pro quo for new or improved commitments? · What considerations weigh on the government's decision to pursue liberaliza- tion in a progressive manner and sequence liberalization with strengthened regulatory and implementation capacities? · Is the government considering making use of article XVIII (additional commit- ments) of the GATS (and its PTA equivalents) in adopting a sequenced approach linking market opening with the strengthening of regulatory and implementation capacities? · Has an attempt been made to benchmark the country's regulatory practices and institutions according to those of key trading partners or of countries at similar levels of development and regulatory sophistication? · To what extent might regulatory harmonization or the pursuit of mutual recognition initiatives help countries address weaknesses in domestic regula- tory practices, help overcome the trade-inhibiting effects of regulatory diver- sity, and move domestic regulatory regimes toward best regional or global practices? · To what extent does the government's liberalization strategy and its approach to sequencing reflect an ex ante assessment of the possible social, environmen- tal, and developmental impacts of market opening? · Is the government confident in its analytical capacity to conduct the various impact assessments linked to service sector liberalization, or does it require dedicated technical assistance? · Have attempts been made to learn, through targeted training, from the postlib- eralization implementation experience of neighboring countries or countries at similar levels of development? Negotiating Trade in Services: A Practical Guide for Developing Countries 65 foreign markets. In many market segments, such as telecommunications, utilities, finance, and transportation, developing-country firms must also contend with the large fixed costs of entering capital-intensive sectors, as well as with the presence of large companies in the market. Even in sec- tors in which developing countries are exporting, studies reveal that their exporters are facing key common problems, including (1) market devel- opment constraints flowing from low brand recognition and difficulties in establishing credibility with international suppliers;10 (2) lack of access to financing for export or business development;11 (3) limited prospects to serve foreign markets through an established presence (that is, more lim- ited returns on Mode 3 commitments by trading partners); (4) lack of access to reliable and inexpensive infrastructure and key input services, notably, finance, information technology, and telecommunications; and (5) lack of access to the range of formal and informal networks and insti- tutional facilities necessary for trade (see OECD 2003, Chaitoo 2008). Typically, developing economies must diversify and add value to their production chains and export baskets. This requires, first and foremost, enhanced access to foreign markets and a progressive lifting of the impediments to trade, investment, and labor movement facing service suppliers, which is the essence of what trade negotiations can deliver. Yet, securing durable gains in supply capacity requires efforts on several other fronts as well. Chief among these are efforts to raise quality standards, meet host-country certification requirements, and improve home-country trade infrastructure, notably, through higher quality and lower cost in communications, finance, transportation, and logistics services. Governments, the private sector, and development partners must invent new ways to work together to foster competitive supply responses. This is arguably the most difficult element in the service negotiating cycle because matters relating to private sector development tend to involve expertise and institutions that are not centrally involved in previous parts of the negotiating life cycle. Still, experience shows that important trade performance payoffs may result from targeting development assistance toward intermediary (or meso-level) institutions and processes, such as private sector associations, support structures for small and medium enterprises, and public-private dialogue and partnering activities. Until now, the aid-for-trade debate has largely centered on support for the public sector rather than the private sector (see elsewhere below). Aid for trade financing has also shown a distinct bias toward nonservice activities.12 While one should not discount the difficulties that public sector entities face in preparing for and conducting trade negotiations and 66 Marconini and Sauvé implementing the outcomes, commercial capacity constraints also exist in the private sector. These constraints may hamper the ability of countries and firms to take advantage of new trade and investment opportunities. The reason for the focus of assistance primarily on public sector entities can be traced to the nature and mandates of the regional and multilateral suppliers of trade-related technical assistance, which represent mainly the interests of national governments or regional regulatory or negotiating entities. However, this bias also has its origin in the dearth of instruments of knowledge and policy aimed specifically at helping developing-country firms expand the service trade. Redressing the bias in the design and deliv- ery of service- and trade-related technical assistance is critical to lifting the constraints on service exporting firms in developing countries. While the governments of countries at all levels of development face numerous challenges in understanding how to maximize the economic benefits and the benefits for service suppliers from a fuller engagement in service trade negotiations, the challenges are clearly more acute for developing countries. There are several reasons for this. First, governments often have incomplete information about the current status of service trade activi- ties within their borders. Most export development initiatives focus on the trade in goods, and service exporters have therefore become used to operating independently of government programs. For this reason, gov- ernment officials typically possess only anecdotal evidence on service export activities. This problem is reinforced by the shortage in service trade statistics that arises, in part, because there is not a convenient checkpoint, such as a border crossing, at which trade data may be col- lected on services. Most WTO members lack not only information about the services being exported and about export markets, but also registries of service exporters to whom they might address queries. Second, most governments do not collect detailed statistics on the services that firms or households purchase and, so, do not have usefully disaggregated data on service inputs into sectors of the economy. This hin- ders efforts to measure the impact on the domestic economy of liberaliz- ing or restricting the access to foreign providers of services. Third, in most countries, including developed economies, up to 95 per- cent of service firms are small and, so, are often underrepresented in statis- tical surveys because of the response burdens such surveys represent. In addition, small firms typically do not have staff dedicated to government relations and therefore do not participate actively in government trade consultations. Negotiating Trade in Services: A Practical Guide for Developing Countries 67 Fourth, service trade agreements are relatively new and have tended to offer relatively few liberalization benefits, other than transparency, in key foreign markets. Thus, service exporters and importers have not been highly motivated to participate in government consultations. Finally, advocacy groups such as industry associations are still largely unaware of the service export activities of their smaller members and are therefore not always able to represent the interests of these members. In many countries, industry associations in services are relatively less devel- oped than their counterparts in manufacturing and agriculture. To negotiate effectively, identify the interests, competitive strengths, and weaknesses of domestic suppliers more accurately, and direct policy attention to the need for more supply capacity, governments, in consulta- tion with domestic stakeholders, should consider a range of objectives (box 2.11). Box 2.11 The Strengths and Weaknesses of Domestic Suppliers Learn about the exporters, the services exported, the export markets, and the supply modes. A major purpose of negotiations is to strengthen the com- petitive positioning of a country's service exporters. If a government is unaware of the competitive strengths of the economy, it may inadvertently ignore or undermine domestic service exporters at the negotiating table. Especially devel- oping economies often assume there is little export activity in service markets. Yet, research by the International Trade Centre has indicated that many develop- ing-country firms export more than 40 different types of services to many export markets. Developing countries may thus have greater export interests and potential in the trade in services than the governments conducting the negoti- ations recognize. Learn about the essentials of the competitiveness of service firms. To develop negotiating positions, governments must understand the nontariff or regulatory obstacles that local service exporters are encountering according to the mode of supply and within the sectors of the exporters or across related sectors. For the request process, governments must also determine priority export markets. This is challenging because the global competitive environment in services is rapidly (continued) 68 Marconini and Sauvé Box 2.11 (continued) changing, and service exporters operate across a range of markets that is wider than the range of markets for goods exporters. Because firms may more easily enter new service markets if the firms have advocates who appreciate the qual- ity of the services being provided, important export markets for the firms are likely to include the home markets of foreign investors in the firms, markets with significant expatriate populations, markets in countries that are regular travel destinations of consumers of the products of the firms, and markets in countries with which the home countries of the firms have reached economic integration agreements. Determine the role of service imports and ensure the economic benefits of liberal market access. The competitiveness of all domestic enterprises, as well as the quality of the lives of citizens, depends on the type and quality of the available service inputs. The existence of the option to import can provide a com- petitive incentive to improve the quality and availability of imports. Foreign firms that choose to establish local offices may also create jobs and generate other pos- itive spillovers, especially in terms of improved product standards, better access to distributional channels, and so on. Build domestic support for service trade liberalization by identifying national champions. Perhaps because service agreements are complex and deal with many issues that affect the quality of people's lives, they often become the focal point of broader concerns about globalization. Civil society actors have expressed the fear that service trade rules may infringe on domestic regulatory sovereignty, disrupt basic services (such as education, health care, and utilities), favor foreign over domestic interests, and limit environmental obligations. These and similar fears often overlook the degree of choice involved in making sectoral commitments under trade agreements such as the GATS and the role of service firms in creating the vast majority of new jobs. It is important to foster an informed public debate about service liberalization, including by creating opportunities for a dialogue between service exporters (especially small firms) and representatives of relevant public interest groups. Identifying and partnering with firms, including small firms, that have become successful exporters of services can he helpful in addressing the legitimate public policy concerns that negotiations in areas characterized by high regulatory intensity and particular policy sensitivities may generate. Source: OECD 2002. Negotiating Trade in Services: A Practical Guide for Developing Countries 69 It is particularly important that the private sector acquire a voice in the trade negotiation process and speak to the needs of service users and providers. Assisting in the creation, early funding, and nurturing of sus- tainable coalitions of service industries in developing countries represents a new type of trade-related technical assistance in the service trade. It involves direct business-to-business dialogue supported by donor govern- ments (box 2.12). Box 2.12 Organizing Service Coalitions in Developing Countries The integration of services in the multilateral trading system during the Uruguay Round and the subsequent liberalization processes that followed at the bilateral, regional, and multilateral levels alerted major private sector stakeholders, particu- larly in developed countries, to the necessity of monitoring these processes and influencing rules and negotiated outcomes to their advantage. A need has arisen in a number of countries to establish organized service-related private sector advocacy groups mandated by industry associations and enterprises to lobby relevant governmental and nongovernmental constituencies and give voice to corporate interests in and concerns about issues in the service trade. The private sector in some developed countries has taken the lead in creating coalitions of service industries that serve as umbrella organizations, establishing informal networks that share a common interest in the development of service industries, and bringing together service firms and business associations to dis- cuss policy issues and identify strategies. Although some of the coalitions in developed countries were organized prior to or during the course of the Uruguay Round, the majority were created after the conclusion of the round. Most of these coalitions operate through small, flexible secretariats. They tend to represent the interests of larger service enterprises, which may not always correspond to the interests of small and medium enterprises. However, the interests of small and medium enterprises can readily be taken into consideration through the affiliation of these enterprises with sectoral service associations that are members of larger coalitions. The majority of the coalitions represent private sector companies, and governments have no institutional role. This enables the coalitions to discuss and coordinate freely, independently formulate policies, and undertake activities in a manner that reflects only their interests. (continued) 70 Marconini and Sauvé Box 2.12 (continued) Coalitions are more common in high-income countries. This may be attrib- uted to a host of factors, including the lack of awareness in many developing countries of the important role of services in their economies, the lack of ade- quate funding, and the prevalence of forces that are not supportive of public-private collaboration and that are unwilling to endorse the concept of institutionalizing private sector policy advocacy mechanisms. Few existing coalitions are dedicated solely to advancing their interests in regional and multilateral trade negotiations. In almost all cases, mandates encompass objectives of a more domestic nature such as establishing internal databases on export opportunities in foreign markets, achieving improvements in service sector statistics and data, enhancing public and private awareness on the strategic economic and social role of services, and encouraging govern- ments to implement domestic economic, fiscal, and monetary policies that promote a service-friendly environment. Policy advocacy by service coalitions: The impact on trade policies. Service sector coalitions in developed countries tend to have significantly wider man- dates and, consequently, more extensive constituencies and larger spheres of interest than their developing-country counterparts. While the lobbying of the latter has been limited to government constituencies, the concerns of the former typically encompass legislative constituencies, government constituencies in for- eign markets, and other stakeholders. Some member companies in developed- country coalitions enjoy considerable political weight in their own right because of their size and global reach. Given their greater financial and human resource capacity and sophistication, developed-country coalitions are generally more active and aggressive in lobbying national constituencies, which, in many instances, is sustained by institutionalized consultation processes. Some developed-country coalitions understand that, if they are to achieve their export goals in foreign markets, their own governments must also address the export interests of trading partners. This is readily apparent in the case of the Coalition of Service Industries, which has, for years, lobbied the U.S. Trade Representative and the U.S. Congress to ease the restrictions on the service and nonservice exports of trading partners through WTO negotiations. In return, U.S. trading partners may, it is hoped, become more engaged in opening their service markets in sectors of interest to the exporters among the coalition members. (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 71 Box 2.12 (continued) Besides private sector service industry coalitions, other national, regional, and international advocates also play an important role in voicing the interests of the industry in multilateral and preferential trade negotiations, although their inputs generally address services more comprehensively by also covering negotiations on the trade in agricultural and nonagricultural goods and other areas. Among the most active lobbying advocates at the international level is the International Chamber of Commerce. It is difficult to document the influence of service industry coalitions on serv- ice trade liberalization. There is, however, significant anecdotal evidence suggest- ing that such coalitions are among the most effective in influencing government positions in service trade negotiations. The advocacy activities of coalitions may be more significant in bilateral and regional trade negotiations, in which, unlike the multilateral trade process, member states may have greater leverage, address policy concerns over shorter time frames, and pursue more narrowly defined trade, investment, and regulatory objectives with partner countries. Future challenges and opportunities. Service sector coalitions face several key challenges, as follows: (1) the heterogeneous nature of the service sector and the conflicting intersectoral interests that occasionally arise from this diversity, which heightens the challenge of achieving coordination; (2) the antiglobalization back- lash that often targets the alleged dangers service sector liberalization represents for the domestic policy space, social security, employment, or access to public services; (3) the adverse implications of the lobbying by influential nonservice pri- vate sector players, which have sometimes succeeded in focusing government attention on other economic sectors, notably, agriculture, regardless of the importance of these sectors (relative to the importance of services) to economies; and (4) the burden to draw attention to the significance of the service sector in the formulation of trade policies. This last challenge tends to be augmented because of budgetary constraints. However, despite the challenges and the existence of few effective coalitions in developing countries, the number and organizational quality of service industry coalitions will increase because of the following factors: (1) the rapidly growing economic importance of services in the developed countries and the developing countries and the increasing appreciation of the vital role of services in shaping economic policy making and trends in international trade; (2) the mounting desire of national and multinational service companies to organize (continued) 72 Marconini and Sauvé Box 2.12 (continued) together to enhance their ability to explore new export markets and develop advocacy initiatives able to influence national, regional, and multilateral trade policies; (3) the integration of more service-related trade and investment rules and liberalization commitments in bilateral, regional, and multilateral trade agree- ments; and (4) the expanding role played by coalitions, mainly in developed countries, in assisting in the establishment of similar coalitions in the developing world by sharing organizational and policy advocacy experience. International organizations can play a vital capacity-building role. This is the case of the Interna- tional Trade Centre, which, through its World Trade Net Program, is providing support so that service industry communities in developing countries become organized and are able to defend their interests and reach their objectives. Source: El-Etreby 2008. Because of its focus on the private sector, capacity building to address supply-side constraints involves institutional actors that are different from the actors concerned with strengthening trade negotiating or regulatory capacity. The difference is important in the design of assistance and in interagency coordination. This is an area in which greater involvement by private sector service exporters in industrialized countries might usefully complement the efforts of bilateral donors and multilateral agencies such as the International Trade Centre or the World Bank. Service exporters in industrialized countries also have a stake in ensuring that developing-country markets become open in a sustainable manner and within a stable regulatory environment. This objective can be served through enhanced private sector support for regulatory insti- tutions and best practices in developing countries. The private sector must contribute financial resources, staff, and expertise to efforts to enhance regulatory performance, improve quality and licensing stan- dards and compliance with these standards, and expand the access to distribution networks. Substantial payoffs may also flow from targeted trade-related techni- cal assistance to provide developing-country suppliers with better eco- nomic intelligence on access conditions and opportunities in export markets and distribution channels, information on product standards, business-to-business dialogue and networking, and so on. Negotiating Trade in Services: A Practical Guide for Developing Countries 73 The lack of straightforward information on domestic regulatory pro- cedures, including licensing and product certification, and the lack of market intelligence rank among the biggest commercial barriers to the service exports of developing countries. Mechanisms must be imple- mented in developed countries and leading emerging economies that replace passive enquiry and contact points by helping predominantly small servicers contest markets in advanced countries. The countries of the Organisation for Economic Co-operation and Development and lead- ing emerging economies need to give meaning to the commitments they made under GATS article IV (the increasing participation of developing countries) and the PTA equivalents by offering tangible support for mar- ket access by developing-country suppliers. Meeting these and other chal- lenges can be facilitated through the work of dedicated agencies such as the Centre for the Promotion of Imports in the Netherlands and the Trade Facilitation Office Canada (box 2.13). Box 2.13 Providing Market Intelligence to Developing-Country Suppliers: The Trade Facilitation Office, Canada Established by the Canadian International Development Agency in 1980, the Trade Facilitation Office Canada is a nonprofit corporation. Its mandate is to assist exporters in developing countries and transition economies in securing greater access to the Canadian market. It does this by offering these exporters practical advice, market information, and exposure in the Canadian marketplace through various promotional activities. The main services of the office include the following: (1) Canadian market infor- mation services is a Web-based source of information on export requirements and market intelligence targeted at small and medium enterprises in developing coun- tries. For a fee, the office also provides exporters with tailored market development consulting services, information seminars, trade missions, and so on. The office also publishes an electronic newsletter containing sourcing information for would- be exporters to Canada. (2) Trade-readiness capacity building services focus on training and the implementation of trade development projects with local part- ners so as to enhance the skills of developing-country exporters and strengthen institutions in developing countries to attract trade and investment. (continued) 74 Marconini and Sauvé Box 2.13 (continued) While the experience of the office in services is limited, it has begun to devote more attention to the sector to develop service offerings suited to the sector and aimed at helping developing-country exporters, particularly small and medium enterprises, understand the fragmented Canadian market for serv- ices, gain a surer foothold in this market, and reach out to Canadian consumers (through Mode 2 trade, for example, consumption abroad) in areas such as health-related tourism and wellness. The office has also produced a market report on the Canadian service sector, focusing particularly on tourism and selected business services (TFO Canada 2008). The report is intended to provide developing-country suppliers with background information on the service sec- tor in Canada to facilitate (1) the development of a strategy for entering the Canadian market, (2) an understanding of the complex nature of the service industry in Canada, (3) an appreciation of the costs involved in entering this market, and (4) the acquisition of additional information from other sources before entering the market. The office occupies a unique niche in private sector development. Canadian negotiators have recently begun to make its services known to trading partners, particularly PTA partners, to signal the attention Canada pays to service issues and other sectors of priority interest to developing countries. Source: Trade Facilitation Office Canada, http://www.tfocanada.ca. Coalitions of service industries in emerging economies and in vari- ous countries in the Organisation for Economic Co-operation and Development can play a role in establishing business-to-business contacts, especially among small and medium enterprises. Funding assistance by gov- ernments for private sector development might also prove helpful. The multiplicity of modes of service supply and the related regulatory intensity in the service trade and in factor movements raise additional chal- lenges in the provision of technical assistance to buttress supply capacities. The dominance of commercial presence as a service supply mode suggests that assistance directed at enhancing the investment climate in a host coun- try may be important in strengthening service sector competitiveness and eliciting an adequate private sector response through foreign direct invest- ment. Beyond providing scarce capital, inflows of foreign direct investment in goods and services can be expected to create opportunities for local suppliers in many service sectors (for example, telecommunications, Negotiating Trade in Services: A Practical Guide for Developing Countries 75 transportation, logistics, finance, and professional and business services) and enhance access to the distribution channels of multinational enterprises in other markets. Particular attention should be devoted to assistance targeted at the creation of a toolkit for the promotion of foreign direct investment and offering advice on best practices in the design and implementation of investment incentive schemes in various service industries. Meanwhile, the rising importance of crossborder trade and the remote supply of service markets highlights the need for greater regulatory conver- gence through the adoption of international standards and the negotiation of mutual recognition agreements to facilitate greater crossborder service trade. Poor standards and inadequacies in domestic regulation frustrate the access of developing-country services and service providers to foreign mar- kets. Helping developing countries improve the quality and standards of domestic services, notably, by strengthening participation in regional or global standard-setting initiatives is another area in which capacity building may be expected to yield development dividends. Questions that may arise in the provision of assistance to strengthen the supply-side capacity of developing-country service exporters are shown in box 2.14. Box 2.14 Strengthening the Supply-Side Capacity of Developing-Country Exporters · Which advisory services and training opportunities have been developed to strengthen trade and investment promotion organizations and private companies in developing countries? · How might information be supplied on the regulatory regimes of service sectors in the markets of developed and emerging economies of interest to developing- country service exporters? · Have online databases and electronic meeting places been developed to facili- tate the interaction between service suppliers in developing countries and companies in developed markets that may be seeking to outsource work or find partners? · What is the best way of providing intelligence to services exporters in develop- ing countries on the service markets and export opportunities in developed and emerging economies? (continued) 76 Marconini and Sauvé Box 2.14 (continued) · What steps have been taken to promote business-to-business dialogue and enhance access to the distribution channels in the service markets of developed and emerging economies? · What types of assistance, including through private companies, would help developing-country firms enhance quality standards and more easily meet host country certification and licensing requirements? · What types of assistance exist or should be developed to help developing- country firms and industry associations participate in standard-setting bodies in service industries? · What type of training and technical assistance would help industry providers, industry associations, or licensing bodies in developing countries participate in and benefit from mutual recognition agreements to facilitate trade and over- come the trade-impairing aspects of regulatory diversity? · What types of assistance will promote the emergence and existence of coali- tions of service industries in developing countries? · What funding opportunities exist to help small service exporters in developing countries take part in trade missions to developed and emerging economies and to support buying missions in developing and emerging economies by service importers from developed countries? · How can leading service suppliers in developed and emerging economies be encouraged to share their expertise in service sector research and develop- ment, access to finance, quality control, recognition, and so on? · What steps should be taken to strengthen the ability of small and medium serv- ice sector enterprises to finance their own growth and development, including in export markets? · What special mechanisms might be created to provide funding at affordable interest rates to small and medium service sector enterprises? · How can financial institutions in developing countries be encouraged to over- come their aversion to lending to service sector firms with limited physical capital and significant intangible assets? The Challenge of Aid for Trade in Services The opening of markets in services should be accompanied by a care- ful combination of competition and regulation. Such a process can present substantial challenges to resource-constrained governments in many developing countries, particularly the least developed countries Negotiating Trade in Services: A Practical Guide for Developing Countries 77 and small and vulnerable economies. Other aspects of successful service sector reform include progressive liberalization, which is a feature that trade agreements are generally well designed to promote, as well as trade-related capacity building, which involves investments in negotiating and regulatory regimes and institutions (a goal that is acknowledged in the Doha Development Agenda and other negotiation forums). Combining aid for trade with additional trade and investment liberal- ization commitments may help advance service negotiations, while addressing the concerns of many developing-country governments and civil society organizations over the extent of asymmetries at the negotiat- ing table. Because of the diversity of the service sectors, any coherence- promoting aid-for-trade package in services requires close cooperation and coordination among multilateral institutions, bilateral donors, and civil society actors, including representatives of the private sector and nongovernmental organizations. The Doha Development Agenda and ministerial declarations linked to PTAs refer to trade-related technical assistance and capacity build- ing. Without greater effort to give operational meaning to these terms, there may be a risk that the lack, inadequate supply, or inappropriate- ness of the assistance may frustrate, unduly hold back, or even provide an excuse to renounce reforms and liberalization commitments. To mitigate such a risk, more formal links are necessary between the enhanced engagement in service negotiations by developing countries and the additional assistance from developed countries and multilateral agencies. This link might lend greater credibility to liberalization and techni- cal assistance programs. Indeed, the development promise of the Doha Round and the ubiquitous calls for coherence in policy making would be well served if future trade agreements entailed tangible provisions and up-front commitments by the leading multilateral and regional lending agencies and bilateral donors to strengthen regulatory institu- tions. This link has begun to take root at the PTA level, with the recent Economic Partnership Agreement (EPA) between the European Community and the CARIFORUM grouping (box 2.15). The Economic Partnership Agreement is a first attempt at crafting opera- tional aid-for-trade provisions in the service trade and embedding them in a trade agreement. Time will tell whether, how, and to what extent such a novel precedent can be replicated in other PTAs, as well as at the multilateral level. 