|DEC r,,-iV OU h: Research' findings For services, rules but few reductions in protection The basic principles of the GeneralAgreement on Trade in Services (GATS) are similar to those of the General Agreement on TariJfi and Trade (GATT). Both are based on fundamental goals of national treatment (treating imports and domestic supplies equally inside a national market) and most favored nation treatment (nondiscrimination between exporters). In addition, the GATS shares with the GATT Because services trade is typically restricted Third offour a prohibition on the use of quantitative restric- by regulations rather than by tariffs, negotiators notes on what the tions. It goes beyond the GATT in including proceeded on the basis of all-or-nothing com- Uruguay Round specific commitments on market access. The mitments to liberalize services trade for partic- mean for stakes involved in a comprehensive liberaliza- ular sectors, modes of supply, and protective meansfor tion of trade in services are very high-poten- instruments. In contrast to merchandise trade, tially the same order of magnitude as the gains no quantitative measure of trade restrictiveness countries from liberalizing merchandise trade. And with comparable to a tariff rate has been developed services trade growing considerably faster, and to allow bargaining over degrees of liberaliza- the remaining protection in the manufactures tion for services sectors. GATS negotiations sector coming down, the gains from liberaliz- revolved around which sectors were to be ing services trade can only become more included in the liberalized set. important. Each country's GATS schedule gives a pos- itive list specifying the sectors and modes of * 1 1 delivery in which the national treatment and market access principles will be applied. The GATS breaks new ground relative to the Within the sectors and modes of supply listed GATT by disaggregating market access com- in a schedule, a negative list approach is used mitments across four basic modes for interna- to specify trade-restricting measures in viola- tional supply: cross-border supply not tion of national treatment and market access requiring the movement of the provider or the principles that may be maintained-that is, consumer (the simple export/import analogy unless a measure is listed, it may not be used. of goods trade); trade involving international A negative list approach is also used for the movement of the consumer (such as tourism); most favored nation principle-that is, most trade involving temporary international favored nation status applies to all services movement of suppliers (such as consultancy except those specifically exempted. services); and trade involving provision of ser- The most favored nation principle was vices through commercial presence. intended to be a general commitment but, in FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY OF THE WORLD BANK NO. 11, MAYi1996 the end, more than sixty countries listed restrictions on international payments relat- exemptions, primarily in audio-visual services, ing to their specific commitments. financial services, and transportation-possi- The GATS contains "safeguard" provisions bly, some argue, to provide leverage for future that roughly parallel the provisions under the negotiations. The exemptions are intended to GATT for merchandise trade. These include last no longer than ten years and will be sub- balance of payments provisions, exceptions on ject to renegotiation in future trade liberaliz- grounds such as health, safety, security, or ing rounds. morals, and modifications of schedules. Nego- Market access commitments apply only to tiations on emergency safeguards are foreshad- listed services, and market access is not even owed in the agreement, but no provision is explicitly defined. Instead, certain barriers to made for antidumping or countervailing market access are prohibited: limitations on duties. The dispute settlement body of the the number of service suppliers allowed, the World Trade Organization is responsible for value of transactions or assets, the total quan- dispute resolution under the GATS as well as tity of service output, the number of people under the GATT and trade-related intellectual who may be employed, the type of legal entity property rights (TRIPs). Where agreement Most favored nation through which a service is provided, and the cannot be reached, retaliation or cross-retalia- status does not imply maximum foreign share or the value of foreign tion between goods and services is permitted. investment in a supplier. Unfortunately, pos- This provision may prove to be important- sibly even fatally, measures equivalent in effect the markedly greater enthusiasm for the GATS domestic and foreign to the listed measures are not proscribed. in industrial countries may balance developing suppliers The national treatment condition is countries' greater enthusiasm for the abolition designed to ensure that foreign suppliers are of the Multifiber Arrangement. treated no less favorably than domestic sup- pliers, except in ways specified in the sched- ules. But national treatment does not require Almost no immediate identical treatment of domestic and foreign reduction in protection firms-since identical treatment (such as a requirement that insurance firms hold reserves The GATS approach of listing sectors and locally) may actually worsen the