Trading services: an opening or a noose?

By Gumisai Mutume

Behind the scenes, with little public attention or participation, an important round of trade negotiations that may profoundly alter the way governments deliver basic social services has been going on at the World Trade Organization in Geneva since 2000. The talks are aimed at reducing barriers to international trade in services. Mr David Hartridge, a former WTO director, describes the talks as "less difficult and less visible politically than agriculture," another contentious trade issue under consideration in the Swiss city. But, he added, they are "very much larger in economic importance and potential."

For the last few years, international public attention has been dominated by opposition to a broad new round of negotiations at the WTO aimed at liberalizing new sectors of the global economy. That opposition climaxed in December 1999, in the US city of Seattle, when violent protests and bitter divisions among negotiators led to the failure to launch the round. Part of the Seattle agenda was to extend the reach of global trade rules into areas never before covered by the WTO, such as investment and labour.

Even though Mr. Hartridge described proposals for liberalizing services as "the least controversial element of the Seattle agenda," questions are increasingly being raised about the possible impact of the General Agreement on Trade in Services (GATS), the accord under negotiation in Geneva. Concerns include the possible -- and virtually irreversible -- effects of GATS on how governments provide or control services in areas such as water, education and health.

What is GATS?

GATS is one of about 60 agreements and decisions signed in 1994 at the conclusion of the 8-year-long "Uruguay Round" of negotiations that led to the formation of the WTO. When countries signed GATS, they committed themselves to periodic negotiations to progressively eliminate barriers to international trade in services without requiring further approval from all 144 WTO members. This "self-triggering" mechanism led to the current round of services negotiations in Geneva.

Even though negotiations started immediately after the "battle of Seattle," they went largely unnoticed. But, "this absence of public controversy is about to change," warned Mr. Hartridge, given greater attention from the press and non-governmental organizations. "Most of this is designed to promote controversy, and it is succeeding."

A tourist park near Harare, Zimbabwe: for some African countries, tourism is a key sector of their international trade in services.

Photo : ©Adarini Inkei

Trade in services is the fastest growing area in international trade, amounting to $1,350 bn in 1999, about a quarter of the figure for trade in goods. But Africa's share of this is small -- about 2 per cent annually. Many African countries were expecting to raise their share of international trade in services after signing GATS, but this has yet to happen. In Kenya, South Africa and Zimbabwe, tourism is an important foreign exchange earner. Benin, Côte d'Ivoire and Tanzania get revenue from shipments from neighbouring landlocked countries transiting through their ports, while Ghana and Mali receive remittances from their citizens working in service sectors abroad.

While Africa's participation in international trade in services is low, the domestic service sector is relatively large -- contributing about 40 per cent to the gross domestic product (GDP) of Uganda and 50 per cent in Zambia. In wealthy countries such as the US, the service sector accounts for as much as 80 per cent of GDP. It is this huge, untapped domestic service market that GATS seeks to open up to foreign competition and participation.

Corporate impetus

Since the General Agreement on Tariffs and Trade (GATT) came into effect in 1948, international trade rules have governed cross-border trade in goods, not services. This changed when GATS came into force in 1995. For the first time, legally binding rules were set for trade in all "commercial services" -- such as engineering, communications, entertainment, construction, finance, retail trade, tourism and transport. Only two areas are not covered by GATS -- air transport and "services supplied in the exercise of governmental authority," defined as those not provided in competition with other suppliers, nor on a "commercial" basis. Government social welfare and support programmes are examples.

According to the WTO, the intention of GATS is to spur economic growth by removing barriers limiting trade in services and enabling countries to attract foreign investment by opening "highly regulated" services to international competition.

The drive to liberalize the service sector is strongly supported by global corporations. In a 1999 address in Tokyo, Japan, Mr. J. Robert Vastine, president of the US Coalition of Service Industries declared that "the overarching objective of the global business community" through GATS should be a "contestable, competitive market in every sector and in every WTO member country."

Like other WTO agreements, GATS is backed by the coercive powers of the organization -- the first worldwide economic institution with the capacity to legally enforce its agreements. GATS violations are adjudicated through the organization's Dispute Settlement Body, which can authorize trade sanctions against violators.

Complex rules

GATS is a complex and often confusing agreement. In some instances it does not fully define terms or spell out the extent of the limitations of its provisions, resulting in differing interpretations. For instance, no clear meaning for "commercial service" is provided. Also, because it is still a new agreement, its rules are still being developed.

These rules apply to four different modes of supplying a service:

• Cross border: services that flow from one country to another, such as banking.
• Consumption abroad: a consumer, such as a tourist, travels into another country to obtain the service.
• Commercial presence: a company enters the local market of another to provide domestic services such as hotels or insurance.

-- Movement of people: workers move to another country to supply a service.