78 Marconini and Sauvé Box 2.15 Addressing Aid for Trade in Services: The CARIFORUM­ European Community Economic Partnership Agreement The provisions on cooperation in the EPA mark the attempt by the European Union to infuse the agreement with a concrete development dimension.a The EPA thus charts new territory at a time when the multilateral community is strug- gling to give operational meaning to the concept of aid for trade. Part I of the EPA, Trade Partnership for Sustainable Development, provides the umbrella provisions on development. Other issue- and sector-specific development cooperation provisions are contained in all the various parts of the EPA. Part I of the EPA states that development cooperation takes financial and non- financial forms. Article 7(3) clarifies the relationship between the EPA and the Cotonou Agreement by providing that European Community financing is to be carried out according to the framework of rules and relevant procedures laid out in that agreement, particularly the programming procedures of the European Development Fund, and, within the framework of relevant instruments, through the general budget of the European Union. The EPA does not feature explicit language on the level of development financing to be made available overall or to be made available for the specific issues and sectors covered by the agreement. This has sparked much criticism throughout the CARIFORUM region over the alleged imbalance of the agreement insofar as the development provisions are somewhat abstract and not legally enforceable, while the liberalization commitments are explicit, legally binding, and enforceable. Responding to this criticism, the Office of Trade Negotiations of the CARICOM Secretariat has cautioned that any perceptions about the practical deficiencies of the EPA with respect to development, development cooperation, and assistance should be tempered by the recognition that the EPA is not the primary vehicle for the achievement of development. Rather, it is a strategic instrument in a range of economic development strategies. According to the Joint Declaration on Development Cooperation appended to the EPA, a package of 165 million was set aside for the following six years to fund trade-related technical assistance and capacity-building activities identified and ranked in the Caribbean regional indicative plan. This regional package includes an incentive tranche of 32 million for adherence to principles of good governance, democracy, and the rule of law. Of the 165 million, CARIFORUM countries indicated that they intended to devote 30 percent of the regional (continued) Negotiating Trade in Services: A Practical Guide for Developing Countries 79 Box 2.15 (continued) indicative plan and the full amount of the incentive tranche to EPA implementation. Besides the funding for the plan, each CARIFORUM country is to receive funds for a national indicative plan, but must identify two priority projects for the addi- tional funding. The Dominican Republic and Jamaica have announced they will use the financing provided for their respective national plans to imple- ment the EPA. The development priorities identified in part I of the EPA include the provision of (1) technical assistance to build human, legal, and institutional capacity in the CARIFORUM countries to facilitate compliance with the commitments of the EPA; (2) assistance for capacity building and institution building for fiscal reform; (3) the provision of support measures aimed at promoting private sector and enterprise development; (4) the diversification of CARIFORUM exports of goods and services through investment and the development of new sectors; (5) enhance- ment of the technological and research capabilities of the CARIFORUM countries to facilitate the adoption of and compliance with internationally recognized sanitary and phytosanitary measures and technical, labor, and environmental standards; (6) the development of CARIFORUM innovation systems; and (7) the development of infrastructure in support of trade. In the investment, services, and e-commerce provisions of the EPA, the generic cooperation provisions are complemented by a few sector-specific coop- eration provisions, the most developed of which are the provisions on the tourism sector. The cooperation activities foreseen are based on the belief that trade- related technical assistance and capacity building are important in complement- ing the liberalization of services and investment, supporting the CARIFORUM countries in their effort to strengthen their capacity in the supply of services, and facilitating the implementation of scheduled commitments. Subject to the provisions of article 7, which addresses development financing, the specific cooperation envisaged includes providing support for technical assis- tance, training, and capacity building to (1) improve the ability of CARIFORUM service suppliers to gather information on and meet the regulations and stan- dards of European Community counterparts, (2) improve the export capacity of local service suppliers, (3) facilitate interaction and dialogue between service sup- pliers in all parties to the agreement, (4) address needs in quality and standards in those areas in which the CARIFORUM countries have undertaken commitments, (5) develop and implement regulatory regimes for specific services CARIFORUM-wide (continued) 80 Marconini and Sauvé Box 2.15 (continued) and within the signatory CARIFORUM states, (6) establish mechanisms to promote investment and joint ventures among service suppliers in the parties, and (7) enhance the capacities of investment promotion agencies in CARIFORUM countries. An additional feature of the development dimension of the EPA is the estab- lishment of a regional development fund. According to article 8(3), the fund will be used to mobilize and channel EPA-related development resources from the European Development Fund and other potential donors. The parties agreed that the CARIFORUM countries are to endeavor to establish the fund within two years of the signature of the agreement. One of the aims of the fund is to increase the speed at which financing is disbursed to the CARIFORUM countries. Source: Sauvé and Ward 2008. a. EPA = Economic Partnership Agreement. The Need for a Tailored Response The particular characteristics of the service trade and service liberalization add several special features to the aid-for-trade debate. The nontariff nature of the impediments to the service trade means that governments do not forgo fiscal receipts if they engage in service liberalization. Without tariff protection, there is no significant preference-erosion agenda in the serv- ice trade, and, hence, there is little need for compensatory payments for countries or regions affected by negotiations based on most favored nation status. Moreover, the practice of market opening in services--in which the more likely outcome is status quo commitments rather than significant de novo market opening--suggests that far-reaching postliberalization adjustment pressures are generally weaker (or minimal) in most negotiat- ing settings. This implies that discussions of an aid-for-trade response in services can generally be divorced from concerns over the design and adequacy of compensatory financing for those countries that may be adversely affected by market opening, which is a key issue in goods nego- tiations. Market opening in services may produce a distributional down- side, as with liberalization in any sector. Nonetheless, significant new market opening is rarely the norm at the negotiating table.13 Any opening should, moreover, be properly sequenced, including precommitments to liberalization through GATS article XVIII (additional commitments) to Negotiating Trade in Services: A Practical Guide for Developing Countries 81 mitigate significant adjustment pressures and ensure that market opening and regulatory strengthening are carried out concurrently. Adjustment pressures resulting from initiatives in service market open- ing may also be addressed through an operational emergency safeguard mechanism. Progress in this area of unfinished rule making is desirable, but discussions have tended to become bogged down over repeated and ultimately futile attempts at replicating in a service setting the practices of the General Agreement on Tariffs and Trade.14 Devising an Aid for Trade Agenda in Services Without the need to respond to concerns over preference erosion and sig- nificant postnegotiation dislocation pressures, where is additional assistance in services most needed? As Mattoo (2006) has aptly noted, developing countries face two central challenges in undertaking service sector reform. The first is the identification of the elements of economically sound poli- cies, and the second is the discovery of ways to support domestic policies through bilateral, regional, or multilateral negotiations. To address the deficit in negotiation, enforcement, implementation, and supply-side capacities that the majority of developing countries face in service negotiations, one must take a fresh look at the idea of embed- ding an aid-for-trade component in service trade agreements. Such a com- ponent should target each of the key moments of the negotiating cycle in services (see elsewhere above). Conclusion This chapter provides a practical guide to the planning, implementation, and evaluation of a program of service negotiations that may be useful for emerging market and developing economies. A great deal of care is needed to carry out a program of service negotiations. The checklists and illustrative examples we provide will give policy makers background and advice that may lead to an effective and successful negotiating outcome for the service sectors in their countries. Notes 1. The cost of not opening up or of opening up in a manner that preserves greater policy space--for example, through fewer legally binding commit- ments or through commitments that favor some forms of entry over others (that is, minority joint ventures versus majority foreign ownership, greenfield 82 Marconini and Sauvé investment versus purchases of existing [national] firms, and so on)--needs to be looked at from various perspectives. These include the impact on access to capital; the resulting investment levels; the nature and extent of contesta- bility in key sectors; the level of competitiveness in particular sectors, in the overall economy, and in export markets; the access to distribution channels; and the capacity to create and innovate. 2. The regional organizations include the Asian Development Bank, the European Commission, the Inter-American Development Bank, the Organization of American States, the United Nations Economic Commission for Latin America and the Caribbean, and the United Nations Economic and Social Commission for Asia and the Pacific. The international organizations include the International Trade Centre, the United Nations Conference on Trade and Development, the World Bank Institute, and the WTO. 3. To assist the process of consultation, the International Trade Centre has pub- lished a useful GATS consultation kit, which contains a series of questions organized in three groups: (a) barriers related to the general principles in the GATS, (b) barriers by mode of supply, and (c) possible market access imped- iments encountered in domestic regulations and the implementation of reg- ulations. These questions may have to be adapted to ensure that all the information needed to assess the impact of service liberalization and formu- late requests and offers is captured through the consultation process. See ITC (1999). 4. Services play an important role in the lives of all citizens; so, consumer and user voices should be represented. Transnational nongovernmental organiza- tions may have the resources to provide briefings on general economic and social impacts. However, it is important to ensure that such groups in the domestic economy are also represented and understand the situation of con- sumers in the particular country. Operators in other sectors of the economy, such as agriculture or manufacturing, are important consumers of services (for example, transportation or financial services). The interests of local man- ufacturers or producers who could benefit from the domestic liberalization of services, including manufacturers who provide bundled solutions for goods and services, should also be represented. 5. This subsection draws on Sauvé (2008). 6. While all WTO members suffer an information deficit in service negotia- tions, many developing countries are at a particular disadvantage because they lack the large networks of embassies, the organized industry associations (coalitions of service industries), the foreign affiliates of home-country chambers of commerce, and even the individual company presence in local markets that many developed countries are able to rely on for information. This uneven access to information means that the negotiating requests of some developed-country partners tend to be highly specific and focus on the Negotiating Trade in Services: A Practical Guide for Developing Countries 83 progressive elimination or liberalization of sector-specific or horizontal measures that are well identified and ranked. Many developing countries are unlikely to be in a position to make similar types of requests, particularly in the early stages of the request-offer process. This tends to force the latter into a defensive posture and leads to commitment patterns that display consider- able precaution, that may be of limited benefit to the development of host nations, and that lack significant commercial value for exporting nations. 7. For a fuller discussion of the potential of developing countries in service exports, see OECD (2003). 8. Some countries, particularly developing countries such as China and India, have shown a tendency to segment the management of PTAs between the goods and the service components, typically focusing on the former first and dealing with services later on. 9. The international organizations with sectoral expertise include the Bank for International Settlements (banking and insurance), the International Organization for Migration (labor mobility), the International Telecommuni- cation Union (telecommunications), the International Trade Centre (private sector development, export promotion), and the World Health Organization (trade and health). 10. This means that small service providers cannot easily compete on the basis of their reputations and must therefore rely heavily on business prospective efforts in target markets so as to make themselves known. This highlights the strong interest expressed by developing countries in opposing restrictions on the temporary entry of business visitors. 11. For many small firms, equity finance is not a viable option. Most small and medium service enterprises thus rely primarily on debt financing to operate and expand their businesses. There is much anecdotal evidence showing that banks are less likely to lend to service firms than to manufacturing enter- prises. To some extent, this may derive from the intangible nature of service sector output and the relatively lower value of the physical assets that may serve as collateral. 12. A recent inventory conducted by the European Commission on com- pleted and ongoing technical support initiatives in the CARIFORUM region has found that, of about 200 trade-related technical assistance proj- ects or multiyear programs, only three specifically targeted services. See Chaitoo (2008). 13. An exception is countries seeking accession to the WTO. For a fuller discussion of the level of GATS commitments by newly acceding WTO members, see Roy, Marchetti, and Lim (2007). 14. For a discussion of emergency safeguard measures in the service trade, see Sauvé (2002). 84 Marconini and Sauvé References AusAID (Australian Agency for International Development). 2007. "Indonesian Ministry of Trade Training Needs Assessment: Supporting the Ministry's Strategic Vision with Training." Report, Technical Assistance Management Facility for Economic Governance Project, February, AusAID, Jakarta. Cardno. 2009. "EU-China Trade Project: Annual Report 2008." Report, March, Emerging Markets Division, Cardno, Brussels. Chaitoo, Ramesh. 2008. "Aid for Trade for Services in Small Economies: Some Considerations from the Caribbean." In Aid for Trade and Development, ed. Dominique Njinkeu and Hugo Cameron, 300­13. New York: Cambridge University Press. Chemonics International. 2008. Indonesia Trade Assistance Project: 2007 Annual Report. Washington, DC: United States Agency for International Development. El-Etreby, Ragui. 2008. "Globalization of Services Trade and the Establishment of Industry Coalitions: Conclusions of an Empirical Study." Business and Trade Policy Briefing, April 14, International Trade Centre. http://www.intracen.org/ btp/wtn/newsletters/2007/3_2/3_2_services7.htm. Feketekuty, Geza. 2008. "Appendix: A Guide to Services Negotiations." In A Handbook of International Trade in Services, ed. Aaditya Mattoo, Robert M. Stern, and Gianni Zanini, 542­92. Washington, DC: World Bank; New York: Oxford University Press. Hoekman, Bernard. 2006. "Liberalizing Trade in Services: A Survey." Policy Research Working Paper 4030, World Bank, Washington, DC. Hoekman, Bernard, and Aaditya Mattoo. 2008. "Services Trade and Growth." Policy Research Working Paper 4461, World Bank, Washington, DC. ITC (International Trade Centre). 1999. Business Guide to the General Agreement on Trade in Services. Geneva: ITC. Mattoo, Aaditya. 2006. "Services in a Development Round: Proposals for Overcoming Inertia." In Trade, Doha, and Development: A Window into the Issues, ed. Richard Newfarmer, 161­74. Washington, DC: World Bank. OECD (Organisation for Economic Co-operation and Development). 2002. "Managing Request-Offer Negotiations under the GATS." TD/TC/WP/ 2002(13)/FINAL (June 21), OECD, Paris. ------. 2003. "Opening Up Trade in Services: Opportunities and Gains for Developing Countries." Policy Brief, OECD Observer (August), OECD, Paris. Roy, Martin, Juan Marchetti, and Hoe Lim. 2007. "Services Liberalization in the New Generation of Preferential Trade Agreements (PTAs): How Much Further Than the GATS?" World Trade Review 6 (2): 155­92. Sauvé, Pierre. 2002. "Completing the GATS Framework: Safeguards, Subsidies, and Government Procurement." In Development, Trade, and the WTO: A Handbook, Negotiating Trade in Services: A Practical Guide for Developing Countries 85 ed. Bernard Hoekman, Aaditya Mattoo, and Philip English, 326­35. Washington, DC: World Bank. ------. 2008. "Conducting a Trade-Related Regulatory Audit in Financial Services." Unpublished working paper, International Trade Department, World Bank, Washington, DC. Sauvé, Pierre, and Natasha Ward. 2008. "The EU-CARIFORUM Economic Partnership Agreement: Assessing the Progress on Services and Investment." NCCR Working Paper 2008/10 (May), NCCR Trade Regulation, Swiss National Centre of Competence in Research, World Trade Institute, Bern. TFO Canada (Trade Facilitation Office Canada). 2008. "Services 2008." Market Information Papers 23, TFO Canada, Ottawa. Vonkhorporn, P. 2008. "Preparing for FTA Negotiations: Thailand's Experience." Presentation to the Asian Development Bank­International Institute for Trade and Development course "Trade and Investment in Services," Bangkok, February 13. CHAPTER 3 The Negotiation and Management of Regulations in the Trade in Services Sebastián Sáez and Marcel Vaillant Negotiations on service agreements are on the modern trade agenda. The growing importance of the trade in services has translated into the promi- nence of services in trade agreements. According to the World Trade Organization (WTO), its members have notified 263 regional trade agreements. Of these, 74 cover the trade in services. Since the entry into force of the WTO in 1995, service agreements have been actively negoti- ated by developed and developing countries alike. Indeed, North-South and South-South agreements have been the main types of agreements negotiated by WTO members. Since 1995, all trade agreements involving Japan or the United States have included services. Beginning with the negotiation of its agreements with Mexico in 2000, the European Union has also incor- porated services in its negotiations with developing countries, and the trade in services has become an integral part of the Economic Partnership Agreements currently under negotiation by the European Union and the countries of the African, Caribbean, and Pacific group. For example, the Economic Partnership Agreement between the European Community and the countries of the Caribbean Community (CARICOM) and the 87 88 Sáez and Vaillant Dominican Republic (the CARIFORUM grouping) entered into force in November 2008. Developing countries face serious resource and administrative con- straints in serving their trade interests in negotiations. They are not always equipped to negotiate and implement commitments, particularly in the context of North-South trade agreements. The administrative burden involved is often a serious barrier. One of the problems facing small and medium developing economies, particularly the least developed countries, is a high turnover among public officials and a shortage of resources. This translates into lost expertise and a lack of the information needed to address service negotiations and administer commitments at the multilat- eral or regional level. The organization, collection, and administration of information are key elements in a successful strategy to confront these issues. The service reg- ulations management tool (SERET) presented in this chapter provides support for the creation of a database to organize and manage the infor- mation needed in trade negotiations.1 The tool promotes coherence in approaches across agreements and in domestic regulations, and improves the administration and implementation of commitments. It is designed to help countries organize information about existing commitments, laws, and regulations. It facilitates the creation of a country-specific service agree- ment database and is sufficiently flexible to permit the organization of information in terms of concessions received and commitments adopted. The SERET database may include information on service sectors, sub- sectors, and activities committed or received; the type of reservation (market access, national treatment, or other); the mode of supply; the rel- evant agreements; the laws and regulations in which the measures are contained; and descriptions of the measures. The classification method applied to services is important in SERET (box 3.1). This chapter discusses the methodology of SERET, as well as the core elements that comprise the tool. The next section describes SERET as a framework for preparing for service trade negotiations and liberalization. The following two sections address the construction of a SERET trade agreement database, first in a positive list, and then in a negative list. The final section concludes. Understanding Service Regulations: The Basic Components of SERET Service sectors are heavily regulated. Table 3.1 lists some of the instruments used to regulate selected service sectors, as well as legitimate reasons and The Negotiation and Management of Regulations in the Trade in Services 89 Box 3.1 Sector Classification Sectoral service commitments are usually specified in trade agreements using the classification of the WTO's General Agreement on Trade in Services (GATS), known as the services sectoral classification list, or the W/120 (WTO 1991), and the United Nations Central Product Classification, known as the CPC or the CPC- provisional (UN 1991). A detailed correspondence among the CPC-provisional, the W/120, revision 3 of the International Standard Industrial Classification of All Economic Activities, which is known as ISIC 3, and the Extended Balance of Payments Classification, which is known as the EBOPS, has been developed for the purpose of facilitating comparisons. The correspondence between the CPC-provisional and the W/120 is based on the W/120. It provides correlation at five digits of the CPC. Although most sectors and subsectors are included, there is no available correlation between the W/120 and the CPC in some cases (such as construction or land services). The correspondence between the CPC-provisional and ISIC 3 has been estab- lished by the United Nations. The only sectors excluded from the correlation are land and some nonfinancial intangible assets such as trademarks and copyrights. Finally, the correspondence between the CPC-provisional and the EBOPS is based on the classification available in annex III of the Manual on Statistics of Inter- national Trade in Services (UN 2002). An exhaustive correlation has been devel- oped between version 1.0 of the CPC, the W/120, and the EBOPS. Source: Authors' compilation. objectives for the regulation. One goal of service liberalization is to elimi- nate discrimination among similar services and service providers. Certain regulations aim at achieving legitimate policy objectives, but may be bur- densome for service providers. Other regulations aim at restricting foreign participation in the market; these regulations are the primary focus of serv- ice trade liberalization. Discrimination against foreign participation may take place at the border or behind the border, and the related measures may benefit some trading partners over others. To address these issues, the most favored nation clause provides that there should be no discrimination among trading partners, while the national treatment clause provides that there should be no discrimination with respect to national or foreign suppli- ers (table 3.2). 90 Sáez and Vaillant Table 3.1 Reasons, Objectives, and Instruments of Regulation in Selected Service Sectors Service Reasons Objectives Instruments Financial Asymmetry of System stability Financial regulation of the information central bank Professional Asymmetry of Quality of services Skill requirements, information monitoring Transportation Economies of Maintaining Intervention to prevent scope and safety competitive anticompetitive actions conditions Telecommunications Economies of scale, Maintaining Intervention to prevent access to public competitive anticompetitive actions; services conditions interconnection conditions Telecommunications Network Avoiding the Standardization externalities existence of techniques to facilitate inefficient small interconnections networks Water, electricity, and Distributive aspects Universal access to Licenses with mandatory telecommunications public services universal services; direct transfers to users Source: Fink and Jansen 2007. Table 3.2 Discrimination and Rules Service provider Benefited Injured Location Rule to address the issue Domestic Foreign Border Free trade Behind the border National treatment Foreign partner Foreign not partner Border Most favored nation Behind the border Most favored nation Source: Author compilation. In the trade in goods, protectionism seeks to discriminate against foreign goods at the border. For example, discrimination may be carried out by imposing customs taxes (tariffs) or other measures (nontariff measures) with a potentially equivalent effect at the border. Once the goods cross the border, discrimination may be hidden in domestic laws and regulations. In the trade in services, many discriminatory measures are applied behind the border, such as restrictions on the establishment of foreign providers in a country or restrictions that otherwise target foreign providers. Market access provisions seek to address restrictions that limit the entry of service suppliers, while the national treatment principle seeks The Negotiation and Management of Regulations in the Trade in Services 91 to correct any discrimination in the domestic regulations affecting the trade in services. In addition, the most favored nation clause is applied to prevent discrimination among countries. There are exemptions that allow countries to negotiate trade agreements with a subset of trading partners (bilateral or regional trade agreements). In the trade in services, regulations may affect the access of suppliers to the market, or they may affect the operations of suppliers (table 3.3). Some of these measures may be discriminatory, or they may affect national and foreign providers in a similar fashion. The Multilateral Framework: Basic Principles of SERET Multilateral rules for the trade in services are contained in the GATS (WTO 1993). The agreement is organized into six parts and eight annexes. The first part defines the scope of the application of the agreement. The second part contains the general obligations and rules applicable to the trade in services. The third part deals with specific commitments and the related rules and defines the market access and national treatment con- ditions accorded by a WTO member to the services and service suppliers of any other member. The fourth through sixth parts address liberaliza- tion issues, contain the institutional provisions of the agreement, particu- larly those on dispute settlement, and create the Council for Trade in Services within the WTO. The annexes deal with specific issues such as most favored nation exemptions, the movement of natural persons, air transportation, telecommunications, and financial services. The GATS defines the trade in services according to the modes of supply of the services, as follows: (1) crossborder supply, (2) consumption Table 3.3 Foreign Suppliers and Types of Impact: Discriminatory and Nondiscriminatory Restrictions Entrance or establishment Development of activities Discrimination, impact (examples) (examples) Nondiscriminatory Boundaries of two suppliers of All retail banking must have staff mobile telephone services available to monitor and provide automated teller machine services Discriminatory Nationality requirements for Fire and car insurance is subject senior managers of subsidiary to additional capital companies; ceiling on shares requirements; the crossborder for investors provision of insurance services is subject to price regulation Source: Hoekman 2006. 