conditions of measures does not allow calculation of a sim- competition for foreign firms. ple summary measure of liberalization corre- The GATS includes other provisions to sponding to an average tariff rate. Since the facilitate trade in services, although some of GATS covers 155 sectors and 4 modes of sup- these apply only to the sectors specifically ply, there are 620 sector-mode supply com- listed in the agreement. The agreement aims binations on which offers could be made to provide greater transparency by requiring (table 1). all members to establish inquiry points for Industrial countries listed just under half information on laws, regulations, and admin- their service trade categories in their market istrative practices. It also requires that mem- access commitments, including more than a bers establish disciplines to ensure that quarter for which market access is completely qualification requirements, technical stan- unimpeded. When sectors with market access dards, and licensing procedures are based on commitments subject to some policy exemp- objective and transparent criteria, and do not tions are counted with a weight of one-half, constitute a restriction on supply. Procedures the measure of guaranteed market access is 36 for recognition of licenses, education, and percent. experience granted by a particular member Developing countries were more reluctant must be transparent and reasonable. Mem- than industrial countries to make offers, with bers are also required to refrain from applying only 16.2 percent of sectors in developing Table 1. Sectoral coverage ratios of GATS market access commitments (percentage of maximum possible listing) Industrial Develop ng Large developing countries countries countries Sector-modes committed with no restrictions 27.1 7.3 14.9 Weighted coverage index 35.9 I0.3 22.9 Total listed coverage 47.3 16.2 38.6 Note: Coverage ratios are not weighted by sector size. Source: Hoekman 1995. countries listed in any fashion, and only 7.3 The fact that the GATS imposes a standstill percent listed with no policy exemptions. only on the sectors and modes of supply cur- When policy weights are applied, the measure rently listed, and then subject only to listed of guaranteed access for developing countries policy exemptions, is a potential problem. is 10.3 percent of their sectors. Many devel- Restrictions can be introduced-perhaps as oping countries made virtually no use of the "negotiating chips" for future negotiations-in opportunity to commit themselves to an open any sector not listed. This is a (perhaps unfore- trading regime for services: four countries seen) consequence of the use of the positive-list The GATS generated listed only one of the 155 service sectors (the approach to the enumeration of service sectors. few commitments minimum required for membership in the If a negative-list approach had been used, it World Trade Organization) and five others would not have been possible to introduce new that require the listed only two. Importantly, however, the protection instruments to unlisted sectors. elimination of current large developing economies (those with GDP The ability to specify different restrictions restrictive measures above $40 billion) proved more willing to for different modes of supply raises the risk that make GATS commitments, listing almost 40 incentives will be created for service sectors to percent of total sectors, including 15 percent relocate to avoid restrictions. If, for instance, with no policy restrictions. national treatment is allowed for the supply of A major weakness of the initial GATS out- a service through the establishment of a local come was that it resulted in very few commit- entity, but not for cross-border supply from a ments that require the elimination of current foreign establishment, incentives may be pow- restrictive measures. Countries generally listed erful for trade barrier-hopping investment. their current regulations and restrictions, -by Will Martin and L. Alan Winters committing at best to only a "standstill" in which the introduction of new measures has been ruled out. While this has value, given the Further reading likelihood that some of the proscribed mea- The following paper is available in Will Martin and L. sures would have been introduced in the Alan Winters, eds., 1995, The Uruguay Round and the absence of the GATS, that value is limited, Developing Economies, World Bank Discussion Paper and the beneficial effect is further reduced by 307. Revised versions are forthcoming in a volume to be the restricted range of sectors and modes of published by Cambridge University Press. supply offered by many members, and partic- Hoekman, B. "Tentative First Steps: An Assessment of ularly by developing countries. the Uruguay Round Agreement on Services." This DECnote has been prepared by Will Martin and L. Alan Winters in the International Economics Department of the World Bank. DECnotes transmit key research findings to Bank Group managers and staff. They are drawn from the work of individual Bank researchers and do not necessarily represent the views of the World Bank and its member countries-and should not therefore be attributed to the World Bank or its affiliates. DECnotes are produced by the Research Advisory Staff We welcome your questions and comments; please e- mail them to the authors or to Evelyn Alfaro, RAD. Prepared for World Bank staff