Services and Trade Agreements:Whither the GATS?

Bernard Hoekman*World Bank

November 20, 2006

* Views expressed are personal and not to be attributed to the World Bank

Genesis of the GATS• Tradability of services increases• Contestability of markets increase

– Deregulation, privatization– Technological changes

• Large gains from liberalization– Services often inputs– Protection generates not just deadweight losses

• US: comparative advantage in services– AIG, American Express, ATT …

• Confluence of forces supports creation of GATS

The Basic Rules & Approach

• 4 modes of supply – includes factor movement• MFN & transparency• 2 specific commitments (“positive list”)

– National treatment

– Market access (mostly QR type policy constraints)

• Weak rules on regulation, but focus of much attention– Reference paper for telecom; talks on professional services

• Uruguay Round: limited to partial scheduling of already implemented liberalization

• Weighted average coverage < 50% for OECD; full commitment < 20%; less for most other countries

Post-2000 Negotiations/Doha

• Little progress to expand GATS (so far 6 years …)

• Bit of a puzzle: – Services should matter to governments for themselves– Services should also matter for overall Doha Round

progress:• (Developing) countries seeking agriculture &

manufactures liberalization in North need to offer a quid pro quo

• North tends to be demandeur in services – a main area of interest to EU, post-demise of new issues

Why such limited traction?• Less “need” for trade agreements?

– Lot of unilateral reform been implemented

• Uncertainty re: costs/benefits of commitments? – E.g., spillover effects of Telmex and Gambling cases

• Backlash of offshoring; Services Directive; anti-migration?

• Complexity of services agenda?– Mix of regulation and discriminatory policies

– Regulators worry about trade negotiators

• A “reciprocity problem”?– Stylized fact: export lobbies are missing in action

Harnessing reciprocity

• MTNs are driven by reciprocity dynamics– Need export interests to push for national reforms

• For many developing countries, services export interests nonexistent, not constrained, or confront non-negotiable barriers– Mode 1: few effective policy barriers– Mode 2 (tourism): own policies matter most– Mode 3: few export interests– Mode 4: very little prospect of market opening

Scope for reciprocity limited

• Mostly a large-firm agenda; intra-OECD and emerging market affair

• Mostly a matter of mode 3 (FDI) and related complementary inputs

• Given weak mode 3 interests of most developing countries, assuming mode 4 is too hard, cross-issue linkage needed:– Mode 3 access in South for merchandise access in

North

Further complications

• In addition to standard political economy forces opposing reform (firms, unions, less-skilled workers), in services have: – Regulators– More skilled workers – “white collar”– NGOs, civil society

• Regulators worry about autonomy and negative spillovers of a market access driven negotiation

• Civil society worries about realization of social objectives, ownership, immigration, etc.

What could be done? (1)

• Remove regulatory opposition by removing generally applicable regulation from the table

• How? Focus only on discriminatory policies, e.g., full national treatment on a sectoral basis– Implies likely opportunity cost if regulation id the

problem, but recognition/harmonization not feasible in any event

• Adopt a “formula approach” limited to critical mass of large players; allow free riding of rest

What could be done? (2)

• Engage poor countries differently: instead of request-offer reciprocity, shift to other instruments

• Constructive engagement to satisfy preconditions to benefit from liberalization– Policy dialogue and monitoring –incl. linkages to IFIs– “Aid for trade” support from donor nations– Greater accountability via an enhanced TPRM-type

mechanism

• May alleviate problem of limited enforcement incentives re: commitments of poor countries

What about regionalism?

• Alternative explanation for limited GATS traction

• Can you get what you want in a PTA?

• Clearly revealed preferred by many governments

• May well be only effective vehicle for mode 4

• May also be more feasible mechanism for regulatory harmonization/recognition

• To date, more talk than action—have only limited commitments in most PTAs and little information on implementation

Conclusions

• GATS not doomed to fail

• But do need a change in modus operandi:– Formula-based, limited group approach with the

focus on discriminatory policies– A “development” approach towards poorer countries,

combining dialogue/engagement, assistance, and monitoring/accountability

• Open question remains whether services can help mobilize agricultural reform in North

• But the services agenda dominates in any event