92 Sáez and Vaillant abroad, (3) commercial presence, and (4) the movement of natural persons (table 3.4). The agreement includes all services except services supplied in the exercise of governmental authority and air transportation traffic rights and services directly related to the exercise of these traffic rights. The most favored nation clause is aimed at ensuring nondiscrimination among all services and service suppliers. The clause applies to all measures that affect the trade in services through all modes of supply. However, in contrast to the most favored nation clause in the General Agreement on Tariffs and Trade (GATT), WTO members listed exemptions to the WTO version of the clause in their schedule of commitments before the entry into force of the GATS or in negotiating their accession to the WTO. There are other general obligations clarified in the GATS that cover governance issues involved in implementing the impartial administration of measures of general application affecting the trade in services, such as transparency and domestic regulations. Additional provisions provide for the development of rules on government procurement, safeguard mech- anisms, and subsidies. Although discussions among WTO members have taken place since the entry into force of the GATS, no agreement on rules on these matters has been reached. There are also obligations dealing with balance of payments and current and capital transactions that mirror GATT provisions. Although the GATS is based on GATT principles, important differ- ences exist. Indeed, the GATS provisions on market access and national treatment reflect the particular characteristics of service transactions. GATT deals mainly, though not exclusively, with market access restrictions Table 3.4 Modes of Supply and the GATS Presence of supplier Other criteria Mode Not present in the The service is supplied in the territory of 1. Crossborder supply territory of the one member from the territory of any member other member The service is supplied to a consumer from 2. Consumption one member who is in the territory of any abroad other member Present in the The service is supplied in the territory of one 3. Commercial territory of the member through the commercial presence presence member of a supplier from another member The service is supplied in the territory of one 4. Movement of member, and the supplier from another natural persons member is present through a natural person Source: WTO 2001. The Negotiation and Management of Regulations in the Trade in Services 93 at the border, such as tariffs and regulatory measures (nontariff barriers) and discrimination between national products and like foreign products. In contrast, in the GATS, market access restrictions are exclusively domestic regulatory measures. The GATS defines six types of domestic measures as market access limitations (table 3.5, column 2). If members wish to maintain these lim- itations, they must list them in their schedules of commitments that are annexed to the GATS. These limitations restrict market access and may also discriminate between national and foreign providers of services. In their schedules, WTO members commit to allow access to and not discrimi- nate against foreign providers in their territories except under the terms and conditions set forth therein. In contrast to GATT, the GATS national treatment provision is not a general obligation. Domestic regulations may imply de jure or de facto discrimination between like foreign and national Table 3.5 Schedule of GATS Commitments National Additional Market access treatment commitments (article XVI), (article XVII), (article XVIII), Mode of supply types of restriction definition type of measure Crossborder Limitations on the number Subject to any Measures affecting supply of service suppliers, conditions and the trade in monopolies, or exclusive exceptions set services are not service suppliers out therein, each subject to Consumption Limitations on the value of member shall scheduling under abroad assets or service accord to services articles XVI or XVII, transactions and service including those Commercial Limitations on the number suppliers of any regarding presence of service operations or the other member, in qualifications, quantity of service output respect of all standards, or Movement of Limitations on the number measures affecting licensing natural persons of natural persons that may the supply of matters; such be employed in a services, treatment commitments particular service sector no less favorable shall be inscribed Measures that restrict or than that it in a member's require specific types of accords to its own schedule legal entities through like services and which a service supplier service suppliers may supply a service Limitations on the participation of foreign capital Source: WTO 1993. 94 Sáez and Vaillant services and service providers. WTO members may list and maintain such discrimination in their GATS schedules (tables 3.5 and 3.6). Commitments and SERET In negotiating bilateral or multilateral commitments, countries must take decisions on a number of procedural aspects. First, countries must decide on the service sectors in which commitments will be adopted. Second, they must decide on the modes of supply through which service suppliers will be allowed to provide a service. Third, limitations on market access and national treatment that affect the trade in services must be listed for each mode of supply. This procedure is known as positive listing. The results of the negotiations are included in the schedules of com- mitments of members. In these schedules, service sectors, subsectors, and activities, together with any market access and national treatment limita- tions (also known as restrictions), are listed for all modes of supply. Under GATT, the disciplines applicable to the trade in goods cover only a share of all possible limitations that affect trade. The GATS widened the coverage of disciplines to include the mode of supplying services through commercial presence and the movement of people (natural persons in the GATS terminology) in the disciplines of nondiscrimination against foreign suppliers both on the border and domestically (table 3.6). At the multilateral level, trade liberalization has been deeper in the case of goods than in the case of services, but all the barriers involving Table 3.6 Comparative Coverage of Rules in GATT and the GATS, Market Access Modes Investment, Crossborder, commercial Movement of Modes 1, 2 presence, Mode 3 people, Mode 4 Access barrier GATT GATS GATT GATS GATT GATS Discrimination Border MFN MFN, NT Covered MFN, NT n.c. MFN, against only if NT foreigners related to CB Domestic NT NT, MA, n.c. NT, MA, n.c. NT, MA, BP BP BP Barriers to both nationals Little MA, MS, n.c. MA, MS, n.c. n.c. and foreigners BP BP Source: Author compilation based on Snape (2000). Note: BP = business practices. CB = crossborder. MA = market access. MFN = most favored nation. MS = market structure. NT = national treatment. n.c. = not covered. The Negotiation and Management of Regulations in the Trade in Services 95 discrimination against foreigners have not been addressed. Trade liberal- ization in services has addressed a larger set of issues, but has not yet achieved significant results. Thus, the scope of the barriers to trade addressed by the GATS is more general and includes aspects of business practices and market structure, such as the existence of monopolies. However, the process of liberalization in services has faced serious dif- ficulties at the multilateral level, and the difficulties are expected to continue. Some of the difficulties are as follows: · The positive list negotiations allow all countries (developed and devel- oping) to adopt commitments at a low level of ambition. Thus far, the general commitments represent less than the status quo; the commit- ments of countries, particularly developing countries, do not necessar- ily represent the actual level of liberalization of the service sectors in these countries. · The complexity of the process has meant that the identification of measures, the organization of information, and the selection of activi- ties are imperfect, particularly in many developing countries. The objective of transparency has therefore not been reached. · The classification of service activities is incomplete and outdated. A more robust system and a greater level of disaggregation are required. The Liberalization of Services through Preferential Trade Agreements Countries have been actively engaged in bilateral, regional, and multi- lateral negotiations on services. The number of preferential trade agree- ments (PTAs) has accelerated over the last 10 years. Countries pursue bilateral or regional negotiations for several reasons, including, first, the domino effect, that is, the need to reduce the cost of exclusion from trad- ing blocs; second, globalization, which creates the need to raise efficiency and improve access to foreign technologies and investment; third, credi- bility in that these agreements represent a way to lock in policy reform; and, fourth, foreign policy and security considerations (Hoekman and Kostecki 2001). PTAs and the GATS have comprehensive objectives in liberalization. However, there are relevant differences between PTAs and the GATS. Thus, PTAs have a more strongly sectoral profile. Liberalization in certain sectors, such as financial services and telecommunications, has been more extensive in PTAs in terms of rules and the elimination of barriers. In 96 Sáez and Vaillant some cases, the liberalization accomplished through PTAs has followed a negative list approach whereby countries may exempt or reserve certain activities from selected rules, but must usually justify the exemption or reservation. This is achieved by listing the nonconforming measures that are in force in domestic legislation and that explain the exception. The aim has been to generate a greater level of liberalization through the PTAs relative to the GATS. However, studies on the evidence have been inconclusive in this regard. This is a complex technical issue, and empirical findings have only begun to emerge (Marconini 2006; Fink and Molinuevo 2007; Roy, Marchetti, and Lim 2007). Nonetheless, some studies have concluded that liberalization has been more substantial under PTAs than under the GATS in terms of sector coverage. In addi- tion, because PTA negotiations seek to bind the existing level of liberal- ization, the PTAs tend to result in greater liberalization. Moreover, because it is not feasible to implement discriminatory trade liberalization in many service sectors, unlike in the trade in goods, the liberalization effects of preferential service agreements tend to be more consistent with the effects of multilateral liberalization. Finally, the rules of origin are less strict in services than in goods and are therefore less discrimina- tory in services. Although PTAs have not necessarily substantively improved the condi- tions for the provision of services by foreign companies, they have achieved a binding of the status quo, particularly in the case of agreements imple- menting a negative list approach. In this sense, PTAs have contributed to transparency in the implementation of regulations, as well as ensuring that current conditions for the provision of services are maintained, reducing the uncertainty about eventual reversals.2 Service liberalization in developing economies has not yet been associ- ated with a serious effort to open and restructure domestic production. To consolidate a negotiating position in the service sector, a government must clearly define its overall objectives: what are the unilateral objectives to be achieved in service sectors through reform? A government should also make a precise assessment of the domestic regulatory environment--a reg- ulatory audit--for comparison with the requirements of the international standards on national treatment and market access. On this basis, service liberalization, whether through multilateral agreements or PTAs, may become an instrument that facilitates the following: · The binding of reforms already completed in some sectors, thereby minimizing, through reciprocal agreements, the possibility of protec- tionist reversals The Negotiation and Management of Regulations in the Trade in Services 97 · Through consolidation, the achievement of improvements in market access in sectors (even in service subsectors) in which a country has offensive (as opposed to defensive) interests · The promotion of new regulatory reforms that governments have pur- sued unilaterally, but that, because of domestic obstacles, they have not yet achieved; international negotiations may generate new incen- tives for the implementation of such reforms The PTA Service Liberalization Approach At the bilateral or regional level, three models of service liberalization have been used, as follows: (1) the WTO-GATS model, (2) the North American Free Trade Agreement (NAFTA) model, and (3) the European Union model. Only European Union members have adopted the third model, and it is therefore not addressed in this chapter.3 There are two main differences between the WTO-GATS model and the NAFTA model. One difference regards the scheduling of commit- ments, and the other regards rules. In the case of the scheduling of commit- ments, the extent of the application of the obligations accorded to specific sectors or service activities is different. In NAFTA and similar agreements, a negative list approach is adopted, meaning that all the provisions of the agreement are applicable unless the country schedules included in the var- ious annexes where the terms, conditions, and limitations are established specify otherwise. The NAFTA provisions on nonconforming measures, that is, measures that violate the agreed provisions, also rely on a ratcheting principle. For example, annex I in NAFTA describes the existing noncon- forming measures a country wishes to maintain. If a country modifies a scheduled nonconforming measure by reducing the degree of nonconfor- mity, this change is immediately frozen and represents the new level of commitment. No such provisions exist in the WTO-GATS or similar agree- ments (Prieto and Stephenson 1999). In terms of rules, the main differences between the two models are related to provisions on market access and domestic regulations that are not included in NAFTA and local presence, performance requirements, and senior management obligations that are part of NAFTA, but are not specifically addressed in GATS. Although other types of provisions are common to both agreements, this does not mean that they are similar in scope, as illustrated, for exam- ple, by the provisions on transparency and transfers. The provisions of NAFTA on competition policy rules and their rela- tionship to the trade in services are applied to private companies and to government measures. The disciplines on private companies are general 98 Sáez and Vaillant and basically ensure the obligations of the parties to adopt or maintain competition laws and to create authorities responsible for the enforce- ment of the laws and due process. With regard to government measures, the rules are more detailed and are oriented toward ensuring that no nullification or impairment of benefits takes place through state-owned enterprises or designated monopolies (private or public) and that these entities act in conformity with the general rules and obligations of NAFTA. These obligations are applicable to the service sector if service suppliers enjoy monopoly rights (as a private or public company) or are public enterprises. In NAFTA, specific commitments are included in annexes following a negative list approach in which countries include the nonconforming measures that affect certain sectors, subsectors, or activities (see above). The original NAFTA text includes annexes indicating the exceptions to certain general rules, including nonconforming measures, nondiscrimina- tory quantitative restrictions, activities to be regulated in the future, exceptions to the most favored nation clause, and activities reserved to the state. In general, the first annex lists the nonconforming measures in relation to five rules (national treatment, most favored nation, local presence, per- formance requirements, and senior management and board of directors). The second annex includes nonconforming measures in relation to future regulations whereby countries maintain their ability to introduce or change nonconforming measures. In the third annex, the nondiscriminatory quantitative restrictions or market restrictions (market access) are listed. The fourth annex deals with exceptions to the most favored nation clause. Finally, the fifth annex lists the activities reserved to the government. This structure of annexes has evolved in more recent agreements based on the NAFTA model and negative lists. In the most recent agree- ments, there are only two or three annexes. One is devoted to the non- conforming measures in force, and the other to future nonconforming measures. Nonconforming measures refer to rules on national treatment, market access, most favored nation, local presence, performance require- ments, and senior managers and boards of directors. These annexes also tend to be more general, that is, showing horizontal exceptions by sec- tors, but containing fewer details by subsector and activity. There may also be a third annex dealing with the financial service sector. Frequently, trade agreements use a mixed scheduling of positive and negative lists. For example, crossborder trade nonconforming measures might be scheduled following a positive list approach, and The Negotiation and Management of Regulations in the Trade in Services 99 investment nonconforming measures might be scheduled following a negative list approach. In recent agreements, in contrast to the nega- tive list approach, services subject to market access obligations are specifically listed. Sometimes, a negative list in crossborder transac- tions and investment is combined with specific commitments in the financial sector (the positive list type), whereby a list of permitted crossborder services is included. A list of all types of PTAs in services ordered by year of notification to the WTO is presented in table 3A.1 (see annex 3A). The agree- ments are grouped taking into account the countries or regions that form the hubs of the agreements. Agreements are classified into three types regarding the scheduling approach: negative list (full liberalization, combined with reservations); positive list (specific schedule, mainly with an incremental pattern to achieve substantial liberalization); and a mix of negative and positive list procedures. Finally, the agreements are classified by the level of development of trading partners (North- North, North-South, and South-South). A summary of this informa- tion is presented in table 3.7. Under the GATS (article V), 63 agreements regulating the trade in serv- ices have been notified to the WTO. Around three-fifths follow a negative list methodology, and about one-fifth are of the positive list type. The remainder show a mixed pattern. Around three-fourths of the agreements include a developed-country partner. The South-South agreements are con- centrated among countries in Latin America and the Caribbean. Globally, the NAFTA-type agreement is the most frequent, representing more than half of the agreements (concentrated among agreements involving Japan, Latin America, Singapore, and the United States). Service liberalization is characterized by the variety of the sectors and disciplines involved and the high degree of expertise required in each discipline or sector. In addressing the issues encountered in nego- tiations, governments should take into account the characteristics in sec- tor coverage. The service sectors associated with economic infrastructure have received the most attention so far, including telecommunications, transportation, and financial services. The characteristics common to these sectors are as follows: · These sectors are paradigmatic of globalization in that an intensive process of technological change has altered the conditions for the trade in the related services at the international level, and this has trig- gered changes in domestic regulatory regimes. 100 Table 3.7 PTAs to Achieve Service Liberalization Totals Negative list Positive list Positive and negative lists Grouping NN NS SS Subtotal NN NS SS Subtotal NN NS SS Subtotal Total European Community 8 n.a. n.a. 8 n.a. 2 n.a. 2 n.a. 1 n.a. 1 11 United States 2 7 n.a. 9 n.a. 1 n.a. 1 n.a. n.a. n.a. n.a. 10 Japan n.a. 2 n.a. 2 n.a. 1 n.a. 1 1 4 n.a. 5 8 Singapore 1 3 n.a. 4 n.a. 1 n.a. 1 1 1 n.a. 2 7 EFTA 2 1 n.a. 3 1 1 n.a. 2 n.a. 1 n.a. 1 6 Australia­New Zealand n.a. n.a. n.a. n.a. 1 2 n.a. 3 n.a. n.a. n.a. n.a. 3 Latin America n.a. 1 12 13 n.a. n.a. 1 1 n.a. n.a. n.a. n.a. 14 China n.a. n.a. n.a. n.a. n.a. 2 1 3 n.a. n.a. 1 1 4 Total 13 14 12 39 2 10 2 14 2 7 1 10 63 Source: Author compilation based on table 3A.1, annex 3A. Note: EFTA = European Free Trade Association (Iceland, Liechtenstein, Norway, and Switzerland). NL = negative list. NN = North-North. NS = North-South. PL = positive list. SS = South-South. n.a. = not applicable. The Negotiation and Management of Regulations in the Trade in Services 101 · Services in these sectors are considered extensively in multilateral and preferential negotiations, which means that the international disci- plines that affect them have shown a tendency to expand. · The development of these services has a horizontal impact on eco- nomic activity because they are part of the cost function in the vast majority of productive sectors. From the point of view of technological change, commitments in other infrastructure sectors have also attracted international attention. Among these sectors are the energy sector and environmental services (water, sewerage, and urban sanitation services). Building SERET: The Positive List Approach The aim of this and the next section is to provide policy makers with a simple procedure for constructing a database that will allow them to compare, analyze, and negotiate services more effectively at the WTO or other bilateral or regional forums. In this section, the methodology we use to construct the database for a fictitious developing country grounded on information from the lists of commitments of WTO members is explained. The methodology may be applied for any WTO member or acceding member, and it may be used for any type of agreement that follows the framework, definitions, and scheduling mechanisms (positive list approach) of the GATS. This chapter explains how the database is built. All supporting files are available on the World Bank Web site (http://go.worldbank.org/ DLM9JWE9A0). Users can download and use the files directly and do not need to build their own template, but reading the methodology together with these files is recommended. Please look for this icon (z) in the margin, which prompts users to go to the Web site. Data Sources In general, a government may begin building a database with its own information and according to its own needs. It may use other sources for raw data such as a country's own services legislation. However, to follow the exact methodology we propose, the data should be arranged to mirror the data structure in the WTO files (schedules). For this example, it is assumed that the country is a WTO member and that the database is being constructed using information available on the WTO Web site.4 102 Sáez and Vaillant WTO service schedules for any given country are arranged in a matrix that lists specific sectors, subsectors, and activities by row and the respective restrictions and additional information by column (table 3.8). In terms of structure, the schedules group commitments Table 3.8 An Example of a Service Schedule Limitations on market Limitations on national Sector/subsector access treatment Horizontal commitments 4) Presence of natural 4) Unbound except for 4) Unbound persons measures concerning temporary entry and stay of nationals of another member who fall into the categories below Sector-specific commitments 1. Business services A. Professional services a) Legal services (CPC 861) 1) None 1) None 2) None 2) None 3) None 3) None 4) Unbound except as 4) Unbound except as indicated under indicated under horizontal horizontal commitments commitments b) Accounting, auditing, 1) Unbound except that a 1) Unbound and bookkeeping foreign service supplier 2) Unbound (CPC 862) may cede its name to 3) Special registration professionals requirements for 2) Unbound accountants who wish to 3) Participation of audit companies such as nonresidents in juridical financial institutions persons controlled by and savings and loan nationals is not allowed. associations; accounting A foreign supplier of and auditing standards services shall not use its must be followed foreign name, but may 4) Unbound except as cede it to professionals indicated under horizontal who will constitute and commitments exercise full participation in a new juridical person 4) Unbound except as indicated under horizontal commitments Source: Author compilation. Note: 4) = Mode 4. Other modes and subsectors, for example, a), are similarly indicated. The Negotiation and Management of Regulations in the Trade in Services 103 into two categories: horizontal and specific to a sector. A horizontal commitment applies to the trade in services in all scheduled service sectors unless otherwise specified. A sector-specific commitment applies to the trade in services in a particular sector. The WTO schedules contain five columns. The first column corre- sponds to the name of the sector, subsector, or activity classified according to the W/120 classification, for example, 01.A.a, legal services (CPC 861). The second column lists the market access limitations for each sector, sub- sector, or activity according to each mode of supply, that is, Mode 1: cross- border supply, Mode 2: consumption abroad, Mode 3: commercial presence, and Mode 4: presence of a natural person. The mode is indicated by a number 1 through 4 followed by a closing parenthesis. The third col- umn lists the national treatment limitations following the same approach as in the previous column. The fourth column (additional commitments) lists obligations that are not related to market access or national treatment limitations, but that may affect the trade in services, such as nondiscrimi- natory licensing requirements. The fifth column (notes) is used for clarifi- cations. (To keep the procedure simple, we have not included the last two columns--columns four and five--in table 3.8 or in the construction of the database; these columns may be included if a user so wishes.) Because the terms used in a schedule create legally binding commit- ments, it is important that the terms expressing the presence or absence of limitations on market access and national treatment be uniform and pre- cise. The term none is used throughout the schedules to indicate that there are no limitations (market access or national treatment) in a particular mode of supply for a given sector. This corresponds to the highest degree of liberalizing commitment (full commitment) and the lowest degree of unpredictability in the limitations placed on this commitment. However, any relevant limitations listed in the horizontal section of the schedule still apply. In contrast, the term unbound is used if a country remains free, in a given sector and mode of supply, to introduce or maintain measures incon- sistent with market access or national treatment. This corresponds to the lowest degree of liberalizing commitment and the highest degree of unpre- dictability in the limitations placed on this commitment. Between these two extremes, many possible options exist, implying that there are specific terms and conditions for market access and national treatment. Preparatory Steps: Organizing the Data The methodology we present here consists of a series of steps based on a file that contains commitment information arranged in the WTO data file 104 Sáez and Vaillant format.5 If users begin on the basis of a schedule that has not been down- loaded from the WTO Web site, they must adapt the data to fit the struc- ture before following the proposed steps. A typical WTO schedule is z shown in table 3.9. First step: Adding the classification. The first step is to create the W/120 classification code for each subsector listed and the respective modes of Table 3.9 First Commitment Schedule Downloaded Limitations on market Limitations on national Sector/subsector access treatment 01.A. Professional services b) Accounting, auditing, 1) None 1) None and bookkeeping services (CPC 862) 2) None 2) None 3) Foreign investment 3) Foreign accounting and up to 49 percent of the auditing enterprises registered capital of must use the name of enterprises the partners 4) Unbound, except 4) Unbound, except as as indicated in the indicated in the horizontal section horizontal section d) Consultancy and 1) None 1) None technical studies for architecture (CPC 8671) 2) None 2) None 3) Foreign investment 3) None up to 100 percent of the registered capital of enterprises 4) Unbound, except 4) Unbound, except as as indicated in the indicated in the horizontal section horizontal section e) Consultancy and 1) None 1) None technical services for engineering (CPC 8672) 2) None 2) None 3) Foreign investment 3) None up to 100 percent of the registered capital of enterprises 4) Unbound, except as 4) Unbound, except as indicated in the indicated in the horizontal section horizontal section Source: Author compilation. The Negotiation and Management of Regulations in the Trade in Services 105 supply. Although the WTO schedule classifies sectors and subsectors according to the W/120, one must create a cell with the complete W/120 code to construct the database.6 The most rapid method for setting the W/120 code is to create a new variable that combines the sector and subsector codes. Using the fictitious schedule, one inserts a new column between the sector/subsector column and the limitations on market access column. The final text that appears will be the full W/120 code for the accounting, auditing, and bookkeep- ing services subsector (CPC 862), that is, 01.A.b. One then creates the W/120 code for the mode of supply of the first subsector. This code must be copied to the other three modes of supply by using the paste as values function. This process must be repeated for all subsectors listed in the schedule. Only then should one proceed to the next step (see table 3.10). Second step: Using the correspondence table to fill in the blank codes. After one repeats the previous step for all scheduled subsectors, most rows should have a W/120 code. However, some activities will remain without codes because, even if these activities are sorted according to the W/120 classification in the WTO data file, they appear at a level of disaggregation other than the W/120. In these cases, unless the subsec- tor description includes another code (such as a CPC code), it is not possible to assign a W/120 code automatically as in the first step of the methodology. If this is the situation, it is possible to use the correlation table to identify the correspondence between CPC codes and W/120 z codes. For instance, in this case, within sector 01.E., rental and leasing services without operators, one finds the activity description, rental of cars without driver (CPC 83101). Because the activity has a CPC code, one may correlate the activity to a W/120 code using the correspon- dence table. In cases in which this is not possible (because the subsector or activity corresponds to more than one W/120 code or because there is no CPC number associated with the code), one must assign a W/120 code using one's knowledge of the classifications and the definitions of the subsector or activity. However, it is unlikely that more than a few items will require such an analysis. Third step: Nesting horizontal commitments. The third step consists of nesting horizontal commitments into specific commitments. This simply means that one adds the horizontal commitments to the specific commit- ments in each cell containing a specific commitment. 