While some rules governing these areas were laid out during the Uruguay Round, more are being established at the current negotiations. The last round managed only to open a few sectors, such as telecommunications and financial services, to international competition. In Geneva, WTO members are taking the process a step further, broadening the rules to open up other areas such as education and health, with major emphasis on allowing foreign providers into local markets.

An independent researcher, Ms. Ellen Gould, studying the implications of GATS on public services in Canada, says the accord has so far not gained "the same regulation-destroying notoriety of other WTO agreements" because members did not complete negotiations on domestic regulation during the last round. "That is what negotiators are working on now."

"What we see now is an attempt to fast-track liberalization of services, without the same willingness to remove trade barriers in agriculture, an important area for developing countries."
-- Mr. Tadeous Chifamba, Africa Group negotiator at WTO

A final agreement on the current talks in Geneva is due for signing in 2005, together with other issues that are part of a broad new WTO round finally launched in Doha, Qatar, last November (see Africa Recovery, December 2001).

Some of the rules of the 1994 agreement bar governments from subsidizing domestic service suppliers at the expense of foreign ones and restrict them from giving preference to domestic suppliers over companies from other WTO member countries. Such regulations may be deemed "trade restrictive" and can be challenged before the Dispute Settlement Body. Non-governmental critics charge that this transfers decision-making powers from elected governments to a panel of WTO experts who may not necessarily act in the interests of the development goals of poor countries.

Broadening the scope

In the Geneva talks, countries are expected to submit what are known as "commitments" that specifically bind sections of their service areas to GATS. During the Uruguay Round, a few areas, such as telecommunications, went through this process. In Geneva this is being broadened, and could include areas that have traditionally been controlled or provided by governments.

GATS requires a member to lower barriers against foreign providers, in much the same way that GATT sought to lower tariffs on trade in goods. A country must also commit itself to never raise them again, under penalty of having to pay compensation to injured parties if it does. Such barriers may include a government's requirement that a foreign service-provider form partnerships with local companies before entering the domestic market. Developing countries often apply such conditions to nurture infant industries and train local staff.

Another provision of the agreement, "national treatment," obliges a country to treat companies from other WTO members as it does its own. This would prohibit a country from subsidizing local businesses in a committed sector, or force it to pay similar supports to foreign companies.

Although little information exists on the impact of liberalizing major service sectors, pressure is mounting on countries to open up even more areas.

"What we see now is an attempt to fast-track liberalization of services, without the same willingness to remove trade barriers in agriculture, an important area for developing countries," Mr. Tadeous Chifamba, a negotiator for the Africa Group at the WTO told Africa Recovery. He says developing countries agreed to parallel negotiations of the two sectors hoping to gain trade-offs in agriculture in exchange for concessions on services. African countries are heavily dependent on agriculture, with 47 out of 53 relying on three or fewer commodities for more than 50 per cent of foreign exchange earnings, notes the UN Conference on Trade and Development (UNCTAD).

It is unlikely that African countries will meet the commitments schedule, since many have not even tabled proposals for negotiation under the present round nor carried out national assessments of their own service sectors. Many developing countries are wary of repeating mistakes of the last round when, reports UNCTAD, they made binding commitments to liberalize some sectors, especially in finance, tourism and insurance, without fully analyzing the impact.

The WTO, however, argues that developing countries may limit the scope and pace of liberalization to enable them to pursue their development strategies. For example, a country could stipulate that it will only open up an area to private companies on condition that they extend coverage of services into neglected areas at affordable prices.

Although countries are not compelled to make commitments, a meeting of African trade negotiators at the UN Economic Commission for Africa in Ethiopia last year noted that failure to do so or placing limitations may harm the already poor flow of foreign direct investment into the continent. Often companies prefer to go where there are fewer restrictions on how they operate. Africa attracts about 3 per cent of annual FDI to developing countries, and some countries are hoping to attract additional investment through the service sector.

In 1994, one third of WTO members -- all developing or least developed countries -- limited their commitments to 20 or less of the approximately 160 service sectors defined during the Uruguay Round. The fewest were in education and health -- areas that have traditionally had strong government involvement in many countries. More than 90 per cent of members undertook some sort of commitment in tourism, while less than 40 per cent made commitments in education and health.

Opening public services

In Geneva, a number of industrialized nations will seek commitments to open up areas such as public utilities, health and education to foreign competition. For instance, Australia is calling for liberalization of education -- a sector it describes as "of international significance," yet with the fewest commitments under GATS. Australia itself has opened up secondary and higher education to other WTO members and seeks policies that will facilitate greater cross-border flow of students and educational services.

Others are pressing for liberalization of environmental services, such as water for human consumption and waste management. The area represents $280 bn in global trade annually, notes the European Union (EU), and international demand is expected to grow to $640 bn by 2010, placing it at roughly the same size as the pharmaceuticals or information technology industries. The EU is proposing that WTO members minimize trade barriers in such services by eliminating monopolies and removing restrictions in some countries that permit only nationals to operate in those sectors.