106 Sáez and Vaillant Table 3.10 Pasting the W/120 Code for Each Mode of Supply in the Subsector Limitations on market Limitations on national Sector/subsector W/120 access treatment 01.A. Professional services b) Accounting, auditing, 01.A.b. 1) None 1) None and bookkeeping services (CPC 862) 01.A.b. 2) None 2) None 01.A.b. 3) Foreign investment 3) Foreign accounting and up to 49 percent of auditing enterprises the registered capital must use the name of of enterprises the partners 01.A.b. 4) Unbound, except 4) Unbound, except as indicated in the as indicated in the horizontal section horizontal section d) Consultancy and 01.A.d. 1) None 1) None technical studies for architecture (CPC 8671) 01.A.d. 2) None 2) None 01.A.d. 3) Foreign investment 3) None up to 100 percent of the registered capital of enterprises 01.A.d. 4) Unbound, except 4) Unbound, except as indicated in the as indicated in the horizontal section horizontal section e) Consultancy and 01.A.e. 1) None 1) None technical services for engineering (CPC 8672) 01.A.e. 2) None 2) None 01.A.e. 3) Foreign investment 3) None up to 100 percent of the registered capital of enterprises 01.A.e. 4) Unbound, except 4) Unbound, except as indicated in the as indicated in the horizontal section horizontal section Source: Author compilation. In our example, a horizontal commitment for commercial presence (Mode 3) is listed as follows: foreign investment in activities reserved for nationals must occur through neutral shares, the purchase of which must be quoted on the stock exchange. Because this commitment applies to all listed subsectors, one must paste the text of this horizontal commitment z in all cells representing Mode 3 for all listed subsectors (table 3.11). Table 3.11 Nesting Horizontal Commitments Sector/subsector W/120 Limitations on market access Limitations on national treatment 01.A. Professional services b) Accounting, auditing, 01.A.b. 1) None 1) None and bookkeeping services (CPC 862) 01.A.b. 2) None 2) None 01.A.b. 3) Foreign investment up to 49 percent of the registered 3) Foreign accounting and auditing enterprises capital of enterprises. Foreign investment in activities must use partners. Foreigners may not reserved for nationals must be through neutral shares, acquire direct ownership of land and water whose purchase must be quoted on the country's stock in a 50-kilometer strip on the coastline and exchange. 100-kilometer strip along the frontiers. Unbound for research and development subsidies and incentives to small service enterprises owned by nationals. 01.A.b. 4) Unbound, except for measures affecting the entry and 4) Unbound, except for measures affecting the temporary stay of natural persons in the following categories of natural persons indicated in the categories: a) persons directly responsible for the sale market access column. The following activities of a service, and b) persons transferred within the same are reserved for nationals: ship captains, aircraft enterprise, provided they are executives, managers, or pilots, ship masters, ships engineers, ships specialists. For the purposes of this offer, a) "persons mechanics, crews of ships and aircraft under directly responsible for the sale of a service" means the flag, airport managers, harbor pilots, persons representing an enterprise that carries on an customs brokers, and train crews. Subsidies activity in a country party to the agreement who are granted to natural persons may be limited temporarily to enter territory (for up to 90 days) in order to citizens. (continued) 107 108 Table 3.11 Nesting Horizontal Commitments (continued) Sector/subsector W/120 Limitations on market access Limitations on national treatment to sell or negotiate the sale of a service or conclude agreements for the sale of the service on behalf of the enterprise they represent, provided this does not in any case constitute a direct sale to the general public, and b) "persons transferred within the same enterprise" means employees of an enterprise who have been employed by that enterprise for at least a year before temporary entry into the territory. Stay is for one year, with the option of renewal in order to continue providing services in that enterprise or a subsidiary of that enterprise in accordance with national laws. Source: Author compilation. The Negotiation and Management of Regulations in the Trade in Services 109 Fourth step: Sorting commitments according to mode of supply. The fourth step consists of sorting the data by mode of supply. To do this, one must highlight the mode of supply column and sort this column in z ascending order. Fifth step: Pasting commitments onto the template. Once commitments have been sorted by mode of supply, the data are transferred to a "template" file. This procedure is repeated for all the modes and mar- z ket access columns as well as for limitations on national treatment. Now that the basic structure for the database is ready, it is possible to populate the database directly without following each time all the steps described. The files are readily available for download and can be used directly. In addition, a more friendly visualization of the information is also available, especially for comparison among different agreements. z Once the SERET database has been constructed and populated with information on bilateral, regional, or multilateral commitments, we are able to compare those commitments adopted by the country across vari- ous agreements. In addition to the comparison among commitments adopted according to sector, subsector, or activity, other useful comparisons may be per- formed. For example, what commitments were adopted according to the type of rule (that is, market access or national treatment)? Also, one may initiate queries to compare commitments across modes of supply. For example, one might determine the activities associated with commitments under crossborder trade (Mode 1) or commercial presence (Mode 3). The Case of PTAs and the Negative List Approach This section describes the methodology used to construct a SERET data- base using information for a country that has negotiated a PTA following a negative list approach. The methodology applies to any country that has followed this approach. We assume that the fictitious country has engaged in service negoti- ations using a NAFTA model. In broad terms, this model is character- ized by three features that are particularly relevant for the construction of a SERET: 1. The service provisions in the agreements are more complex so that a large number of variables intervene in scheduling commitments beyond only market access and national treatment. 110 Sáez and Vaillant 2. The agreements include disciplines on investments (Mode 3) and crossborder trade in services (Modes 1, 2, and 4) in separate chapters. 3. The agreements normally follow a negative list approach in schedul- ing. This means that, except for the sectors specifically scheduled, all rules and disciplines contained in the agreement are applicable. In addition, the agreements normally include two annexes showing commitments. The first annex covers nonconforming measures, and the second annex covers the sectors, subsectors, or activities on which no commitments have been adopted (the future nonconform- ing measures). Taking into consideration these basic features, we present a second option for the construction of the SERET database. The goal is to use bilateral commitments and translate them into the same database format. As in the case of the positive list approach, a pattern is identified as a starting point for the development of a detailed procedure to complete z SERET for both horizontal and nonhorizontal (specific) commitments. Annex 1 and annex 2 in the NAFTA model discuss existing and future nonconforming measures, respectively. The variables in these annexes are sector, which refers to the sector, subsector, or activity with restrictions; obligations concerned, that is, the nature of the restriction applied (national treatment, market access, local presence, most favored nation, performance requirements, or senior management and board of directors); the level of government to which the measure applies (cen- tral, subnational, and so on); measures, that is, the legal basis for the restriction; and the description of the measures, including the mode of z supply to which it applies (box 3.2). The second step involves an alteration of the file that is in template form. First, all measures in the prevailing nonconforming measures annex (annex 1) must be placed in the same cell so that the user is eventually able to deal with them together.7 This is done by copying or cutting the data if one or more measures apply to the same reservation. In lieu of the word description, the word mode is inserted, and the description is inserted as a new field in the row below (comprising the description of the meas- ures). This step is also carried out for annex 2­type reservations. The aim is to separate the mode field from the description field because both enter z into our analysis, but in different ways. The third step consists of the identification of the specific activities subject to a reservation. Because the information provided in bilateral and regional service agreements is not always associated with a W/120 or a The Negotiation and Management of Regulations in the Trade in Services 111 Box 3.2 Annex 1: Type of Reservation: United States­Chile Free Trade Agreement Sector: All sectors Obligations concerned: National treatment (article 10.2) Most favored nation treatment (article 10.3) Level of government: Central Measures: 22 U.S.C. §§ 2194 and 2198(c) Description: Investment The Overseas Private Investment Corporation insurance and loan guarantees are not available to certain aliens, foreign enterprises, or foreign-controlled domestic enterprises. Source: Office of the United States Trade Representative, "Chile FTA." Annex 1, "U.S. Measures," page 5. http://www.ustr.gov/sites/default/files/uploads/agreements/fta/chile/asset_upload_file722_4021.pdf. CPC code, one must add codes to many activities using the activity descriptions as guides and sometimes also the descriptions of the related z measures. The correspondence tables may be helpful in this process. Once the activity has been identified, the user creates a new column corresponding to the W/120 code and repeats the code in each cell of the column that describes the same activity. If a reservation applies to more than one activity, this solves the problem of assigning codes because the reservation may be repeated (copied and pasted) as many times as necessary. For example, in the case of private primary and sec- ondary education, the W/120 codes 05.A. and 05.B are inserted. In con- trast, in the case of horizontal measures, the term horizontal is inserted as a key word to be used later in the nesting process. An example may be found in those reservations applicable to all sectors. After all specific reserved activities have been identified and assigned, the empty rows between reservations are eliminated so that one may sort them. Sort by column, which contains the elements of the reservation, and then substitute the obligation concerned and the mode with the corresponding abbreviation according to the worksheet on negative list z variables. For instance, level of government is assigned a 1; mode (of supply) is assigned a 1 or a 3; obligation concerned may include national treatment or local presence; and so on. Finally, one picks up the value 112 Sáez and Vaillant for each variable to place in the auxiliary negative list file. This proce- dure is repeated for annex 2­type reservations. Having completed the table in the auxiliary negative list file, one must now introduce horizontal restrictions in a new column named z HR (horizontal restrictions) by copying the restrictions in all the cells. Once the database is constructed, a country with several bilateral agreements based on the negative list approach and the NAFTA struc- ture can compare the commitments adopted across those agreements.8 Because of the differences between the structure of obligations and the liberalization approach (negative versus positive), it is not easy to compare results among agreements that are based on the GATS or NAFTA model. The problems arise because of differences in the terms of obligations and liberalization approach. For instance, NAFTA-type agreements contain obligations with regard to performance require- ments for investment and prohibition of local presence obligations. Nothing similar is found in the GATS. Our tool does not at this stage resolve this problem and does not provide for a comparison between one and the other. Instead, it provides the option to organize and compare information across agreements based on similar structures and liberalization approaches. Conclusions This chapter develops a methodology for building a service regulations management tool (SERET). Originally, one of the motivations for build- ing such an instrument was to provide developing countries with a method for codifying and processing information on the liberalization of the services trade. This objective may be met by analyzing negotia- tions before any commitments are recorded. However, the tool may also be used to analyze the commitments in force or to construct a domes- tic database to assess the regulatory regime of a country and propose possible reforms. The tool is a database on services that covers various types of trade agreements. SERET allows the user to maintain information on service commitments in a convenient format. The goal is to facilitate international comparisons among agreements of similar structure. Specifically, SERET permits comparisons across commitments according to sector, subsector, and activity. Other useful comparisons may also be performed. For exam- ple, commitments may be examined according to type of rule, whether market access or national treatment, and according to mode of supply. The Negotiation and Management of Regulations in the Trade in Services 113 The SERET database may be constructed using information on the commitments adopted by the trading partners with which a country is negotiating trade agreements so as to assess the quality and openness of the commitments and compare them to the commitments offered in the negotiations. SERET is useful because it increases the level of transparency in nego- tiations on the trade in services. Normally, the global framework for lib- eralization in the services trade has been established in such a way that the information is contained in a complex text that is not easy to analyze. This tool is sufficiently flexible to allow countries to accomplish the following: · Assess their current services regime by uploading the required infor- mation into the database · Populate the database with country commitments at bilateral, multi- lateral, and regional levels · Prepare for negotiations by populating the database with information on trading partners, thereby facilitating, for example, comparisons across the offers and concessions provided among trading partners · Maintain records on a negotiation process by populating the database with information on (1) the current regime of country A, (2) country B requests to country A, (3) country A offers to country B, and (4) actual outcome of the negotiations · Satisfy numerous other needs identified by the user Annex 3A Statistics on Service Agreements Table 3A.1 Service Trade Agreements by Type, Hub Country, Partner, and WTO Notification Year Hub Year Partner Type United States (10) 1995 NAFTA NL 2002 Jordan PL 2003 Chile NL Singapore NL 2004 Australia NL 2005 Morocco NL 2006 Bahrain NL DR-CAFTAa NL 2009 Peru NL Oman NL (continued) 114 Sáez and Vaillant Table 3A.1 Service Trade Agreements by Type, Hub Country, Partner, and WTO Notification Year (continued) Hub Year Partner Type European 1995b Treaty establishing the European FL Community (11)b Community Enlargement 9 FL (NL for transition) Enlargement 10 FL (NL for transition) Enlargement 12 FL (NL for transition) Enlargement 15 FL (NL for transition) 1996 European Economic Area FL, NL 2002 Mexico PL and NL 2004 Enlargement 25 FL (NL for transition) 2005 Chile PL 2007 Enlargement 27 FL (NL for transition) 2008 CARIFORUM PL Japan (8) 2002 Singapore PL and NL 2005 Mexico NL 2006 Malaysia NL 2007 Thailand PL Chile NL and PL 2008 Philippines PL and NL Indonesia PL and NL Brunei Darussalam PL and NL Singapore (7) 2001 New Zealand PL and NL 2003 Australia NL 2006 Korea, Rep. NL Jordan PL 2007 Panama NL India PL and NL Trans-Pacific Strategic Economic NL Partnershipc European 2002 European Free Trade Association NL Free Trade 2001 Mexico NL Association (6) 2003 Singapore PL 2004 Chile PL and NL 2006 Korea, Rep. PL 2008 Iceland­Faeroe Islands FL Australia­New 1995 Australia­New Zealand (Closer PL Zealand (3) Economic Relations) (services) 2004 Australia-Thailand PL 2005 New Zealand­Thailand PL (continued) The Negotiation and Management of Regulations in the Trade in Services 115 Table 3A.1 Service Trade Agreements by Type, Hub Country, Partner, and WTO Notification Year (continued) Hub Year Partner Type Latin America 1997 Canada-Chile NL and the 2001 Panama­El Salvador NL Caribbean (14)d 2002 Panama-Chile NL 2003 CARICOM FL, PL 2004 Korea, Rep.­Chile NL Chile­El Salvador NL 2005 Guatemala-Mexico NL Mexico-Nicaragua NL 2006 El Salvador­Mexico NL Costa Rica­Mexico NL Chile-Mexico NL Mercosur (services) FL, PL Honduras-Mexico NL 2008 Chile­Costa Rica NL China (4) 2003 Macao, China PL Hong Kong, China PL 2008 Association of Southeast Asian PL Nations Pakistan-Malaysia PL and NL Total 63 Source: WTO Regional Trade Agreements Database, http://www.wto.org/english/tratop_e/region_e/region_e.htm. Note: FL = full liberalization. NL = negative list. PL = positive list. a. DR-CAFTA = five countries of Central America (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua), plus the Dominican Republic. b. CARIFORUM = Caribbean Community (CARICOM: Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago) and the Dominican Republic. Enlargement 9 = Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, and the United Kingdom. Enlargement 10 = previous, plus Greece. Enlargement 12 = previous, plus Portugal and Spain. Enlargement 15 = previous, plus Austria, Finland, and Sweden. Enlargement 25 = previous, plus Czech Republic, Cyprus, Estonia, Latvia, Lithuania, Malta, Poland, Slovak Republic, Slovenia, and Hungary. Enlargement 27 = previous, plus Bulgaria and Romania. European Economic Area = the European Union, plus Iceland, Liechtenstein, and Norway. c. Brunei Darussalam, Chile, New Zealand, and Singapore. d. For CARICOM, see note b. Mercosur = Southern Common Market (Argentina, Brazil, Paraguay, and Uruguay). Notes 1. Files that support the methodology for the construction of the database are available at http://go.worldbank.org/DLM9JWE9A0. 2. A broader discussion of these issues may be found in Mattoo and Sauvé (2008) and Marchetti and Roy (2008). 3. The Treaty of Rome, which was signed in 1958 and contains the key ele- ments of European integration, included a brief, but powerful reference to 116 Sáez and Vaillant the trade in services. The original article 59 prohibited restrictions on the free supply of services within the European Community in respect of nationals of member states who are established in a member state other than the state in which the person resides to whom the services are sup- plied. The original article 65 states that, as long as restrictions on the free supply of services have not been abolished, each member state is to apply these restrictions, without distinction on grounds of nationality or residence, to all persons who supply services. These provisions apply to services supplied in a temporary manner. Services supplied on a permanent basis are governed by the provisions on the right of establishment set forth in article 52, accord- ing to which restrictions on the freedom of establishment of nationals of a member state in the territory of another member state were to be progres- sively abolished. See Sáez (2005). 4. The commitments of WTO members are available in the WTO Services Database (http://tsdb.wto.org/) and may be downloaded. 5. The steps in building the database are described in detail at http://go.worldbank .org/DLM9JWE9A0. 6. For instance, in the schedule, the b) subsector-accounting, auditing, and bookkeeping services (CPC 862)--is found under sector 01.A., professional services. The W/120 code for this subsector is taken from the combination of the sector and subsector item code, that is, 01.A.b. Although all the infor- mation regarding the W/120 code is listed, the full code does not appear in any cell and must therefore be created. 7. All supporting files are available at http://go.worldbank.org/DLM9JWE9A0. 8. Although negative lists and positive lists are normally associated with NAFTA and the GATS respectively, this is not always the case. For instance, the Andean Community adopted a GATS-type agreement using a negative list approach for liberalization. References Baldwin, Richard E. 2006a. "Globalization: The Great Unbundling(s)." Working paper, Secretariat, Economic Council of Finland, Prime Minister's Office, Helsinki. ------. 2006b. 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Washington, DC: Statistics Department, IMF. Marchetti, Juan A., and Martin Roy. 2008. Opening Markets for Trade in Services: Countries and Sectors in Bilateral and WTO Negotiations. Geneva: World Trade Organization; New York: Cambridge University Press. Marconini, Mario. 2006. "Services in Regional Agreements between Latin American and Developed Countries." Serie Comercio Internacional 77, Division of International Trade and Integration, United Nations Economic Commission for Latin America and the Caribbean, Santiago, Chile. Mattoo, Aaditya, and Pierre Sauvé. 2008. "Regionalism in Services Trade." In A Handbook of International Trade in Services, ed. Aaditya Mattoo, Robert M. Stern, and Gianni Zanini, 221­287. Washington, DC: World Bank; New York: Oxford University Press. Mattoo, Aaditya, Robert M. Stern, and Gianni Zanini. 2008. A Handbook of International Trade in Services. 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Unpublished working paper, World Bank, Washington, DC. ------. 2005. "European Union's Bilateral Negotiations in Trade in Services: A Review of the Experience with Developing Countries." Paper presented at the Second Meeting of the Common Market for Eastern and Southern Africa "Technical Working Group of Services Specialists for the Regional Services Assessment," Mauritius, July 11­15. Sampson, Gary, and Richard Snape. 1985. "Identifying the Issues in Trade in Services." World Economy 8 (2): 171­81. Snape, Richard. 2000. "The WTO Agenda: Next Steps." In Impediments to Trade in Services: Measurement and Policy Implications, ed. Christopher C. Findlay and Tony Warren, 358­71. New York: Routledge. UN (United Nations). 1991. "Provisional Central Product Classification (Provisional CPC)." Document ST/ESA/STAT/SER.M/77, Economic Statistics and Classifications Section, Statistics Division, Department of Economic and Social Affairs, United Nations, New York. http://unstats.un.org/unsd/class/family/ family2.asp?Cl=9. ------. 2002. Manual on Statistics of International Trade in Services. Statistical Papers, Series M, 86, ST/ESA/STAT/SER.M/86. New York: Statistics Division, Department of Economic and Social Affairs, United Nations. Warren, Tony. 2000a. "The Identification of Impediments to Trade and Investment in Telecommunications Services." In Impediments to Trade in Services: Measure- ment and Policy Implications, ed. Christopher C. Findlay and Tony Warren, 71­84. New York: Routledge. ------. 2000b. "The Impact on Output of Impediments to Trade and Investment in Telecommunications Services." In Impediments to Trade in Services: Measurement and Policy Implications, ed. Christopher C. Findlay and Tony Warren, 85­100. New York: Routledge. The Negotiation and Management of Regulations in the Trade in Services 119 WTO (World Trade Organization). 1991. "Services Sectoral Classification List: Note by the Secretariat." Document MTN.GNS/W/120 (July 10), WTO, Geneva. ------. 1993. "General Agreement on Trade in Services." WTO, Geneva. http:// www.wto.org/english/docs_e/legal_e/26-gats.pdf. ------. 2001. "Guidelines for the Scheduling of Specific Commitments under the General Agreement on Trade in Services (GATS)." Document S/L/92 (March 28), Trade in Services, WTO, Geneva. CHAPTER 4 Liberalization in the Trade in Services: A Negotiation Exercise Sebastián Sáez and Anna Lanoszka This chapter presents a negotiation exercise designed for policy mak- ers, trade negotiators, and trade practitioners involved in services. The exercise will help these experts gain a better understanding of the preparatory and negotiating stages of the process leading to the liber- alization of the trade in services. The exercise includes a simulation containing a substantive introductory description intended to provide users with easily accessible educational material relevant to the issues under consideration. The exercise relies on the General Agreement on Trade in Services (GATS) as a framework (WTO 1993). Our choice of this framework reflects the importance of the GATS and its relevance for all developing countries, including countries acceding to the World Trade Organization (WTO). Moreover, the GATS model has also been adapted as the frame- work for liberalization at the regional level. The European Union uses the GATS as a framework in its negotiations with developing and least devel- oped countries. Among other developing regions, the Southern Common Market and the Association of Southeast Asian Nations have based their integration efforts on GATS provisions and liberalization mechanisms. Because of this, the exercise has a wider application and may be readily 121 122 Sáez and Lanoszka adjusted and applied as the bilateral, regional, or multilateral context requires. The exercise addresses the negotiations in two service sectors in three fictitious countries: logistics services and health services. The aim of the exercise on logistics services is to show negotiators that, although these groups of services present complex negotiating problems, they are con- nected and are all necessary for the efficient provision of logistics services. For instance, to offer safe cargo handling services, a provider may be required to provide storage and warehousing services. As the exercise demonstrates, such services are often an integral part of the infrastructure and a major determining factor of the competitiveness of countries engaged in increasingly global production and supply networks. Other areas not directly related to market access and national treat- ment issues, such as measures on access on competitive, reasonable, and nondiscriminatory terms, are critical components in the provision of logis- tics services. Among these areas are regulatory matters, such as licensing requirements and procedures, technical standards, and anticompetitive practices, and other procedures and formalities, such as documentation requirements, customs clearance, customs inspection, and electronic pro- cessing. The exercise provides negotiators with options and the means to address these areas. Health services are a regulated sector with particular complexities because of sensitive issues such as domestic health policies. In this case, the exercise emphasizes limitations beyond the measures covered by the market access and national treatment disciplines for all modes of supply and the various categories of service suppliers. These issues are critical for the effective use of trade opportunities. The exercise addresses the defi- nition of health services, the classification of the activities included in the sector, professional accreditation and the recognition of professional titles, and related issues such as timing, transparency, due process, and the bur- densomeness of the measures. The aim of the exercise is to illustrate how the scope of market access and national treatment commitments may be affected by indirect regula- tions, as well as measures that directly affect health services. For example, domestic regulations on data processing or health insurance regulations may affect the provision of health services. The exercise also deals with other issues that may be relevant to ensure market access, such as mutual recognition and domestic procedures to recognize professional qualifica- tions and address them in the course of negotiations, and it covers ways Liberalization in the Trade in Services: A Negotiation Exercise 123 to generate opportunities for future work. Finally, the exercise provides options for reaching policy objectives that are relevant for this sector, such as wider coverage, universal access, and the role of the public sector in health services. The Trade Dimension of Logistics Services Progress in transportation and communication technologies has allowed the fragmentation of production into tasks that may be performed in dif- ferent locations. Logistics services are a critical infrastructure in the devel- opment of the trade in these tasks. The connection among tasks requires an efficient logistics service sector for the production of goods. Logistics services provide the links among tasks performed in different countries. The quality of logistics infrastructure may therefore influence the decisions of firms about the countries in which to open locations, the suppliers to rely on, and the consumer markets to enter (Arvis et al. 2007). Logistics is defined as "the process of planning, implementing, and con- trolling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements" (UNCTAD 2006a, 6). Logistics services were traditionally located inside firms. More recently, logistics services have been outsourced to specialized companies, known as third-party logistics or 3PLs, that offer integrated transportation, ware- housing, inventory control, order processing, customs brokerage, and other logistics services. The most frequently outsourced activities are domestic and international transportation, followed by warehousing, cus- toms clearance and brokerage, and forwarding. 3PL firms provide logistics services tailored to the exact needs and specifications of their clients. Although outsourcing has been particularly intense in industrialized countries, companies in developing countries are also beginning to out- source logistics services. According to some estimates, the logistics industry represents around 14 percent of global gross domestic product (GDP). Furthermore, logis- tics costs may represent some 10 to 17 percent of GDP in industrialized countries. The logistics industry has grown by around 10 percent per year since the early 1990s. The most rapid growth rates are in 3PL and fourth- party logistics services (companies that coordinate activities among 3PLs), followed by international container shipping and air freight (Memedovic et al. 2008). Government spending on logistics services has 124 Sáez and Lanoszka been estimated at US$1.4 trillion per year globally, averaging between 2.0 and 2.7 percent of GDP within countries (HP Enterprise Services 2009). Developing countries are generally ranked low in the logistics perform- ance index, and the high cost of logistics in these countries is a major bar- rier to trade. On average, logistics costs represent 18 percent of firm sales in Latin American countries, reaching 32 percent in Chile and in the countries of the Southern Common Market, or Mercosur (Argentina, Brazil, Paraguay, and Uruguay) (World Bank 2006). In the case of African countries, improvements in logistics services as measured by the logistics performance index provide the greatest benefits relative to any other components of the costs of trade (Portugal-Perez and Wilson 2008). These results have been confirmed for low-income countries in general (Hoekman and Nicita 2008). However, country income alone does not account for the wide variety of performance levels in logistics services across countries. Thus, for example, Bangladesh, China, the Democratic Republic of Congo, India, Madagascar, the Philippines, South Africa, Thailand, Uganda, and Vietnam are overperformers. This means their scores are higher than expected based solely on income level (figure 4.1). In contrast, Botswana, Croatia, Eritrea, Fiji, Gabon, Greece, Montenegro, Namibia, the Russian Federation, and Slovenia are underperformers, that is, their scores are lower than expected according to income level. These facts, together with a general dispersion in performance within income groups, suggests that policy has a strong influence on logistics sector performance (Arvis et al. 2010). Figure 4.1 Overperformers and Underperformers: Gross National Income per Capita and the Logistics Performance Index 4.5 4.0 3.5 LPI score 3.0 2.5 2.0 1.5 4 5 6 7 8 9 10 11 12 log of gross national income per capita (US$) Africa other Source: Arvis et al. 2010. Note: LPI = logistics performance index. Liberalization in the Trade in Services: A Negotiation Exercise 125 Logistics Service Regulations Unlike financial, distribution, communication, or professional services, logistics services represent a bundle of service industries. In contrast to these other services, logistics services are thus subject to regulations that are aimed at different service activities. Logistics service providers must therefore deal with larger numbers of regulators who have diverse regu- latory objectives and cultures. Moreover, the regulation of logistics serv- ices on the basis of the components of the services means that an optimal regulatory regime is difficult to develop. The providers of financial, telecommunication, or professional services are subject to numerous, complex regulations and compliance require- ments. However, the regulations fall under the purview of a single regu- lator or, in the case of financial industries, a maximum of three regulators who have similar regulatory objectives and approaches. Moreover, although there are different regulatory structures and environments, these sectors, except for financial services, are usually subject to a single licens- ing requirement. In contrast, because the development and growth of logistics services have involved diverse service activities to adjust to the demands of clients, the providers of integrated logistics services may be subject to the regula- tory regimes of transportation (air, maritime, and land), customs, port, and airport authorities and, in some cases, also to requirements specific to providers of logistics services. They may also be subject to several sets of licensing requirements (de Souza et al. 2007). One may appreciate the complex structure of the logistics service sec- tor through a classification proposed during the WTO Doha Round negotiations (see also at table 4.2 later in the chapter). According to this classification, three sets of activities are integrated within the sector. The first set of activities is known as core freight logistics services, within which supply chain consulting services and transportation management services are included. These services are offered by the majority of logis- tics service firms and are often supplied with other logistics services or on a stand-alone basis. Supply chain consulting services deal in global net- work design and distribution strategies and the determination of trans- portation needs and appropriate warehouse locations. Supply chain consulting may also cover inventory forecasting and planning, product design strategies, information technology needs assessment, and vendor identification and management. Such specialized services are generally not offered as stand-alone services, but are usually tailored to client needs. Transportation management services deal in storage and warehousing, 126 Sáez and Lanoszka cargo handling, transport agency services, and customs brokerage (World Bank 2009). The second set of activities is known as related freight logistics serv- ices, within which the transportation services that are integral to the movement of goods throughout the supply chain are included. Most core logistics providers also engage in transportation services. Related freight logistics services may be supplied by firms that use their own equipment and transportation fleets or by firms that act as intermediaries between clients and transportation firms. Noncore freight logistics services represent the third set of activities. These services cover fleet maintenance and repair, packing services, com- puter and related services, and management consulting. They are inputs or value added services for the supply chain, but they do not necessarily generate revenue. Thus, the regular maintenance and repair of transport equipment ensure the integrity of transport fleets, although they are not necessarily offered as third-party services to client firms (USITC 2005). Also, while data and message transmission services and other telecommu- nication services are value added services that are necessary in tracking the movement of goods, they are often integrated with the core freight logistics or related freight logistics services (World Bank 2009). Restrictions on the Trade in Logistics Services If they become engaged in international operations, logistics service providers face four groups of constraints embedded in the domestic and international regulations that affect the services they offer. Some of the constraints are common to other service activities, but others are specific to logistics services. Table 4.1 provides concrete examples of the limita- tions faced by logistics service providers. One group of constraints is related to market access and discriminatory regulations (involving national treatment violations). Joint venture requirements for foreign investment, rules on the legal entities allowed to provide services, and limitations on foreign ownership affect certain logis- tics activities such as transportation services. Restrictions on the move- ment of persons and requirements to employ nationals in certain services also affect the provision of logistics services. These limitations narrow the modes of supply available to providers for the delivery of services. Another group of constraints is related to the access and use of infra- structure to provide logistics services. In broad terms, there are two types of logistics service providers: asset-based providers and non­asset-based providers. The former use their own equipment and transportation fleets, Table 4.1 Trade in Logistics Services: Examples of Restrictions Mode Market access National treatment Access and use Synchronicity Other Crossborder logistics Maritime: subject to Airlines are subject to Firms are not permitted to Border clearance proce- services, including cargo reservation, which domestic laws and own and operate ground dures, including cus- consumption abroad requires that a portion regulations that may transport equipment toms processing and of a country's impede their ability to In the European Union, inspection, are the international cargo be operate at foreign airports; shippers are unable to most frequently transported on national limited hours of operation provide uninterrupted reported impediments flag vessels at customs facilities; pre- crossborder rail transport to the foreign provision Road: regulatory impedi- ferred treatment for services between some of logistics services ments such as limita- domestic carriers; security- member countries Customs clearance and tions on fleet size, related rules because passenger trans- inspection are the most equipment usage, and No coordination between portation has priority over time-consuming pro- hours of operation customs and quarantine cargo transport, requiring cedures related to air departments; no auto- that firms find alternative and maritime cargo mated procedures for methods of conveying transport items cleared from quar- goods to customers Customs laws and antine; no postclearance Laws and regulations in regulations may be process for exports some countries require applied inconsistently No central processing airlines to use third-party at different ports in a facility for government providers for ground han- country agencies dling services or prevent airlines from offering such services to other airlines (continued) 127 128 Table 4.1 Trade in Logistics Services: Examples of Restrictions (continued) Mode Market access National treatment Access and use Synchronicity Other Commercial presence Brokerage: foreign Licensing requirement Ports: the ability of foreign maritime firms to gain adequate Broker responsible for providers cannot obtain for brokers; logistics access to government-owned port facilities or to provide shipment contents brokerage licenses; citi- firms providing multi- their own or third-party port-related services is also sub- Brokerage companies zenship requirements ple services cannot act ject to domestic regulation; in many countries, ports are may not finance for service providers as customs brokers; owned and operated by a government agency, such as a services on behalf of Cargo reservation: all maritime and airports port authority; in some cases, the agency will permit pri- customers modes of transportation each require separate vate sector firms to provide maritime auxiliary services, Cabotage: requirement brokerage licenses such as cargo handling, storage and warehousing, and to use local road trans- Foreign providers are container station and depot services; in other cases, the portation companies not permitted to own agency will provide all such services itself or designate and operate ground one or more private sector firms to provide all port- transport fleets and related services equipment Movement of natural Foreign firms: required to Brokerage: individuals Lengthy or costly persons hire local residents in cannot perform services processes to obtain countries where they work visas operate Source: Author compilation based on USITC 2005. Liberalization in the Trade in Services: A Negotiation Exercise 129 along with value added logistics services, to provide cargo handling, stor- age and warehousing, customs brokerage, and supporting and auxiliary transport services. The latter act as intermediaries between clients and asset-based transportation firms, but they may also provide supply chain planning and management, transportation management, warehouse man- agement, and various other services involving information technologies (USITC 2005, de Souza et al. 2007). In both cases, logistics service providers require access to the available infrastructure for their opera- tions. This infrastructure is generally not owned by the service providers and is controlled by other entities. Thus, providers of logistics services require access to ports, airports, and roads that are generally owned and managed by public entities or are licensed to private firms on a nondis- criminatory basis (national treatment and most favored nation treatment). In addition, poor or inadequate road, airport, and port infrastructure may negatively affect the provision of logistics services although this is a con- sequence of government regulations. In some cases, conflicts of interest or lack of competition restrict the operations of logistics providers. Facility owners or administrators may also be providers of logistics services, or they may establish requirements for access and service provision by service providers. If this is so, the related terms and conditions on the access to and use of the infrastructure--which may involve preference for domestic suppliers over foreigners, authoriza- tion procedures, and applicable competition rules--become critical com- ponents of the effective supply of logistics services. The regulatory authority and operations should be separate so as to prevent conflicts of interest. Egypt offers an example of the types of problems that may arise. According to Ghoneim and Helmy (2007, 15), "the maritime transport sector and its related logistics services suffer from conflicts of interests as port authorities are the owners, regulators and performers, all at once (where they provide services such as pilotage, safety and tugboat, and are owners of companies that provide stevedoring activities)." In the Philippines, the network of public ports is controlled by the Philippines Ports Authority, which acts as both landlord and regulator. There are small private ports, but they are allowed to handle only their own cargos or, in some cases, third-party cargos, and they cannot compete with the public ports (de Souza et al. 2007). Likewise, in Uruguay, the port authority is engaged in both port admin- istration and the provision of certain services. 130 Sáez and Lanoszka A third group of constraints relates to government regulations. Logistics services are part of a chain that requires the integration and coordination of several services. Government regulations that disrupt this integrated supply chain such as regulations limiting the ability of foreign firms to provide brokerage services, the inefficiency of inbound clearance processes, and regulations allowing foreign investment in warehousing and distribu- tion but not in transportation are also a constraint. The interruption of the logistics chain by governmental regulations such as the requirement to use domestic operators for certain segments of the chain instead of allowing providers to offer a full range of services affects the integration and coordination that an efficient logistics chain requires. The fourth group of constraints faced by logistics service providers is related to the management of foreign trade. These constraints may be for- mal if they arise because of government regulations or informal if they arise because of administrative procedures or unwritten rules. According to the United States International Trade Commission (USITC 2004, 2005) and de Souza et al. (2007), customs procedures and inspections pose the most significant obstacle to 3PL providers. The most pressing constraints are restrictions on the weight and value of shipments and time-consuming documentation requirements, partly because of the lack of electronic data interchange systems. Also included under this category are nontransparent rules, the lack of coordination among the public enti- ties responsible for customs clearances, and burdensome inspection requirements. These constraints are at the core of the trade facilitation agenda that has been the focus of World Bank technical assistance initia- tives and research (McLinden et al. 2010). Logistics Services in the GATS Since the conclusion of the Uruguay Round, there have been significant changes in logistics services that have been driven by improvements in technology. These improvements have facilitated the interconnection among services that were not previously interacting directly. As a result, for example, the transportation industry has transformed services that used to be provided from port to port and from airport to airport to com- prehensive door-to-door services. This transformation has been eased by the growing shift to freight shipping in containers that was first introduced in the mid-1960s and that has enhanced safety and allowed service providers to combine transportation modes in the delivery of goods. The growing reliance on information and communication technologies has also Liberalization in the Trade in Services: A Negotiation Exercise 131 facilitated transactions among consumers and service providers, thus boosting logistics service development (UNCTAD 2006a). Multilateral rules on the trade in services are contained in the GATS. The GATS is one of the agreements administered by the WTO. Service negotiations are conducted on the basis of the services sectoral classifica- tion list, also known as the W/120, which was prepared by the Secretariat of the General Agreement on Tariffs and Trade (WTO 1991). This list aggregates the more elaborate United Nations Provisional Central Product Classification, known as the CPC or the CPC-provisional (UN 1991). Neither the CPC, nor the W/120 have a specific classification for logistics services. Indeed, both systems classify distinct services, such as transportation and distribution, in different sections though they are part of logistics services. A group of WTO members has developed a proposal for conducting WTO logistics service negotiations, particularly the scheduling of com- mitments (WTO 2004).1 The proposal has become a collective request list that defines three pillars for logistics service negotiations (table 4.2; see also elsewhere above). It is nonbinding and may be adopted or not by members to govern national service sectors. Thus, logistics services in the GATS are not part of an integrated framework. Moreover, relevant regu- latory issues such as those we identify elsewhere above are not addressed. Bilateral and regional trade agreements have not included the adoption of other, more detailed rules on logistics services. The first pillar in the collective request list includes core freight logistics services (see elsewhere above). These services are defined as services auxiliary to all modes of transportation (subsection H of the transportation service section in the W/120). Included in this pillar are cargo handling services, storage and warehousing services, transport agency services, and other auxiliary services, among others. The second pillar covers related freight logistics services (see elsewhere above). It includes all modes of transportation services (subsections A, B, C, and E of section 11 in the W/120, maritime, air, and land transporta- tion services), as well as other, related logistics services such as technical testing and analysis services and courier services. It contains highly polit- ically sensitive services that have also been dealt with separately in the current Doha negotiations such as international maritime services. (A group of WTO members has presented a collective request addressing these particular services.) The third pillar defines noncore freight logistics services (see else- where above). It includes computer and related services, packaging, and 132 Table 4.2 Freight Logistics Checklist Related freight Noncore freight Core freight logistics services logistics services logistics services 11. H. Services auxiliary to all (1) Freight transport services The availability and efficiency modes of transport 11. A. Maritime transport services of the following services are a. Cargo handling services Services identified under maritime transport negotiations important for the effective Container handling 11. B. Internal waterways transport services operation of freight logistics services (CPC 7411) Services identified under maritime transport negotiations supply chains; liberalization Other cargo handling 11. C. Air transport services in these areas would be (CPC 7419) b. Air freight transport desirable for a comprehen- b. Storage and warehous- CPC 732 (currently excluded from the GATS subject to the annex on air transport services) sive offer on logistics: com- ing services c. Rental of aircraft with crew puter and related services, CPC 742, includinga distri CPC 734 (currently excluded from the GATS subject to the annex on air transport services) packaging, and manage- bution center services 11. E. Rail transport services ment consulting and related and materials handling b. Freight transport (CPC 7112) services. and equipment services 11. F. Road transport services such as container sta- b. Freight transport (CPC 7123 tion and depot services c. Rental of commercial vehicles with operator (CPC 7124); without operator c. Transport agency (CPC 83102) services (2) Other, related logistics services CPC 748, includinga 1. F. e. Technical testing and analysis services (CPC 8676 customs agency serv- 2. B. Courier services (CPC 7512) ices and load scheduling d. Other auxiliary services 4. A. Commission agent services (CPC 621) (CPC 749), includinga 4. B. Wholesale trade services (CPC 622) through-chain logistics 4. C. Retailing services (CPC 631, 632, 6111, 6113, 6121), includinga inventory management services, reverse logistics, of goods, assembling, sorting and grading of goods, breaking bulk, redistribution and container leasing and delivery services rental services Other supporting services not covered by 11. H: CPC 743, 7113, 744 (excluding 7441), and 746 Accompanying additional commitments (article XVIII) 1. [The Member] will accept electronic versions of trade administration documents. 2. Service suppliers are entitled to supply listed freight logistics services (from services auxiliary to all modes of transport, freight transport, courier services, and distribution services) in combination, subject to measures necessary to prevent anticompetitive behavior. 3. [The Member] will ensure that various procedures and formalities, such as documentary requirements, customs clearance, customs inspection, and electronic processing, would not be unnecessarily burdensome. Sources: WTO 2004; "Logistics Services," Collective Requests Database, European Services Forum, http://www.esf.be/new/?page_id=279. a. These services are not explicitly listed in the official CPC explanatory note. They should be explicitly listed in schedules for clarity. 133 134 Sáez and Lanoszka management consulting and related services. The availability and effi- ciency of these services are considered essential for the effective provi- sion of logistics services. The proposal also defines additional commitments that WTO mem- bers might undertake and include in schedules, such as the acceptance of electronic documents and measures to prevent anticompetitive practices. Because there are no internationally agreed definitions or classifica- tions for logistics services, the classifications proposed are being used as a basis for conducting the logistics service negotiation exercise. Conclusion: Logistics Services Negotiations on logistics services exhibit special complexities that are not characteristic of other service sectors (table 4.3). First, logistics services consist of sectors ranging from general advisory services to the provision of transport services. These components are all part of a supply chain the proper functioning of which depends on each component. Second, the effective provision of logistics services involves more than the traditional issues of market access and national treatment limitations. It also requires the access to and use of infrastructure that is not necessarily owned by service providers. The terms and conditions for gaining access to and using this infrastructure should also be examined by negotiators. Third, some logistics activities are affected by border management regulations, includ- ing customs procedures, that are not related to the direct regulations of these services. This means that negotiation teams should consider the par- ticipation of customs and port management experts to ensure that regu- lations do not nullify or impair the provision of these services. The Trade Dimension of Health Services Countries are competing to become key exporters of health services.2 In particular, the growing phenomenon of health tourism appeals to many developing countries because local clinics providing services for a foreign clientele are flourishing. An increasing number of countries, from Costa Rica to India, South Africa, and Thailand, are offering attractive holiday packages that include surgery, recuperation, and rejuvenation programs. On the demand side, the United States remains the largest consumer of health services worldwide. Deloitte Consulting has estimated that 750,000 Americans went abroad for health care in 2007, and, with a pro- jected annual growth rate of 100 percent from 2007 to 2010, the number is expected to reach 6 million outpatients in 2010 (Deloitte 2008). On Table 4.3 Logistics Services: Issues in the Development of Negotiating Positions Horizontal measures 1. Do any measures provide for direct or indirect discrimination against foreign providers through taxation, foreign equity limitations, or land ownership restrictions? 2. What type of government support is offered to providers of logistics services? 3. Do domestic and foreign providers receive state support? Measures affecting cross- 1. May nonresidents supply logistics services across the borders? border supply (Mode 1) 2. Are there specific logistics services that are restricted in crossborder supply, including because they are considered technically unfeasible? 3. Are there any legal restrictions on the electronic submission of logistics documents? 4. Where and how clearly are any restrictions spelled out? 5. What are the policy reasons behind the restrictions? 6. Are there less trade restrictive means of achieving the same objectives? 7. Are any measures in place to support the enhanced use of information and communication technology to allow improved crossborder supply? Measures affecting 1. Are foreign suppliers of services required to establish through particular legal procedures? If so, which ones? What is the commercial presence prescribed legal procedure for joint undertakings? (Mode 3) 2. Are there any nationality requirements (for example, with respect to boards of directors)? 3. Are there any prior residency requirements? 4. Are there any foreign equity limitations? 5. Are there any restrictions on the movement of professional, management, and technical personnel? 6. Are there any requirements for the transfer of technology, expertise, management skills? 7. Are there restrictions on the use of the names of international foreign firms? 8. Are established foreign firms subject to specific remittance and foreign exchange restrictions or specific performance requirements, including local content and manufacturing requirements? 9. Where and how clearly are any restrictions spelled out? 10. What are the policy reasons behind the restrictions? 11. Are there less trade restrictive means of achieving the same objectives? 135 (continued) 136 Table 4.3 Logistics Services: Issues in the Development of Negotiating Positions (continued) Measures affecting the 1. Are there limitations on the number of persons that a logistics firm may transfer as intracorporate transferees? movement of natural 2. Are there limitations on the number of persons delinked from Mode 3, such as transport laborers, drivers, or freight handlers? persons (Mode 4) 3. Are there specific (educational, qualification, licensing) requirements for providers of logistics services? 4. Are there prior experience or postqualification experience requirements attached to the granting of visas or work permits? 5. How are entry permits and work permits obtained? 6. Are there time limitations on the presence of foreign providers of services (for example, duration of stay)? 7. Is the entry of foreign providers of services subject to economic needs tests? Measures relating 1. Is there an adequate legal framework that is supportive of trade in logistics services and that recognizes the legal effects to domestic regulations and validity of electronic data messages and transactions? 2. Do provisions in domestic law protect service providers from corruption, theft, and accidents? 3. Are there any qualification or licensing requirements or procedures or technical standards that affect (the trade in) logistics services? Issues relating to 1. Are technical, industry, and security standards being implemented? technical and security 2. Are these standards transparent and nondiscriminatory? standards, professional 3. Is there an independent body monitoring the implementation of these standards? qualifications, and so on 4. Is there widespread data security in the country? 5. What conditions must foreign providers of services fulfill to meet the requirements of the mutual recognition agreements to which the host country is a party? 6. Do foreign providers of services need to be locally established to be eligible for participation in mutual recognition agreements? Universal access 1. Which universal service regulations apply? 2. May the government impose obligations on service providers concerning the development of logistics service infrastructure? 3. What measures or mechanisms are in place for the achievement of public service obligations? 4. Are these measures objective and transparent? 