Some industrialized nations are pressing for liberalization of water and other domestic public services in the South.

Photo : ©UNICEF / Maggie Murray-Lee

However, allowing market forces to prevail "could be fundamentally incompatible with the requirements or the desire of many governments to provide basic public services for their people," warns a proposal to the Geneva talks by a group of developing countries that includes Kenya, Uganda and Zimbabwe. They caution that "certain sectors of their populations may not be able to afford to pay market prices for these services." In Africa, governments frequently rely on public entities to provide services such as energy, sewers, waste removal and post and telecommunications. Using subsidies, they are often able to keep basic services affordable for poor communities.

The WTO claims such fears are unfounded since GATS excludes services as long as they are "provided in the exercise of governmental authority." But to qualify, a public service should not be provided on a commercial basis or in competition with other suppliers.

Many public services do not meet such criteria, notes a GATS study conducted for the provincial government of British Columbia, Canada. "Despite the significance of GATS coverage, there are indications that some member governments may not fully appreciate the limited scope of the governmental authority exclusion," notes the study. "Many governments may not recognize that certain aspects of public services and their regulation are already subject to those GATS obligations that apply across-the-board."

Hard to compete

African governments are increasingly embracing policies promoting private ownership, with strong encouragement from the World Bank and International Monetary Fund (IMF). But their industries are often too weak to compete with the large firms from industrial countries that dominate the services market. Developed countries account for 80 per cent of world exports of services, even though they constitute only 10 per cent of WTO members, says the submission by the developing countries. Their multinationals have massive financial strength, access to the latest technology and global infrastructure.

"It is difficult, if not impossible, for developing countries, without the advantage of an early start, to catch up with these large firms," notes the submission. African service providers are simply too weak to set up branches in the lucrative markets of the EU, US or Japan.

According to UNCTAD, multinationals even dominate sectors where African countries have a potential advantage, such as tourism. The four largest tour operators -- Thompson, Airtours, First Choice and Thomas Cook -- control 80 per cent of the world tourism market. In addition, studies by the UN body show that many countries in Africa do not possess the necessary conditions to build competitive service sectors. These include human resources, technology, telecommunications infrastructure, regulations that enhance competition, government support for service firms and national strategies to export services.

Still, it is imperative for these countries to develop their service sectors if they are to benefit from GATS, says Ms. Mina Mashayekhi of UNCTAD's Division of International Trade. She argues that "the telecommunications and information technologies sectors should be allocated the highest profile."

Egypt and South Africa, with more advanced infrastructure, could also develop their potential to export health services.

Movement of labour

At the GATS negotiations, there is growing contention over demands by developing countries that liberalization include the free movement of labour. During the Uruguay Round, industrial countries obtained commitments on "important service sectors of interest to them" such as financial services and telecommunications, says Mr. Bhagirath Lal Das, former Indian ambassador to GATT. In the interests of balance, he says, Geneva must emphasize sectors of interest to developing countries, such as allowing free movement of workers to areas with employment opportunities. "This is a sector in which developing countries have clearly an advantage," says Lal Das. "But there is spontaneous resistance to it in developed countries."

In 1994, countries agreed to liberalize capital markets under GATS, but industrial countries rejected proposals from developing countries to open up their markets to significantly more labour from the South. They continue to use strict visa requirements or refuse to recognize educational qualifications from poorer countries.

Negotiating the unknown

Many developing countries were reluctant to participate in GATS during the last round given the lack of studies on the impact of liberalizing services. "We made a compromise when we signed the agreement that assessments should precede future negotiations," says Mr. Chifamba. "But there is no willingness to finance such assessments."

Kenya, Uganda and Zimbabwe are among countries calling for further study on the impact so that the negotiations in Geneva are informed by the findings. They want to know if more jobs have been created and if poor countries have secured any significant share in the international services trade, as promised through the signing of the agreement. They also want to know if liberalization of telecommunications has improved access to telephones in developing countries. To make informed decisions in Geneva, many developing countries would also need to know if GATS has contributed to economic growth since 1995, and how it has influenced trade in agricultural and industrial goods.

Mr. Chifamba says that without such knowledge, developing countries are heading blindly into the same trap they fell into in 1994 when they signed the Uruguay Round agreement. Upon implementation, some of those accords are proving incompatible with the needs of developing countries. One, the Trade Related Aspects of Intellectual Property Rights agreement, has gained international public attention for curbing access to cheap medicines in poor countries.

"What we will end up with is another monster that will constrain the ability of governments to act in the best interests of their people," says Mr. Chifamba. "What they are doing in Geneva is to determine the size of the rope, but if you are going to hang yourself in the end, it does not matter what the size of the rope is."