5. Are foreign suppliers of services subject to different conditions relative to domestic suppliers in terms of public service obligations? Implementation of article IV; 1. Are there any policies or initiatives to improve the quality and competitiveness of logistics services in developing countries contributions to (including through encouragement for the transfer of technology, joint ventures, and so on)? competitive developing- 2. Do commitments exist or are commitments being offered in modes of export of interest to developing countries? country services and 3. Might one envisage the use of additional article XVIII commitments related to logistics as a tool for implementing article IV? exports Issues relating to the 1. Is there adequate information and communication technology to allow information to be exchanged, contracts to be adequacy of technology, entered into, and goods to be tracked during transit? equipment, and so on 2. Is there both public and private investment in the related technology and infrastructure? 3. Is there a sufficient number of trained personnel to deal with information and communication technology and container cargo efficiently? 4. Are there public policies aimed at improving the overall quality of the technology in the country? 5. Are there any restrictions on the temporary admission of the equipment needed to carry out services in a foreign market or on the maintenance of such equipment? Competition issues 1. Are there sectoral exemptions to competition law in the importing country that affect the conditions for competition in logistics service markets? 2. Is there competition among the domestic providers of logistics services? 3. Are contracts awarded in a transparent manner (for example, by using tender procedures)? 4. Are any of the logistics services offered by providers within the reserved domain of a state monopoly (for example, a postal monopoly)? 5. Do any licenses grant exclusive rights? 6. How does the competition law define and deal with instances of the abuse of monopoly power? Cartels? 7. Is there both public and private participation in ports? 8. Is the ownership of certain transport facilities reserved to the public sector? Preferential liberalization 1. Are there any preferential agreements, including in the regional context, affecting the supply of any logistics services? measures, most favored 2. Do these preferential arrangements apply to the movement of natural persons? nation obligation 3. Do any preferential access measures favor developing countries? Source: Author adaptation for logistics services based on UNCTAD (2006b), annex. 137 138 Sáez and Lanoszka the supply side, in 2008, more than 400,000 non­United States resi- dents sought care in the United States and spent almost US$5 billion for health services; there were 300,000 in Malaysia, 410,000 in Singapore, 450,000 in India, and 1.2 million in Thailand (Deloitte 2008). The motives for the crossborder movement of patients vary considerably, however, and not all countries are competing in the same market segments. There is thus a case for specialization on the basis of resources and trade opportunities. Medical tourism has received significant media attention, but the trade in health services is not limited to the crossborder movement of patients, which represents only one of the four possible modes of service delivery identified by the GATS (Mode 2). The other modes are the temporary movement of health professionals to deliver services across borders (Mode 4), for example, the crossborder movement of doctors and nurses; foreign establishment (Mode 3), for example, the opening of a branch abroad by a clinic; and the crossborder provision of health services through technological means (Mode 1), for example, telemedicine. Other services and goods are also traded at the margin of health services; it is a common characteristic of many services that they enable trade in other sectors. Other examples of the modes are indicated in table 4.4. The trade in health services has potentially significant effects on the availability of these services, the quality of health systems, and the health of populations in exporting and importing countries. The effects of the trade in health services vary considerably from one mode of delivery to another, and imports often appear more important than exports in improving a domestic health system. An excessive enthusiasm for med- ical tourism that is not backed by serious business plans or coherent gov- ernment policies may result in low returns on investment, lead to frustrated expectations, and prejudice the local supply of health services. Not all countries have a comparative advantage in the health service trade. While a carefully designed trade strategy in the health sector may have significant and positive spillover effects on the domestic supply of and access to health services (in addition to the positive impacts on global trade), a poorly designed strategy may divert already scarce resources from people in need in developing countries. Health is not merely a commodity, and health care is not merely a service: they are public goods. The trade in health services may contribute directly to reaching or missing--if the negative effects prevail--the health-related Millennium Development Goals.3 Trade objectives in the health sector should be compatible with other legitimate social objectives (for example, universal access). Table 4.4 The Modes of Trade in the Health Sector Mode Health services Ancillary services Associated goods Mode 1, crossborder Telemedicine, including diagnostics, radiology Remote medical education and training Health care equipment supply Medical transcription, back-office services Drugs Medical research tools and databases Medical waste Medical insurance Prosthesis Mode 2, consumption Medical tourism, that is, voluntary travel to All activities associated with health tourism abroad receive medical treatment abroad (transport, hotel, restaurant, paramedical, local Medically assisted living in residences for retirees purchases, and so on) Expatriates seeking care in countries of residence Local medical education and training among Emergency cases (for example, accidents abroad) foreign nationals Mode 3, commercial Foreign participation or ownership of hospitals, Foreign-sponsored education or training centers presence clinics, or medical facilities (for example, capital Foreign-sponsored medical research facilities investments, technology tie-ins, collaborative ventures) Mode 4, presence of Movement of doctors and health personnel for Movement of doctors and health personnel for natural persons the purpose of commercial medical practice other purposes (for example, education or training) Source: World Bank staff. 139 140 Sáez and Lanoszka Health is also a highly regulated profession, and this is so for legiti- mate purposes: even more than other professional services, medicine is characterized by the asymmetry of information between service pro- viders (doctors trained in the practice of medicine) and consumers (the patients). The regulation of the health sector is necessary to protect patients against malpractice. Therefore, the promotion of trade in the health sector is not focused on deregulation, but on more effective reg- ulation and, sometimes, on more regulation, for example, to adopt higher- quality standards in hospitals and clinics. Similarly, the promotion of trade is not focused on challenging the public health sector, which often plays a crucial role in the supply of health services and medical educa- tion, but on designing efficient services within a more competitive envi- ronment. Experience shows that public involvement is often necessary for the success of export promotion strategies in the health sector. Nonetheless, private investment, including foreign investment, remains a crucial factor in success, particularly if public resources are lacking to maintain an efficient health system. The sustainability of public health insurance schemes, the aging of populations, and related supply bottlenecks in health systems are among the drivers of frustration and outbound medical tourism in the North. Most developing countries face far more crucial health issues, such as critically low availability of medical services and poor quality in infra- structure and services, that, combined with other factors, result in poor public health and higher mortality rates. In all these countries, the trade in health services should be considered not only as a source of income in the balance of payments, but primarily as a means to remedy shortages and improve domestic health systems. The main challenge is therefore to find adequate accompanying policies that are able to maximize the pos- itive domestic spillovers and minimize the negative domestic spillovers of the trade in health services. The focus of the media and of many expert studies has been on North- South trade (for example, the movement of patients) or South-North trade (for example, the movement of doctors and nurses). The potential of South-South trade has often been ignored or neglected, in sharp contrast with the reality in trade. In Tunisia, for example, Libyans represent more than 80 percent of the foreign medical patients; similarly, more than 80 per- cent of the Omani patients treated abroad have been treated in India. There is justification for greater cooperation in the South. This may involve the creation of regional health centers of excellence (for medical education or treatment) to share the cost of medical education and infrastructure and reach a critical size to offset the cost of investment in technology. Liberalization in the Trade in Services: A Negotiation Exercise 141 When Should Health Services Be Liberalized under the GATS? The GATS is silent on whether and to what extent the financing and delivery of health services should be privatized in a country.4 The GATS only deals with the treatment of foreigners, not nationals, and the GATS is silent on national debates on allowing the private sector to play a role in the health care system. Once the decision to privatize has been made, the GATS becomes use- ful. It may then assist in addressing the desire to increase the efficiency of national private sector providers by exposing them to competition, the use of foreign suppliers to meet key shortages in the short to medium term, the desire to gain access to new technologies or skills that may not be avail- able through national suppliers, and the desire to increase the facilities and services available to health care consumers despite the lack of capacity among domestic suppliers. Equal consideration must also be given to determining how to ensure the quality of foreign providers and the impact of foreign suppliers on local suppliers and on the local health care system. How Do Commitments Made under the GATS Impact a Country's Health Policy? Liberalizing commitments made under the GATS apply to profit-oriented health services, and they therefore concern private providers. The GATS excludes services provided through the exercise of governmental author- ity as long as such services are not provided on a commercial basis or in competition with other services. Is the Main Focus the Commitments on Market Access and National Treatment? The commitments on market access and national treatment are not always sufficient to allow foreign providers of services to supply a market. Indeed, if the country that imports the service does not recognize the qualifications of foreign providers, the value of any market access that has been granted is neutralized. The recognition of qualifications is a crucial element in the provision of health services. This is one area in which the government must protect public health and information asymmetries by establishing the qualifications required for the provision of services. The nursing and medical professions are particularly affected by the criteria applied in the recognition of qualifications. Article VII of the GATS pro- vides that members may enter into mutual recognition agreements enabling them to certify the education or experience obtained, the requirements met, or the licenses or other documents issued in one or several other countries (Blouin, Drager, and Smith 2006). 142 Sáez and Lanoszka Additional Benefits Enhancing the international trade in health services may have positive impacts in terms of the availability of capital for infrastructure, new knowledge, and new technology. To this extent, governments can intro- duce measures to ensure that these additional resources are harnessed to benefit national health systems. Examples of such measures include the following (Blouin, Drager, and Smith 2006): · Mode 1, crossborder supply: National governments may adopt interna- tional cooperative agreements to facilitate telemedicine and informa- tion sharing on the health services offered through the Internet. · Mode 2, consumption abroad: Policy makers may consider various measures to ensure that the additional incomes from foreign patients are harnessed to benefit the national health system more generally. For instance, the government may restrict the provision of health services to foreigners to private clinics, tax the profits of these clin- ics, and earmark the revenue for the public health system. If services are provided to foreign patients by public hospitals, administrative mechanisms may be put in place to ensure that the additional rev- enue generated from the treatment of foreign patients subsidizes the provision of services to other patients (which is often the case in education). · Mode 3, commercial presence: To take advantage of new services offered by foreign providers and make these services available to all income groups, governments may target individual patients and pro- vide subsidies or vouchers for types of treatments that are not available in the public system, but that are available in private foreign-owned establishments. The additional resources generated by foreign investors may be harnessed to subsidize the public health system by taxing the profits of foreign providers. · Mode 4, presence of natural persons: In addition to the improvement of skills, one of the key benefits for developing countries of health service exports through Mode 4 is the potential for remittances. Ways should be sought to harness the private flows of remittances for the development of the health system. Health Services: Issues to Consider in Developing Negotiating Positions What regulatory issues should be considered? Are any GATS disciplines related to local regulatory methods (Blouin, Drager, and Smith 2006)? Liberalization in the Trade in Services: A Negotiation Exercise 143 Foreign suppliers only gain local access to provide services that are per- mitted in a country. Thus, for example, a commitment on Mode 3 market access for foreign clinics does not enable these clinics to provide services that are forbidden by law (table 4.5). Commitments do not interfere with the ability of WTO members to regulate health services. Foreign entrants to the market remain subject to the national regulatory framework. GATS commitments also allow a country to impose stricter regulations or special conditions on foreign suppliers provided a national treatment limitation is scheduled. Where no commitments are made for a sector, only the general obliga- tions apply (for example, most favored nation and transparency). Where commitments are made, additional procedural obligations apply (related to transparency, the administration of measures, decisions regarding authorizations to supply a service, and recognition). Regulatory measures on qualification and licensing requirements and procedures and on technical standards that are nondiscriminatory and that are not market access restrictions may be subject to disciplines developed under article VI.4 of the GATS, which concerns domestic regulation. WTO members may also make commitments to apply good regulatory practices either for a particular sector or across all sectors (for example, providing all national and foreign suppliers with the opportunity to com- ment on new regulations before they are introduced). WTO members are free to recognize the qualifications of some mem- bers and not others. However, they must notify any recognition agree- ments they are negotiating and give other interested WTO members the opportunity to prove that they meet the same standards. If a commit- ment to provide access to health service professionals has been made, adequate procedures must be available to verify the competence of these professionals. Conclusions: Health Services Negotiations on health services involve complexities that are similar to the complexities involved in negotiations on other service activities with a significant impact on social development, such as education and social security. First, in liberalizing health services, governments must ensure that the level of the access to the services is improved or, at least, main- tained. This requires that government policies not be negatively affected by greater liberalization. Second, liberalization in this sector means that important decisions must be adopted by governments on the role of the public and private sectors as regulators and service providers. Third, 144 Table 4.5 Health Service Trade: Issues to Consider in Developing Negotiating Positions Horizontal measures 1. Do any measures directly or indirectly discriminate against foreign providers or impose market access limitations on for- eign providers? 2. What is the nature of the government involvement in the sector: regulator, provider, or a combination? 3. Do domestic and foreign providers receive state support? Measures affecting cross- 1. Can nonresidents supply health services from across the borders? border supply (Mode 1) 2. Are specific activities restricted (including because they are considered technically unfeasible) in terms of crossborder supply? 3. Are there legal restrictions on the electronic submission of information documentation (for example, for reasons of data protection or other reasons)? 4. Where and how clearly are restrictions spelled out? 5. What are the policy reasons behind the restrictions? 6. Are there less trade restrictive means of achieving the same objectives? 7. Do any measures support enhanced applications of information and communication technology so as to allow improved crossborder supply? Measures affecting 1. Are foreign suppliers of services allowed to establish a commercial presence? Are they required to establish through commercial presence particular legal procedures? If so, which ones? What is the prescribed legal procedure for a joint undertaking? (Mode 3) 2. Are there any nationality requirements regarding management, the number of workers, or boards of directors? 3. Are there any prior residency requirements? 4. Are there any foreign equity limitations? 5. Are there any restrictions on the movement of professional, management, or technical personnel? 6. Are there any requirements for the transfer of technology, expertise, management skills? 7. Are there restrictions on the use of the names of international foreign firms? 8. Are established foreign firms subject to specific performance requirements, including local content and manufacturing requirements, and remittance and foreign exchange restrictions? 9. Where and how clearly are restrictions spelled out? 10. What are the policy reasons behind the restrictions? 11. Are there less trade restrictive means of achieving the same objectives? Measures affecting the 1. Are there limitations on the number of persons that may be transferred as intracorporate transferees? movement of natural 2. Are there limitations on the number of persons delinked from Mode 3, such as doctors or nurses? persons (Mode 4) 3. Are there specific requirements for providers (educational, qualification, licensing)? 4. Are there prior experience or postqualification experience requirements attached to the issuance of visas or work permits? 5. How are entry permits and work permits obtained? 6. Are there time limitations on the presence of foreign providers of services (for example, duration of stay)? 7. Do measures limit the participation of foreign providers in the public sector? 8. Is the entry of foreign providers of services subject to economic needs tests? Measures relating to 1. Is there an adequate legal framework supportive of the trade in health services? domestic regulations 2. Are there provisions in domestic law that protect service providers from corruption, theft, and accidents? 3. Are there any qualification or licensing requirements or procedures or technical standards that affect (the trade in) health services? Issues relating to techni- 1. Are technical, industry, and security standards implemented? cal and security 2. Are these standards transparent and nondiscriminatory? standards, professional 3. Is there an independent body monitoring the implementation of these standards? qualifications, and so on 4. Is there widespread data security in the country? 5. What conditions must foreign providers of services fulfill to meet the requirements of existing mutual recognition agree- ments to which the host country is a party? 6. Must foreign providers of services be locally established to participate in mutual recognition agreements? (continued) 145 146 Table 4.5 Health Service Trade: Issues to Consider in Developing Negotiating Positions (continued) Universal access 1. What universal service regulations apply? 2. May the government impose obligations relating to universal access on service providers? 3. What measures or mechanisms are in place for the achievement of public service obligations? 4. Are these measures objective and transparent? 5. Are foreign suppliers of services subject to different conditions relative to domestic suppliers in relation to public service obligations? Issues relating to ade- 1. Are there any restrictions on the temporary admission of the equipment necessary to provide services? quate technology, equipment, and so on Competition issues 1. Are there sectoral exemptions to competition law that affect the conditions of competition? What is the role of profes- sional bodies in determining the conditions of competition? 2. Are there limitations on competition between domestic service providers and foreigners? 3. Do any licenses grant exclusive rights? Preferential liberalization 1. Do any preferential agreements, including in the regional context, affect the supply of any health services? measures, most favored 2. Do these preferential arrangements apply to the movement of natural persons? nation obligation 3. Do any preferential access measures favor developing countries? Source: Author adaptation for logistics services based on UNCTAD (2006b), annex. Liberalization in the Trade in Services: A Negotiation Exercise 147 different options may be pursued by governments according to policy objectives. For instance, a government may open the provision of health services to foreign doctors and nurses and maintain the provision of these services as public services. A government may also wish to open health serv- ices to private investors, while maintaining nondiscriminatory universal access requirements to ensure broad policy objectives. A government may encourage the provision of health services to foreign consumers (patients) as a means to create profitable activities for domestic doctors. Fourth, serv- ice agreement architectures provide for a range of options in addressing lib- eralization in health services and ensuring consistency with the social objectives of governments. Trade in Services: A Negotiation Exercise Learning Objectives After this simulation exercise has been completed, the participants are expected to understand the complexities of the liberalization of logistics and health services and to have enhanced their technical skills with respect to negotiations within the framework of the WTO, the GATS, and other, regional agreements.5 The simulation is intended to be an engaging educational experience. The final outcome is anticipated to be a win-win scenario. Given the number of ways the simulation may unfold, the idea is not to force par- ticipants to reach a particular best possible solution, but rather to provide them with an opportunity to perfect their negotiating and technical skills in the area of service liberalization. The Length of the Simulation and the Number of Participants The simulation is designed to run from three to five days, depending on the level of expertise and the declared needs of the participants. The optimum number of participants is 24 (that is, 8 for each of the three countries involved: 4 representing government officials and 4 representing interested private stakeholders). However, the simulation is designed to be sufficiently flexible to accommodate between 18 and 30 participants successfully. This comprehensive exercise is intended to be used as part of a broader course on the trade in services. It is designed to accommodate participants with considerable knowledge of negotiations and services, as well as par- ticipants who are in the process of learning or sharpening skills. Participants who wish to develop their knowledge or practice their negotiating skills will find this exercise especially useful. The exercise 148 Sáez and Lanoszka focuses on two sectors, logistics and health, to highlight issues that relate to particular sectors, but remains grounded within the general framework of service negotiations. It is recommended that the exercise be fully presented and explained at the beginning of a course on the trade in services so that participants may become familiar with it while they are learning the required knowl- edge and may apply their new knowledge directly to the sectors in the exercise. Discussions and clarifications must be pursued as the course progresses. The last part of the course should concentrate on the exercise. This calls for intense interaction among participants, instructors, and their colleagues. Instructions for the First Part of the Exercise The aim of the first part of the exercise. Each delegation or country team, led by the participants representing government officials, should prepare a negotiating position for the plurilateral stage of the negotia- tions on the liberalization of the trade in services. The negotiating posi- tion will focus on sectors related to health services and logistics services, but, in their negotiation strategies, participants may also wish to use other sectors or include other issues in the course of the negoti- ations. The framework of the negotiations is the GATS or GATS-type agreements (see chapter 3 for a discussion on the differences between the GATS model and other models of service liberalization). There are three countries involved in the negotiations, A, B, and C.6 Each of the three country delegations is expected to prepare its position as a team. The teams consist of government officials working in consultation with interested private stakeholders. Concluding the first part of the exercise. To conclude the first part of the exercise, each negotiating country team should prepare the following documents: 1. A negotiating position paper drafted in consultation with the private stakeholders. The document is to be given to the instructor. The doc- ument should include the following: · The concerns of each country with regard to the negotiations · The country goals in the negotiations · A list of the offensive interest(s) of the country; these are deter- mined through consultations Liberalization in the Trade in Services: A Negotiation Exercise 149 · A list of the defensive interest(s) of the country, including an expla- nation of each point · An ideal schedule, which represents the most advantageous negoti- ating outcome for the participating country · A paper describing and specifying the general regulatory reform that may be necessary as a result of the negotiations; the paper should identify the role of trade policy in the achievement of the objectives of reform This document will allow the instructor(s) to assess the performance of the team according to initial objectives and final results. 2. A proposal representing the country's initial offer. The proposal must take the form of a revised schedule of the country's specific commit- ments.7 It will be forwarded to every government delegation in the plurilateral group. 3. Two individual requests directed at every trading partner in the pluri- lateral group. The preparation of the documents requires the following: · Each country team should nominate a chairperson to represent the government. · The chairperson becomes the team's chief negotiator. · Allow all the government and private stakeholders sufficient time to read the confidential set of priorities prepared by the leading trade and development experts in each country. · Carefully read the descriptions of the three countries. · Carefully analyze all three schedules of specific commitments as a starting step in negotiations. · Start to evaluate your country's priorities with respect to services. · Each country team should elaborate an overall reform strategy in the context of service liberalization. · Rank issues in terms of importance. · Assess the relevant domestic conditions and priorities and formulate a negotiating position in consultation with relevant stakeholders. · Identify starting offers for each sector in the scenario. · As a team, formulate the country's negotiating position. · As a team, prepare a proposal and distribute it to the other negotiat- ing teams in the group. · As a team, prepare an individual request for each of the other trading partners in the group. 150 Sáez and Lanoszka Descriptions of the Three Negotiating Countries This exercise includes the countries A, B, and C. These three countries are members of a multilateral trade organization, which is an intergov- ernmental organization. They are about to engage in negotiations aimed at advancing the liberalization of the international trade in serv- ices. For the purpose of the exercise, this plurilateral stage of negotia- tions will focus on sectors related to health services and logistics services. All countries are fictitious and are not intended to resemble real countries. Each country is represented by a delegation consisting of government officials. In addition, several representatives of relevant stakeholders are participating to monitor the negotiations. These stake- holders actively engage in consultations with the government officials to ensure the transparency of the decision-making process and the availability of well-informed assessments of the proposals and offers presented at the negotiating table. Country A. Population: 50 million GDP per capita in 2007: US$38,000 Annual average economic growth in 2004­07: 3 percent Country A's negotiating team includes government officials, as follows: · Representative(s) of the Ministry of Trade · Representative(s) of the Ministry of Transport · Representative(s) of the Ministry of Health and Welfare · Representative(s) of the Ministry of Finance Stakeholders observing the negotiation process include the following: · Representative(s) of Country A's Alliance of City Councils · Representative(s) of the Service Sector Coalition · Representative(s) of the Association of Professionals Relevant economic data--Country A's per capita GDP, at US$38,000, is among the world's highest. Country A is a large developed country with access to the sea. Its trade policy has traditionally been outward looking, which helps explain Country A's good economic performance over the last decade. However, there are significant foreign investment restrictions in many areas. Country A is also known for providing substantial subsidies to Liberalization in the Trade in Services: A Negotiation Exercise 151 the country's service industry, especially the health and transport sectors. These subsidies have caused much inefficiency. Recently, the government has been faced with growing complaints about the deteriorating standards in health care. Country A has restrictive laws on the employment of foreign workers, including professionals. As a rule, no foreign professional accreditations are recognized, except the accreditations of a limited number of developed countries. Essentially, all professions are regulated, and citizenship and residency requirements apply in most cases. Furthermore, more restrictive immigration regulations have recently been introduced to address grow- ing security concerns. Customs has been given greater discretionary power to conduct additional security checks at the borders. This has cre- ated uncertainty over the amount of time required for trucks to cross Country A's borders and for cargo processing at the ports of entry. While the balance of trade in goods showed a surplus between 2002 and the first half of 2007, the balance in services was in deficit. Country A continues to be a net importer of services. Trade and foreign investment are particularly important for Country A, which is the world's eighth largest merchandise trader. The trade in goods and services represented the equivalent of close to 70 percent of Country A's GDP in 2007. However, productivity growth has been rela- tively slow. This has often been compounded by delays in filling vacan- cies in professional positions. Productivity might be increased by, among other initiatives, removing the restrictions on foreign investment, mini- mizing subsidies that distort competition, and reforming regulations that impose numerous licensing requirements. Health service sector--The government of Country A is the main source of funding for health care because it plays a key role in the insurance market. Every citizen of Country A is entitled to insurance and to receive compre- hensive health services under the Country A Health Act. Since 2005, the list of services included in the health care insurance plan covered by the government has been reviewed annually. Faced with growing health care costs, the government has removed some nonessential procedures from the list of publicly funded health services (deinsurance). The private sector plays a significant role. Private health insurance pro- vides additional coverage for health services that are not insured through the public plan. The citizens of Country A also have the option of buying enhanced private plans that provide coverage for nonessential services normally not covered by the government plan (medicines, massages, 152 Sáez and Lanoszka physiotherapy, and dental services). Furthermore, the government does not deliver publicly insured health services. The delivery of health care in Country A is largely the responsibility of the private sector: most medical practitioners are in private practice, and hospitals are generally private nonprofit organizations. However, the provision of and remuneration for physician and hospital services are subject to government regulation. Laboratory and diagnostic services paid for through public health insur- ance are delivered by private for-profit facilities. Most dental services are covered by private insurance plans. The gov- ernment only provides limited dental care for low-income individuals on social assistance. In recent years, this needs-based dental program has been facing criticism. Because of the huge demand, the wait for treatment in government-run dental clinics can be more than a year. There also con- cerns about the condition of equipment. There are several reasons for these problems, including chronic underfunding and a shortage in dental health professionals. The government has no additional resources to build and manage more dental clinics to meet the demand. As a result, there are only two publically run dental clinics in the capital (population 3 million), one of the largest cities in Country A. The same clinics are now being used to provide eye examinations and psychotherapy for the poor in cases of medical necessity. The wait for these services, which have recently been deinsured, is about 15 months. Over the last decade, hospitals have experienced shortages in nursing and other health professionals. The population of the country is rapidly aging. Country A's birth rate has declined. It is estimated that, by the year 2030, approximately 20 percent of Country A's population--one person in five--will be over 65. This demographic transition is exerting pressure on the already overburdened health care system. The system is funded through revenues from the progressive tax structure. However, because of the aging population, the costs associated with health care have increased, and the public health care system is facing growing budgetary problems. Logistics services--In Country A in the past, logistics were an in-house activity in the manufacturing and distribution sectors. Businesses would respond to their logistics needs by designating staff and resources for the required activities. Increasingly, logistics services are emerging as a separate service sector in which specialized firms offer services on a contract basis. Businesses now rely more on the outsourcing of one or several logistics functions to 3PL service providers. 3PL firms specialize in integrated logistics services. They address the logistics needs of their clients by integrating transport, warehousing, Liberalization in the Trade in Services: A Negotiation Exercise 153 inventory control, order processing, customs brokerage, and other logis- tics activities in a comprehensive and seamless supply chain management system. They provide logistics services tailored to their clients. Their rapid growth is directly linked to the increasing trend of outsourcing supply chain management activities. Certain industries tend to have recourse to 3PL firms. For example, relative to the automotive, chemical, and retail industries, the high-technology, electronics, and consumer products industries tend to make greater use of 3PL services. Fourth-party logistics services take the 3PL concept one step further by focusing on the integration of all companies in the supply chain. This guarantees that the planning, management, and monitoring of all logistics procedures are carried out by a single service provider with a long-term strategic objective. A fourth-party logistics service acts as a super manager who supervises all aspects of the supply chain of a man- ufacturer or distributor and is the sole point of contact between that company and the array of logistics and information service providers (UNCTAD 2006b). Doing business in Country A is far from perfect. Country A's logistics services are still constrained by regulatory and institutional challenges. Logistics services must deal with a cluster of complex measures that affect various aspects of the processes in which they are involved. Thus, for instance, regulations requiring approvals by several regulatory agencies are cumbersome; they should be streamlined. In Country A, all commer- cial truck drivers must be members of professional associations and face twice yearly driving tests. Foreign truck drivers are subject to numerous licensing regulations, and the process of obtaining a permit to drive a truck in Country A may take up to six months. There are also new immi- gration laws and random security checks at the borders. The processing of entry visas for professionals, executives, and authorized service providers is slow and should be accelerated. These few examples illustrate the need for a wide-ranging review of market access and national treatment barri- ers to trade, but also of regulatory and administrative constraints that keep the cost of doing business high and, hence, impede the production and delivery of many goods and services. The Country A Security and Customs Act--The articles of the Country A Security and Customs Act provide as follows: 1. The Ministry of Trade may designate customs officers for a specified purpose or, generally, for business relating to customs and immigration and may, at any time, amend, cancel, or reinstate any such designation. 154 Sáez and Lanoszka 2. The ministry may change the regulations relating to customs and immigration if required. Notice of 48 hours should be given and pub- lished on the Country A customs and immigration notice board. 3. Customs officers are to be given special discretionary powers to ensure the security of Country A's borders. 4. Any individual crossing Country A's borders must comply with the most recent regulations. All business people must be able to show all required forms and permits. Failure to present all required documen- tation may result in delays or refusal of entry. 5. To be a licensed customs broker or establish a brokerage firm in Country A, an individual must be a Country A citizen, or permanent resident, or a corporation. The corporation must be incorporated in Country A, and the majority of the directors must be Country A citizens or permanent residents. 6. The ministry may make regulations prescribing qualifications as to knowledge of the laws and procedures relating to imports and exports and any other qualifications that must be met by an applicant for a customs broker license. Country B. Population: 30 million GDP per capita in 2007: US$5,000 Annual average economic growth in 2004­07: 4 percent Country B's negotiating team includes government officials, as follows: · Representative(s) of the Ministry of Trade · Representative (s) of the Ministry of Transport · Representative(s) of the Ministry of Health and Welfare · Representative (s) of the Ministry of Finance Stakeholders observing the negotiation process include the following: · Representative(s) of the Country B Business Coalition · Representative(s) of the Association of Health Care Professionals · Representative(s) of the Country B Regulatory Transport Commission · Representative(s) of the Country B Development Association Relevant economic data--The Country B is a middle-income, landlocked, developing country that shares a border with Country A. Since 1998, the Liberalization in the Trade in Services: A Negotiation Exercise 155 country has been pursuing liberalizing reforms in an effort to reverse pre- vious inward-looking policies. During the last four years, Country B has achieved an average annual growth rate of 4 percent. However, macroeco- nomic imbalances have again precipitated economic stagnation. The economy has shown large budget deficits, the core of Country B's current economic difficulties. Between 2002 and 2006, fiscal deficits escalated sharply to 15 percent of GDP. Funded mainly by central bank borrowings, the deficits have severely strained public finances and the banking sector. Faced with the looming economic crisis, the government began imple- menting corrective measures in 2006 that caused the budget deficit to fall to 10 percent in 2007. In 1996, agricultural production represented 40 percent of GDP and employed over 50 percent of the population. However, in 2006, because of structural changes and the inability of the government to continue to provide agricultural subsidies, agricultural production fell to 25 percent of GDP. By 2007, less than 30 percent of the population was employed full time as farmers. Manufacturing and mining have traditionally accounted for about 20 percent of GDP, but, because of inefficient infrastructure and the high cost of production, many factories have closed, leading to an increase in the number of the unemployed. Overall, these traditional industries have not been creating a sufficient number of jobs. Meanwhile, the service sector is generally underdeveloped. The current government supports the continuation of economic reform. Foreign investors are reluctant, however, to establish businesses in Country B. The country puts severe restrictions on foreign investors, and the procedures followed by the Country B Land Commission in granting permits lack transparency. In addition, overly complicated pro- cedures, practices, and formalities related to the packaging, processing (including data processing), and transport of goods have deterred investors from establishing a presence in Country B. Consequently, the cost of doing business in Country B is high. The domestic service sector is inadequate, but foreign competition is not permitted. There are vast undeveloped areas in the mountainous regions of the country. Many streams flow through these areas, and some of them are known to be rich in minerals and salts. The rich flora includes an abundance of plants with soothing, healing, or medicinal qualities. In short, there is great potential for health tourism. The mountainous regions of the country would be attractive to tourists interested in taking holidays at spas close to warm streams and hot springs. The Country B is a large country with abundant natural resources and mineral-bearing waters. 156 Sáez and Lanoszka Health service sector--The government of the Country B is barely coping with the rising cost of health care. The government provides basic health care for all low-income citizens and provides health insurance automatically for all citizens. However, the treatment available through the insurance is basic and mostly covers only individuals under life-threatening circum- stances. Moreover, no regulations specifically define the nature of the essen- tial health services that are covered by the public insurance system. As a result, the government has been arbitrarily removing procedures from insur- ance coverage. Private insurance is also available, but there are only two major providers. Some hospitals are run by the government and employ physicians and nurses paid by the government. Private hospitals and clinics are allowed. No regulations specify the relationship between the govern- ment-run system and the private sector financing and delivery of health care. The health care sector is completely closed to foreign competition. The health sector suffers because of a poor reputation. The government- run hospitals and clinics consume up to 25 percent of the government health budget, but the standards are low. Private hospitals and clinics run notoriously huge budget deficits that allow them to qualify for government subsidies. The sustained subsidies going to the private sector mean that there are no incentives to make health care more efficient. It has recently been reported in the media that a significant share of health care costs are accounted for by administration, including the large health bureaucracy. Hospitals and clinics are poorly equipped, and public and private insur- ance schemes are poorly managed. Data management is poor. Thus, for example, the processing of claims takes months because so many forms must be submitted. Because the regulations on health insurance lack pre- cise definitions of the procedures and activities covered, bureaucrats are inconsistent in responding to claims, especially in cases involving multiple procedures. Because the burden of proof rests with the hospitals and clin- ics, the costs of submitting additional documentation and the time devoted to seeking reimbursements are excessive at every health care facility in the country. The health care history of patients is not readily available because there is no medical data processing and storage system. Individuals mov- ing from one area of the country to another are responsible for obtain- ing and transferring their medical files to their new doctors. The fee for this sort of service is prohibitive, and few people maintain their own medical files. Health professionals therefore often have only limited knowledge of the medical history of their patients. New diagnoses are Liberalization in the Trade in Services: A Negotiation Exercise 157 expensive and not regularly carried out. This leads to errors in treatment and waste in the use of resources. Logistics services--The Country B has the potential to be a competitive exporter of lumber, minerals, and some agricultural products. It could also become an attractive manufacturing base given its productive capac- ities. However, domestic and foreign companies operating in Country B are unable to bring goods to foreign markets at the lowest possible cost and under the conditions required by customers. Logistics services in Country B are virtually nonexistent. There are no logistics service sup- pliers in Country B, and the country has yet to liberalize the relevant service sectors, especially transport. The problem is caused by the limitations on market access and national treatment, including limits on foreign equity capital participation and limitations on establishment, for example, the requirement to form joint ventures with domestic suppliers. Moreover, there are also regulatory constraints, including cumbersome, discriminatory, nontransparent, and nonuniform customs procedures. Inadequate Internet and other digital and electronic infrastructure is aggravated by the shortage in profession- als skilled in digital technologies, resulting in poor data collection and storage and unnecessary administrative delays because of the inability to submit documentation electronically. Reliance only on traditional transport services is insufficient for meet- ing the needs of today's markets. More efficient and wide-ranging logis- tics services must be developed that are also proficient in the use of information and communication technologies. Multimodal transport operations involving a single service provider that assumes responsibility for the entire transport chain must be fostered. Thus, for example, business services are important in the develop- ment of modern logistics services. The following services may be espe- cially crucial: · Professional services (legal, accounting, bookkeeping) · Computer and related services · Research and development services · Rental and leasing services · Other business services, including advertising, market research and opinion polling, management consulting, technical testing and analysis, agricultural services, mining services, manufacturing services, printing 158 Sáez and Lanoszka and publishing, photography, packaging, convention services, transla- tion and interpretation, design, and data processing. The Country B Transportation Corporation Act--The articles of the Country B Transportation Corporation Act provide as follows: 1. The government of Country B shall control 60 percent of the common shares of the corporation. 2. The remaining 40 percent of the common shares may be traded on the Country B stock exchange. 3. The Transportation Corporation of Country B shall provide air, road, and rail services in Country B without any additional licensing and permit requirements. 4. The board of directors may annually issue a limited number of permits to private transport companies based on economic needs tests. 5. The Transportation Corporation of Country B shall own all railway stations servicing the rail lines used by the Corporation. 6. The Transportation Corporation of Country B shall own all airports in Country B. 7. All employees of the Transportation Corporation of Country B must be citizens of Country B. 8. The owners of firms that are contracted by the Transportation Corpora- tion of Country B for the purpose of improving operations (for example, providers of business services) must be citizens of Country B. Country C. Population: 120 million GDP per capita in 2007: US$18,000 Annual average economic growth in 2004­07: 5 percent Country C's negotiating team includes government officials, as follows: · Representative(s) of the Ministry of Trade · Representative (s) of the Ministry of Transport · Representative(s) of the Ministry of Health and Welfare · Representative (s) of the Ministry of Finance Stakeholders observing the negotiation process include the following: · Representative(s) of the Tourist Association of Country C · Representative(s) of the Bureau of Public Roads of Country C Liberalization in the Trade in Services: A Negotiation Exercise 159 · Representative(s) of the Bureau of Professional Accreditations · Representative(s) of the Country C Manufacturing Business Alliance Relevant economic data--Since it started the process of transformation from an interventionist to an open economy model two decades ago, Country C has become more outward oriented. The ongoing structural reforms, including liberalization of the trade and investment regimes, have contributed to stable economic expansion. Growth has averaged 5 percent annually, much of this attributable to exports. The trade in goods and services increased from 89 percent of GDP in 2004 to approx- imately 90 percent in 2007. Nonetheless, the maintenance of govern- ment ownership in transport services and of conflicting regulations on the professions and on overall investment has hindered competition and promoted high logistics costs and low labor productivity in many areas of the economy. Inward foreign direct investment declined from 1.5 percent of GDP in 2004 to 0.5 percent in 2007. This is considered low by the standards of developed countries. The decline and low level of inward foreign direct investment in relation to GDP can be attributed to the increasing cost of doing business in Country C, the country's often-baffling regulations, and the existing restrictions. Despite the introduction of a more open foreign investment regime, several sectors remain completely closed to foreign investors, and many are partially restricted. The service sector is charac- terized by low labor productivity and declining growth; this is because of insufficient competition as a result of unduly burdensome regulations, the predominance of state-owned enterprises, and low foreign presence. Customs procedures have not yet been streamlined and modernized. Foreign direct investment in Country C is subject to the Country C Investment Act. Health service sector--A two-tier public-private system, the health service sector in Country C is inefficient, encumbered with conflicting regulations, and overburdened. Public health insurance is needs based. Private health insurance is supplied through one provider. The public is critical of the sec- tor as are surgeons, emergency response experts, and others especially frus- trated because of the poor quality of trauma services in Country C. For instance, in the capital of Country C, there are only 35 public ambulances with emergency life-saving equipment available to serve a population of 12 million. The health care system is inequitable, despite the country's recent economic growth. Still, more and more foreigners have been coming 160 Sáez and Lanoszka to Country C for heart surgeries or hip replacements in private hospitals that offer single rooms and butler services. Meanwhile, public hospitals are sometimes so overcrowded that patients are obliged to share beds. Many are forced to ask relatives for money so that they may transfer to private hospitals with computed tomography scanners or dialysis machines. Country C spends 1 percent of GDP on public health, far less than other countries at similar levels of per capita income. While the cost of private clinics and hospitals is out of the reach of most citizens of Country C, the public sector system suffers from inadequate funding. The public sector is divided into A1 and A2 providers of health serv- ices. A1 hospitals and clinics serve only government officials and members of the military. A2 hospitals and clinics serve low-income groups. Over the years, this division has been heavily criticized. It is well documented that the health care standards in the A1 facilities are much higher because A1 providers receive most of the government health care funding. Country C has well-developed business services especially in the field of data storage. The technology sector is, in fact, a success story in Country C. This is why policy makers should promote the export of serv- ices, such as data entry of health records and of health insurance claims, as a way to generate income and employment in the country. (Under the GATS, health data processing and storage services are not classified under health services, but under computer-related services.) Logistics services--Services that contribute to enhancing the competitive- ness of production processes and delivery--the supply chain--are known as logistics services. Logistics services are crucial for achieving and main- taining a higher level of development. Businesses operating in Country C complain about logistics and trans- port delays. There are many challenges that the government of Country C must address, in consultation with private stakeholders. The complexities of logistics services mean that the government must examine its interests in market access and the regulatory, infrastructural, and institutional con- straints in the country. An example of an area in which immediate improvements may be made is exports. Given that Country C moves most of its exports and receives its imports by sea, the efficient processing of cargos at the coun- try's four main harbors is critical. However, cargo containers are often lost or burglarized. Because of the administrative delays and poor communi- cations between truck drivers and harbor officials, cargo containers are routinely kept outside within the harbor area for up to two days before Liberalization in the Trade in Services: A Negotiation Exercise 161 drivers are able to haul them away. There is no secured storage or ware- house facilities. Even companies that hire security firms to guard their containers are unable to guarantee the contents from loss or theft. The Country C Investment Act--The articles of the Country C Investment Act provide as follows: 1. The Ministry of Investment shall carry out market analysis on domestic and international investment. The ministry shall have authority to deter- mine the scope of economic needs tests that relate to foreign investment initiatives and of work permits for foreign workers and professionals. The ministry's determination will be made in accordance with the following: (a) the effect of the investments on the level and nature of economic activity in Country C, including employment and the use of parts, com- ponents, and services produced in Country C, and (b) the scope of par- ticipation by citizens of Country C in the proposed investments. 2. The act applies to foreign investments through acquisitions, mergers, and takeovers, as well as new investments and portfolio investments. The minimum capital necessary for foreign investments is US$100,000 in the case of joint ventures and US$400,000 for projects wholly owned by foreigners. All investments by non-citizens of Country C exceeding US$500,000 are subject to an application process that must be reviewed by the ministry. An applicant shall receive a reply within 12 months of the submission of the application. 3. The act reserves certain business activities to citizens of Country C. These are the top management positions in businesses with more than 50 employees, all insurance agents, and supervisors on public con- struction projects. The Ministry of Investment may make exceptions to this rule based on economic needs tests. 4. The ministry may impose requirements or enforce any commitment or undertaking in connection with the location of production, the employment and training of workers, and the construction or expan- sion of individual facilities in Country C. 5. The ministry may designate immigration officers solely responsible for issuing special business visas and related permits. Country C has spe- cific visa requirements. Only top executives of foreign companies may obtain automatic three-month renewable visas. All other foreigners, including professionals, must apply for special visa permits issued by the Ministry of Investment or the Ministry of Trade. The application process should not exceed three months. 162 Sáez and Lanoszka Instructions for Conducting the Second Part of the Exercise The second part of the negotiation exercise covers the actual negotiations and the preparation of revised schedules and final reports. The aim of the second part of the exercise. The delegations representing Countries A, B, and C must negotiate with their trading partners to fulfill the priorities they have each identified. Concluding the second, final part of the exercise. To conclude the second part of the exercise, each of the three negotiating teams must prepare the following documents: 1. New, revised, and improved schedules of specific commitments 2. Two brief report notes: one by the private stakeholders, and one by the government representatives To prepare the documents, each country team is expected to do the following: · Consult with private stakeholders. · Engage in the negotiation process. · Work as a team, but with a designated chairperson. · Consult with private stakeholders as the negotiations unfold. · Conclude the negotiations to the best of the team's abilities. · Prepare the revised schedule of commitments. · The private stakeholders should prepare a brief note assessing the process and the outcome of the negotiations from the point of view of private stakeholders. · The government team should prepare a brief note assessing the process and the outcome of the negotiations from the point of view of the government. The instructor who conducts the exercise will hold an open evaluation session to share comments on the process and the outcome of the exercise. Annex 4A Health-Related Services Table 4A.1. Health-Related Services: Relevant Sectors and the Corresponding CPC Classifications WTO sectoral classification list CPC code CPC definition 1. Business services A. Professional services (h) Medical and dental services CPC 9312 General medical services: services consisting of the prevention, diagnosis, and treat- ment by medical doctors of physical or mental diseases of a general nature --consultations --physical checkups, and so on. These services are not limited to specified or partic- ular conditions, diseases, or anatomical regions. They may be provided in the practices of general practitioners and also delivered by outpatient clinics, clinics attached to firms, schools, and so on. Specialized medical services Includes: --consultation services in pediatrics, gynecology-obstetrics, neurology and psychi- atry, and various medical services --surgical consultation services --treatment services in outpatient clinics, such as dialysis, chemotherapy, insulin therapy, respirator treatment, X-ray treatment, and the like --functional exploration and interpretation of medical images (X-ray photographs, electrocardiograms, endoscopies, and the like) Does not include: --services of medical laboratories, for example, 93199 Dental services --orthodontic services, for example, treatment of protruding teeth, cross bite, overbite, and so on, including dental surgery for inpatients in hospitals 163 (continued) 164 Table 4A.1. Health-Related Services: Relevant Sectors and the Corresponding CPC Classifications (continued) WTO sectoral classification list CPC code CPC definition --services in oral surgery --other specialized dental services, for example, in periodontics, pedodontics, endodontics, and reconstruction --diagnosis and treatment services for diseases affecting the patient or aberrations in the cavity of the mouth and services aimed at the prevention of dental diseases (i) Veterinary services CPC 932 Veterinary services for pet animals (93210) --animal and veterinary hospital and nonhospital medical, surgical, and dental services delivered to pet animals. The services are aimed at curing, restoring, or maintaining the health of the animal. --hospital, laboratory, and technical services, foods (including special diets), and other facilities and resources Veterinary services for livestock (93220) --animal and veterinary hospital and nonhospital medical, surgical, and dental services delivered to livestock. The services are aimed at curing, restoring, or maintaining the health of the animal. --hospital, laboratory, and technical services, foods (including special diets), and other facilities and resources Other veterinary services (93290) --animal and veterinary hospital and nonhospital medical, surgical, and dental services delivered to animals other than pets or livestock (including zoo animals and animals raised for fur production or other products). The services are aimed at curing, restoring, or maintaining the health of the animal. --hospital, laboratory, and technical services, foods (including special diets), and other facilities and resources (j) Services provided by CPC 93191 --services such as supervision during pregnancy and childbirth midwives, nurses, --supervision of the mother after birth physiotherapists, and --services in nursing care (without admission), advice and prevention for patients paramedical personnel at home, the provision of maternity care, children's hygiene, and so on --services provided by physiotherapists and other paramedical persons (including homeopathic and similar services) --physiotherapy and paramedical services are services in the field of physiotherapy, ergotherapy, occupational therapy, speech therapy, homeopathy, acupuncture, nutrition, and so on; these services are provided by authorized persons other than medical doctors 7. Financial services A. All insurance and insurance-related services (a) Life, accident, and health CPC 8121 Accident and health insurance services insurance services --underwriting services of insurance policies that provide protection for hospital and medical expenses not covered by government programs and usually other health care expenses such as prescribed drugs, medical appliances, ambulance, private duty nursing, and so on --underwriting services of insurance policies that provide protection for dental expenses --underwriting services of insurance policies that provide protection for medical expenses incurred in traveling outside a certain geographical area --underwriting services of insurance policies that provide periodic payments if the insured individual is unable to work as a result of a disability due to illness or injury --underwriting services of insurance policies that provide accidental death and dis- memberment insurance, that is, payment in the event that an accident results in death or loss of one or more bodily parts (such as hands or feet) or the sight of 165 one or both eyes (continued) 166 Table 4A.1. Health-Related Services: Relevant Sectors and the Corresponding CPC Classifications (continued) WTO sectoral classification list CPC code CPC definition 8. Health-related and social services A. Hospital services CPC 9311 --surgical services delivered under the direction of medical doctors chiefly to inpatients and aimed at curing, restoring, or maintaining the health of patients --medical services delivered under the direction of medical doctors chiefly to inpatients and aimed at curing, restoring, or maintaining the health of patients --gynecological and obstetrical services delivered under the direction of medical doctors chiefly to inpatients and aimed at curing, restoring, or maintaining the health of patients --rehabilitation services delivered under the direction of medical doctors chiefly to inpatients and aimed at curing, restoring, or maintaining the health of patients --psychiatric services delivered under the direction of medical doctors chiefly to inpatients and aimed at curing, restoring, or maintaining the health of patients --other hospital services delivered under the direction of medical doctors chiefly to inpatients and aimed at curing, restoring, or maintaining the health of patients; these services comprise medical, pharmaceutical, and paramedical services; nursing services; laboratory and technical services, including radiological and anesthesiological services; and so on --military hospital services --prison hospital services B. Other human CPC 9319 (other than Ambulance services health services 93191) --services involving the transport of patients by ambulance, with or without resus- citation equipment or medical personnel Residential health facility services other than hospital services --combined lodging and medical services provided without the supervision of a medical doctor located on the premises Other human health services --services provided by medical laboratories --services provided by blood, sperm, and transplant organ banks --dental testing services --medical analysis and testing services --other human health services not elsewhere classified C. Social services CPC 933 Welfare services delivered through residential institutions to elderly persons and persons with disabilities Includes: --social assistance services involving round-the-clock care at residential institutions for elderly persons --social assistance services involving round-the-clock care at residential institutions for persons with physical or intellectual disabilities, including those having disabilities in seeing, hearing, or speaking Does not include: --education services, for instance, 92 --combined lodging and medical services, for example, 93110 (hospital services), if under the direction of medical doctors, and 93193, if without supervision by a medical doctor Other social services with accommodation --residential social assistance services involving round-the-clock care for children, for example, social services for orphanages, homes for children in need of protec- tion, homes for children with emotional impairments --residential social assistance services involving round-the-clock care for other clients, for example, homes for single mothers, juvenile correction homes --rehabilitation services (not including medical treatment) for persons with impair- ments such as alcohol or drug dependence --other social rehabilitation services 167 Sources: WTO 1991; UN 1991. 168 Sáez and Lanoszka Notes 1. A commitment is a legally binding undertaking specific to a country under one of the agreements administered by the WTO (Goode 2007). 2. This section is based on Cattaneo (2010). 3. The Millennium Development Goals pertaining to health include goal 4 (reduce by two-thirds the mortality rate among children under 5), goal 5 (reduce by three-quarters the maternal mortality ratio; achieve, by 2015, uni- versal access to reproductive health), and goal 6 (halt and begin to reverse the spread of HIV/AIDS; achieve, by 2010, universal access to treatment for HIV/AIDS for all those who need it; halt and begin to reverse the incidence of malaria and other major diseases). 4. This subsection is based on Blouin, Drager, and Smith (2006). 5. Documents accompanying this exercise are provided at http://go.world bank.org/DLM9JWE9A0. Users will find suggested instructions for each country, as well as the relevant schedule of commitments that will allow users to complete the information required to carry out the exercise. 6. The descriptions provided of countries A, B, and C do not represent any exist- ing country. Participants are encouraged to use fictitious names for their coun- tries during the exercise. 7. Such a schedule may be found at http://go.worldbank.org/DLM9JWE9A0. References Arvis, Jean-François, Monica Alina Mustra, Lauri Ojala, Ben Shepherd, and Daniel Saslavsky. 2010. "Connecting to Compete 2010: Trade Logistics in the Global Economy; The Logistics Performance Index and Its Indicators." Report, World Bank, Washington, DC. Arvis, Jean-François, Monica Alina Mustra, John Panzer, Lauri Ojala, and Tapio Naula. 2007. "Connecting to Compete: Trade Logistics in the Global Economy; The Logistics Performance Index and Its Indicators." Report, World Bank, Washington, DC. Blouin, Chantal, Nick Drager, and Richard Smith, eds. 2006. International Trade in Health Services and the GATS: Current Issues and Debates. Washington, DC: World Bank. Cattaneo, Olivier. 2010. "Health without Borders: International Trade for Better Health Systems and Services." In International Trade in Services: New Trends and Opportunities for Developing Countries, Olivier Cattaneo, Michael Engman, Sebastián Sáez, and Robert M. Stern, ed. Washington, DC: World Bank. Deloitte. 2008. "Medical Tourism: Consumers in Search of Value." Deloitte Center for Health Solutions, Washington, DC. Liberalization in the Trade in Services: A Negotiation Exercise 169 de Souza, Robert, Mark Goh, Sumeet Gupta, and Luo Lei. 2007. "An investiga- tion into the Measures Affecting the Integration of ASEAN's Priority Sectors (Phase 2): The Case of Logistics." REPSF Project 06/001d, Report, Regional Economic Policy Support Facility, Association of Southeast Asian Nations, Manila. Ghoneim, Ahmed F., and Omneia A. Helmy. 2007. "Maritime Transport and Related Logistics Services in Egypt." Issue Paper 8 (December), Programme on Trade in Services and Sustainable Development, International Centre for Trade and Sustainable Development, Geneva. Goode, Walter. 2007. Dictionary of Trade Policy Terms. 5th ed. New York: Cambridge University Press. Hoekman, Bernard, and Alessandro Nicita. 2008. "Trade Policy, Trade Costs, and Developing Country Trade." Policy Research Working Paper 4797, World Bank, Washington, DC. Hollweg, Claire, and Marn-Heong Wong. 2009. "Measuring Regulatory Restrictions in Logistics Services." ERIA Discussion Paper d017 (May), Economic Research Institute for ASEAN and East Asia, Jakarta. HP Enterprise Services. 2009. "Government Supply Chain: Synchronization, Speed, and Security in Government Logistics." Government Journal 1 (3), HP Enterprise Services, Plano, TX. http://h10134.www1.hp.com/industries/gov ernment/journal/. McLinden, G., E. Fanta, D. Widdowson, and T. Doyle. 2010. Border Management Modernization: A Practical Guide for Reformers. Washington, DC: World Bank. Memedovic, Olga, Lauri Ojala, Jean-Paul Rodrigue, and Tapio Naula. 2008. "Fuelling the Global Value Chains: What Role for Logistics Capabilities?" International Journal of Technological Learning, Innovation and Development 1 (3): 353­74. Portugal-Perez, Alberto, and John S. Wilson. 2008. "Why Trade Facilitation Matters to Africa." Policy Research Working Paper 4719, World Bank, Washington, DC. UN (United Nations). 1991. "Provisional Central Product Classification (Provisional CPC)." Document ST/ESA/STAT/SER.M/77, Economic Statistics and Classifications Section, Statistics Division, Department of Economic and Social Affairs, United Nations, New York. http://unstats.un.org/unsd/class/family/family2.asp?Cl=9. UNCTAD (United Nations Conference on Trade and Development). 2006a. "Negotiations on Transport and Logistics Services: Issues to Consider." Report UNCTAD/SDTE/TLB/2005/3, UNCTAD, Geneva. ------. 2006b. "Trade and Development Aspects of Logistics Services: Note by the UNCTAD Secretariat." Document TD/B/COM.1/AHM.1/2 (July 7), Trade and Development Board, UNCTAD, Geneva. 170 Sáez and Lanoszka USITC (United States International Trade Commission). 2004. Express Delivery Services: Competitive Conditions Facing U.S.­Based Firms in Foreign Markets. Publication 3678, Investigation 332­456. Washington, DC: USITC. ------. 2005. Logistic Services: An Overview of the Global Market and Potential Effects of Removing Trade Impediments. Publication 3770, Investigation 332­463. Washington, DC: USITC. World Bank. 2006. "Infraestructura logística y de calidad para la competitividad de Colombia." Report 35061-CO, Sustainable Development Department, Latin America and the Caribbean Region, World Bank, Washington, DC. ------. 2007. "Port Reform Toolkit." World Bank, Washington, DC. http://go.worldbank.org/1CN4CR6GH0. ------. 2009. "Uruguay Trade and Logistics: An Opportunity." Unpublished report, September 30, World Bank, Washington, DC. WTO (World Trade Organization). 1991. "Services Sectoral Classification List: Note by the Secretariat." Document MTN.GNS/W/120 (July 10), WTO, Geneva. ------. 1993. "General Agreement on Trade in Services." WTO, Geneva. http://www.wto.org/english/docs_e/legal_e/26-gats.pdf. ------. 2004. "Communication from Australia; Hong Kong, China; Liechtenstein; Mauritius; New Zealand; Nicaragua; Switzerland, and the Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu: Logistics Services." Document TN/S/W/20 (June 25), Council for Trade in Services, WTO, Geneva. Index Boxes, figures, notes, and tables are indicated by b, f, n, and t, respectively. A Economic and Social Commission for Asia and the Pacific, 82n2 A. T. Kearney, 13 Europe and Central Asia, openness of adjustment pressures, 80­81 regime in, 8 Africa. See also Sub-Saharan Africa, and Asian Development Bank, 82n2 specific countries Association of Southeast Asian Nations Middle East and North Africa, (ASEAN), 121 diversification of exports, 2 audits, trade-related regulatory, 36­42, aid for trade in services, 14, 21, 76­81 37­40b, 42­42b adjustment pressures, 80­81 agenda for, devising, 81 EPAs, 5, 77, 78­80b B regulatory capacity-building, Bangladesh, 124 58­61, 59­61b Bank for International Settlements, 38 tariffs, 80 Botswana, 124 trade-related technical assistance, Brazil, 2, 124 61­62, 62­63b Arab Republic of Egypt, 129 C Argentina, 124 ASEAN (Association of Southeast Asian Canada, 12, 40b, 73­74b Nations), 121 capacity to supply. See supply capacity, Asia. See also specific countries enhancing ASEAN, 121 CARICOM, 5, 87­88 diversification of exports through CARIFORUM, 5, 77, 78­80b, services in, 2 83n12, 87­88 East Asia and Pacific, agreements with Centre for the Promotion of Imports European Union in, 5 in the Netherlands, 73 171 172 Index Chile, 2, 13, 111b, 124 discriminatory and nondiscriminatory China, 59­60b, 83n8, 124 regulations, 8­9, 9t, 89­91, Coalition of Service Industries, 70b 90t, 91t commitments Doha Round defined, 168n1 collective requests, shift toward, 46, modes of supply, sorting by, 109 47­48b, 52 SERET. See under service regulations Doha Development Agenda, 20, 77 management tool impact of nonservice trade negotiations under GATS, 93t, 94­95, 94t on service negotiations, 53 conducting negotiations, 21, 44­53 logistics services negotiations, 125 Doha Round shift toward collective Dominican Republic, 5, 88 requests, 46, 47­48b, 52 factors in formulating request or offer, E 49, 50­51f East Asia and Pacific, agreements with market opening, 46­53, 80­81, 81­82n1 European Union in, 5. See also negotiation exercise (Part 2), 162 specific countries pertinent concerns, 54­55b Economic and Social Commission for Asia rule making process, 45­46 and the Pacific, 82n2 Congo, Democratic Republic of, 124 Economic Partnership Agreements (EPAs), coordination of stakeholders, 27­35, 5, 77, 78­80b 28­30b, 31­33t, 34f, 35f, 82n4 economy-wide implications of Costa Rica, 2, 134 service-sector reform, 22­23 Cotonou Agreement, 78b Egypt, Arab Republic of, 129 Council for Trade in Services, 91 entry and establishment, regulations CPC (United Nations Provisional affecting, 8­9, 9t Central Product Classification), EPAs (Economic Partnership Agreements), 131, 163­167t 5, 77, 78­80b Croatia, 124 Eritrea, 124 crossborder trade Europe and Central Asia, openness of as mode of supply, 7, 12 regime in, 8. See also specific health services, 138, 142 countries negotiating, 30, 46, 75 European Commission, 82n2, 83n12 relative success at, 13 European Union SERET and, 91, 98­99, 103, 109 all trade agreements with now involving cultural exceptions to international trade in services, 5, 87­88 agreements, 12 CARIFORUM and CARICOM agreements, 5, 77, 78­80b, D 83n12, 87­88 exceptions, negotiating, 12 database for trade in services GATS, use of, 6, 121 management. See service liberalization model, 97 regulations management tool Treaty of Rome (1958), 115­116n3 de Souza, Robert, 130 European Union­China Trade Project, Deardoff, Alan V., 8­9 59­60b Deloitte Consulting, 134 exceptions, negotiating, 12 Democratic Republic of Congo, 124 deregulation. See liberalization of F trade in services development. See strategic development Feketekuty, Geza, 20 role of trade in services Fiji, 124 differential and special treatment of Francois, Joseph E., 7 developing countries, 14 freight logistics. See logistics services Index 173 G Helmy, Omneia A., 129 Hoekman, Bernard, xii, 7 Gabon, 124 human capital General Agreement on Tariffs and Trade importance of, 13­14 (GATT), 81, 92­94, 94t training. See training General Agreement on Trade in Services (GATS) I capacity-building efforts tending to focus on, 25­26 implementing negotiated outcomes, commitments under, 93t, 94­95, 94t 21, 53­55, 64b conducting negotiations, 46, 48 India, 2, 13, 83n8, 124, 134 GATT compared, 81, 92­94, 94t Indonesia Trade Assistance, 60­61b health services, 141, 142­143 information access issues, 82­83n6, 88. importance of, 6 See also service regulations International Trade Centre consultation management tool kit, 82n3 infrastructure, restrictions on access and liberalization and, 80, 95­96, use of, 126­129, 127­128t 97, 99, 112 Inter-American Development Bank, 82n2 logistics services, 130­134 intergovernmental coordination, 27­30, market access restrictions, 93­94, 93t 28­30b, 35f multilateral framework, 91­94, 92­94t international agreements, strategic negotiation exercise, as framework development role of, 11­14 for, 121 International Association of Insurance regulatory weaknesses, addressing, 56 Supervisors, 38 stakeholders, coordination of, 28 International Chamber of Commerce, 71b supply capacity, enhancing, 73 International Organization of Securities trade-related regulatory audits, 39 Commissions, 38 Uruguay Round, broader obligations International Trade Centre, 72b, 82n2 emerging from, 53 Ghani, Eja, 3 J Ghoneim, Ahmed F, 129 Japan, 5, 87 Gootiiz, Batshur, 13 Japan-Philippines Economic Partnership government, coordination within, Agreement, 41b 27­30, 28­30b, 35f Greece, 124 K H Kenya, 2 health services, 134­147 L crossborder trade, 138, 142 development of negotiating positions, Lanoszka, Anna, 121 issues to consider for, 142­143, Latin America and Caribbean. See also 144­146t specific countries GATS and, 141, 142­143 crossborder supply in, 13 in negotiation exercise, 122 diversification of exports through country A, description of, 151­152 services in, 2 country B, description of, 156­157 European Union, agreements with, country C, description of, 159­160 5, 78­80b, 83n12, 87­88 modes of supply, 138, 139t, 142 logistics services in, 124 potential benefits and drawbacks, openness of regime in, 8 138, 142 liberalization of trade in services regulatory issues, 140, 142­143 assessment of impact, 9­10 supply and demand, 134­138 defined, 7 174 Index European Union model of, 97 Mexico GATS and, 80, 95­96, 97, 99, 112 crossborder supply in, 13 importance of, 3 diversification of exports through NAFTA model, 97­99, 109­110, 112 services in, 2 openness/protectiveness of regimes European Union, trade agreement measuring, 7­8 with, 5, 87 performance and, 13 exceptions, negotiating, 12 progressive liberalization, 77 trade-related regulatory audits, 41­42b PTAs, through, 95­101, 100t Middle East and North Africa, reform strategy, designing, 10­11 diversification of exports in, 2. regulation and, 7, 8­9, 56 See also specific countries strategic nature of, 6­11 Millennium Development Goals, Libya, 140 138, 168n3 logistics services, 123­134 modes of supply core freight logistics, 125­126, GATS classification of, 91­92, 92t 131, 132­133t health services, 138, 139t, 142 defined, 123 negotiating, 12, 74­75 foreign trade management constraints, Montenegro, 124 127­128t, 130 Morocco, 2 in GATS, 130­134 most favored nation clauses, 89, 92 in negotiation exercise, 122 country A, description of, 152­153 N country B, description of, 157­158 country C, description of, 160­161 NAFTA. See North American Free Trade increasing tradability of, 2­3 Agreement noncore freight logistics, 126, Namibia, 124 132­133t, 132­134 national development strategy overperformers and negotiation process, importance underperformers, 124t to, 26­27 regulatory issues, 125­126, policy making and reform 127­128t, 130 for, 22­24, 24­25b related freight logistics, 126, negotiation exercise, 121­170 131, 132­133t as part of broader course restrictions on trade in, 126­130, work, 147­148 127­128t conducting negotiation (Part 2), 162 special issues involved in development country A, description of, 150­154 of negotiating position on, country B, description of, 154­158 134, 135­137t country C, description of, 158­161 WTO negotiation proposal, GATS as framework for, 121 131, 132­133t goals and objectives, 122­123, 147­148 health services in, 122. See also health services M length of simulation, 147 Madagascar, 124 logistics services in, 122. See also Marconini, Mario, 19 logistics services market access restrictions, 93­94, number of participants, 147 93t, 126, 127­128t preparation of negotiating position market opening, 46­53, 80­81, 81­82n1 (Part 1), 148­149 Mattoo, Aaditya, 13, 81 negotiation of agreements, 4­5, 19­68 medical tourism. See health services aid for. See aid for trade in services Mercosur or Southern Common conducting. See conducting negotiations Market, 121, 124 exceptions, 12 Index 175 implementing negotiated outcomes, preparation for negotiation of agreements, 21, 53­55, 64b 21, 25­42 mapping strategy for, 21­24, 24­25b coordination of stakeholders, 27­35, modes of supply, 12, 74­75 28­30b, 31­33t, 34f, 35f, 82n4 nonservice negotiations, impact of, 53 key questions arising during, 43­44b preparation for. See preparation for national development strategy, negotiation of agreements establishing, 26­27 regulatory weaknesses, addressing, negotiation exercise (Part 1), 148­149 55­63, 59­61b trade-related regulatory audits, 36­42, strategic nature of, 12­13 37­40b, 42­42b supply capacity. See supply capacity, PTAs. See preferential trade agreements enhancing nonservice trade negotiations, impact R of, 53 regulatory issues, 4 nondiscriminatory and discriminatory analytical structure of, 8­9, 9t regulations, 8­9, 9t, 89­91, discriminatory and nondiscriminatory 90t, 91t regulation, 8­9, 9t, 89­91, 90t, 91t North American Free Trade Agreement health services, 140, 142­143 (NAFTA) in country A, negotiation exceptions, 12 exercise, 153­154 liberalization model, 97­99, in country B, negotiation exercise, 158 109­110, 112 in country C, negotiation exercise, 161 trade-related regulatory audits, 39b, liberalization and regulation, 7, 8­9, 56 40b, 41­42b logistics services, 125­126, 127­128t, 130 negotiations as means of addressing O weaknesses in, 55­63, 59­61b operations, regulations affecting, 8­9, 9t objectives and instruments of regulation, Organisation for Economic Co-operation 88­89, 90t and Development (OECD), 8, SERET. See service regulations 63, 73, 74 management tool Organization of American States supply capacity, enhancing, 73, 75 (OAS), 82n2 trade-related regulatory audits, 36­42, 37­40b, 42­42b P Rome, Treaty of (1958), 115­116n3 rule making process, 45­46 Paraguay, 124 Russian Federation, 124 Philippines, 2, 41b, 124, 129 policy making and reform, 4 S as national development strategy, 22­24, 24­25b Sáez, Sebastián, 1, 87, 121 coordination of stakeholders in, 33, 34f Sauvé, Pierre, 19 service coalitions, 70­71b sequencing issues, 4­5 preferential trade agreements (PTAs) SERET. See service regulations classification, ordered by year of management tool notification to WTO, 98, 113­115t service coalitions, 69­72b conducting negotiations, 45 service regulations management tool liberalization through, 95­101, 100t (SERET), 5, 87­119 preparation for negotiations, 28, 36, 40b classification codes, 104­105, 106t regulatory weaknesses, addressing, 55, 56 classification of sectors in, 88, 89b segmentation of management of, 83n8 commitments, 94­95 success of unilateral efforts versus, 20 GATS commitment schedules, supply capacity, enhancing, 73, 77 93­94, 93t 176 Index nesting horizontal commitments, service coalitions, 69­72b 105, 107­108t trade-related technical assistance, 72 positive list commitment schedules, supply, modes of. See modes of supply 103­104, 104t sorting by mode of supply, 109 T template, pasting onto, 109 data sources, 101­103, 102t tariffs, 80 discriminatory and nondiscriminatory technical assistance, trade-related, 61­62, regulations, 8­9, 9t, 89­91, 90t, 91t 62­63b, 72 multilateral framework, 91­94, 92­94t Thailand negative list approach, 109­112, 111b coordination of stakeholders objectives and instruments of in, 33, 34f, 35f regulation, 88­89, 90t diversification of exports through positive list approach, 101­109 services in, 2 PTAs, liberalization through, 95­101, 100t health services in, 134 WTO service schedules, 102­103, 102t logistics services in, 124 Singapore­United States Free Trade policy-decision matrix, 33, 34f Agreement, 41b Trade Facilitation Office Canada, 73­74b Slovenia, 124 trade in services, ix­x, 1­18 South Africa, 2, 124, 134 aid for, 14, 21, 76­81. See also aid for Southern Common Market or trade in services Mercosur, 121, 124 database for, 5, 87­119. See also service special and differential treatment of regulations management tool developing countries, 14 defined, 1 stakeholders, coordination of, 27­35, increasing tradability of, 2­3 28­30b, 31­33t, 34f, 35f, 82n4 international agreements, strategic Stern, Robert M., 8­9 development role of, 11­14 strategic development role of trade in liberalization of. See liberalization of services, 1­3 trade in services international agreements, 11­14 negotiation exercise, 121­170. See also liberalization, 6­11 negotiation exercise negotiation process, importance of negotiations, 4­5, 19­68. See also development strategy to, 26­27 negotiation of agreements policy making and reform, policy making and reform, 4. See also 22­24, 24­25b policy making and reform special and differential treatment, 14 regulations, 4. See also regulatory issues Sub-Saharan Africa sequencing issues, 4­5 diversification of exports through strategic development role of, 1­3. See services in, 2 also strategic development role of European Union, agreements with, 5 trade in services liberalization, importance of, 3 training, 6. See also training logistics services in, 124 trade-related regulatory audits, 36­42, openness of regime in, 8 37­40b, 42­42b supply capacity, enhancing, 21, 63­75 trade-related technical assistance, 61­62, dedicated agencies for, 73­74b 62­63b, 72 identifying strengths and weaknesses of training, 6 domestic suppliers, 67­68b negotiation exercise. See key questions, 75­76b negotiation exercise modes of supply, 74­75 regulatory capacity-building, public and private sectors, 58­61, 59­61b involving, 65­72 trade-related technical assistance, regulatory issues, 73, 75 61­62, 62­63b Index 177 Treaty of Rome (1958), 115­116n3 V Tunisia, 2, 140 Vaillant, Marcel, 87 Vietnam, 124 U U.S. Agency for International Development W (USAID), 60­61b Uganda, 124 World Bank, 72, 130 United Nations Conference on Trade and World Bank Institute, 82n2 Development (UNCTAD), 82n2 World Trade Net Program, 72b United Nations Economic Commission for World Trade Organization (WTO). Latin America and the Caribbean, See also Doha Round; 82n2 Uruguay Round United Nations Provisional Central commitment schedules, 103­104, 104t Product Classification (CPC), 131, conducting negotiations, 46 163­167t countries seeking accession United States to, 83n13 all trade agreements with now involving GATS. See General Agreement on Trade trade in services, 5, 87 in Services exceptions, negotiating, 12 GATT, 81, 92­94, 94t health services, demand for, 134­138 implementation issues, 55 Singapore­United States Free Trade information access issues, 82­83n6 Agreement, 41b logistic services negotiation proposal, USAID, 60­61b 131, 132­133t United States International Trade number of agreements entered into by Commission (USITC), 130 members, 87 United States­Chile Free Trade PTAs ordered by year of notification to, Agreement, 111b classification of, 98, 113­115t Uruguay, 2, 124, 129 service coalitions, 70b Uruguay Round service schedules, 102­103, 102t bilateral request-offer approach in, 47b special and differential treatment of broader obligations established by, 53 developing countries, 14 logistics services, 130 stakeholders, coordination of, 28, 30 service coalitions, 69b success of unilateral efforts versus, 20 USITC (United States International Trade supply capacity, enhancing, 66 Commission), 130 trade-related regulatory audits, 36 ECO-AUDIT Environmental Benefits Statement The World Bank is committed to preserving Saved: endangered forests and natural resources. The · 3 trees Office of the Publisher has chosen to print · 1 million BTU's of Trade in Services Negotiations on recycled total energy paper with 50 percent postconsumer fiber in · 323 lb. of greenhouse accordance with the recommended standards gases for paper usage set by the Green Press · 1,555 gal. of waste Initiative, a nonprofit program supporting water publishers in using fiber that is not sourced · 94 lbs. of solid from endangered forests. For more informa- waste tion, visit www.greenpressinitiative.org. Services negotiations are an integral element in designing and implementing programs to liberalize and deregulate trade unilaterally, bilaterally, and multilaterally in both developing and advanced economies. This book is especially valuable for its insights into the strategy and consequences of services negotiations and for the practical information that can help to guide negotiators in carrying out and assessing their policy objectives. --Robert M. Stern Professor of Economics and Public Policy University of Michigan Successful trade policies and services sector reforms are about content, design, and imple- mentation. This book is an additional yet exclusive contribution from the World Bank Group to trade policy making. The book dwells on flexible methodologies, practical recommendations, and tools to address the needs of developing countries in a simple and accessible manner. --Osvaldo Rosales Director International Trade and Integration Division United Nations ECLAC Former Chilean Chief Trade Negotiatior It has been only recently that the subject of services has been added to the trade negoti- ating agenda. The very concept of trade in services was developed during the Uruguay Round of trade negotiations. The sheer novelty and complexity of the subject matter pres- ents trade negotiators with important challenges. The translation of policy reforms into possible commitments; the coordination of positions in capitals among diverse agencies, ministries, and stakeholders, and the development of negotiating strategies are among the most prominent challenges. This book is an important contribution to the efforts of governments and international organizations to build and enhance negotiating capacity in a way that helps governments and negotiators achieve their objectives. It also offers sound assistance for the conduct of the negotiations themselves. --Hamid Mamdouh Director of the Trade in Services Division World Trade Organization ISBN 978-0-8213-8410-7 SKU 18410