GATS HAS POTENTIAL, NO IMMEDIATE VALUE TO SOUTH

6:25 AM Jul 1, 1994

GATS HAS POTENTIAL, NO IMMEDIATE VALUE TO SOUTH
Geneva 1 July (Chakravarthi Raghavan) -- The General Agreement on Trade in Services (GATS) has brought no major economic value to the developing countries, but its framework and some of its provisions could bring potential benefits in future rounds of liberalisation, according to the UN Conference on Trade and Development.

The GATS is part of the package of agreements in the Uruguay Round and annexed to the World Trade Organisation agreement.

UNCTAD's detailed and full assessment of the outcome of the Round from the perspective of the developing countries is to be published in its 1994 Trade and Development Report.

But in a report to the Standing Committee on Services, UNCTAD says that a full evaluation would be possible only after the continuing negotiations on specific commitments -- in financial services, maritime services and basic telecommunication services, as well as on the mode of supply by movement of natural persons which is of particular interest to developing countries are completed.

In these three sectors, the report notes, the developing countries are under very heavy pressure to offer even more market access to the developed countries.

A determining factor as to whether the GATS would benefit developing countries or not, UNCTAD says would depend on the extent to which the major trading partners actually respect their obligations and don't abuse the flexibility built into various provisions of the GATS, and renounce attempts to obtain concessions through bilateral pressures entailing threat of punitive action rather than through offer of reciprocal benefits.

Their willingness in this respect, UNCTAD says, "may be indicated by their attitude to the faithful incorporation of the multilateral obligations in their domestic law" and through negotiation of specific commitments related to access to technology, distribution channels and information networks, and liberalised markets.

By 15 December 1993, 94 countries have submitted their schedules of specific commitments, with 62 offers accompanied by an MFN exemption list. These commitments vary widely in sectoral coverage, extent of limitations on market access, national treatment and modes of supply.

Most offers of both developed and developing countries provide a standstill on a wide range of sectors, though with important qualifications and limitations. The extent to which these actually provide a rollback of restrictions can only be determined after an analysis of legislative changes by countries to implement their concessions.

But even consolidation of status quo through application of MFN, and specific market access and national treatment commitments in specific sectors and subsectors, by guaranteeing security of access, will expand trade and investment in services.

Given that developing countries have a weaker services sector, their offer includes a more limited number of sectors than those of developed countries.

But developed countries have excluded some important sectors -- audio-visual services by EU, maritime services by USA and specific subsectors in financial and business services by Japan.

The modes of supply most frequently included are of commercial presence and movement of consumers, while cross-border trade as a mode of supply has been left unbound in many offers. The mode of supply of natural persons is in most offers, but as a horizontal concession limited to intracorporate transferees -- manages, specialists, executives -- and business visitors, linked to commercial presence but without sectoral specificity.

There have been some offers of additional categories of natural persons. Canada for some professional categories for three months; US for some 'speciality occupations' but under very strict conditions and entry limited to three years; Japan in some specific activities like legal services, accounting, auditing, bookkeeping and taxation for a period not exceeding five years.

In the area of access to distribution channels and information networks, the offers of some developed countries such as US, Canada and Switzerland omit access to computer reservation systems.

The emphasis in offers of most developed countries is via commercial presence as mode of supply and movement of persons in intra-corporate transferees. Most developing countries cannot benefit from these offers.

The GATS establishes for the first time a multilateral framework of rules and principles for trade in services and provides a framework for achieving progressively higher levels of liberalization of trade in services through successive rounds of multilateral negotiations.

The universal coverage (of services) and the definition of trade in service as one involving four modes of supply -- cross-border movement, movement of consumers, of commercial presence and movement of natural persons as suppliers of services -- has been an innovation of significant importance for developing countries.

But the wide definition could also lead in future to complications about origin of services traded.

For example, Art XXVIII of GATS, on definitions, provides that a juridical person is "owned" by persons of a Member if more than 50 percent of equity interest in it is beneficially owned b persons of that Member. But many of the schedules contain under 'commercial presence' commitments for less than 50 percent equity ownership, which would mean that the juridical person established would be considered as domestic.

The GATS has provided for unconditional MFN treatment -- a contentious issue since developing countries had been afraid that they might otherwise face 'conditional' MFN and denying them benefits unless they agreed to a certain level of obligations. But Art. II.2 has provides for exceptions, governed by criteria set out in an Annex. This would enable MFN exemptions for ten years, subject to a review after five years.

The unconditional MFN would provide export opportunities in many sectors, even if no specific market access or national treatment commitments have been entered in the schedules, since many participants already have relatively open markets. And unless exempted, benefits of existing preferential treatment under bilateral investment or friendship and commerce treaties would have to be extended to all.

However in some sectors like basic telecommunications, financial services and maritime transport, some participants with liberalised domestic markets, confronted with closed markets for their 'exports' have entered MFN exemptions in schedules as a way of securing sectoral reciprocity. Some of the MFN exemptions entered are couched in terms such as to cover even future measures, showing that attempts to secure sector-specific reciprocity have been relatively successful.

By including a clear obligation on "increasing participation of developing countries", there has been a recognition in GATS of the basic asymmetry between developed and developing nations and a commitment that developed countries would take concrete measures to strengthen domestic services sector of developing countries and provide effective market access for their exports.

The developing countries are allowed to pursue this objective through imposition of conditions on foreign suppliers in return for market access, and undertake liberalization in services sectors of interest to developed countries to seek reciprocal access conditions in services exports of interest to them.

The inclusion of these provisions remove any doubt over the legitimacy of measures taken by developing countries to strengthen their services capacity -- such as by imposing on foreign service suppliers conditions for transfer of technology or access to network, or employment requirements, or apply other national policy measures including subsidizing their services sector.

In their schedules, some developing countries have attached conditions such as limitations or requirements on type of commercial presence -- joint venture requirements or general criteria for authorization to deliver services through commercial presence to ensure development of competitive services sectors. Other conditions attached include minimum requirements for training and employment, effective control of the enterprise through domestic shareholders, training of local employees and employment of domestic subcontractors, local content requirement (such as a percent of screen time in private film screening to be devoted to domestic films or advertisements), surcharges and different tax rates, access to technology -- foreign supplier to use 'appropriate and advanced technology', equipment and managerial experience and obliged to transfer its technology and experience to domestic personnel.

But the entire provisions about increasing participation of developing countries in the world services trade remains at present "a statement of good intentions", depending on negotiated specific commitments.

In Art VIII, GATS has strict conditions sought by the developed countries that monopoly suppliers of a service in a country (many public utility services are either state-owned or operate in monopoly conditions) in the supply of a service operate in line with a country's obligations and commitments. But they "have resisted comparable provisions" on treatment of restrictive business practices (RBPs) and other anti-competitive practices of private corporations.

The provisions, recognising the effect of RBPs and providing for consultations, cooperation and exchange of information, but with no specific obligation to eliminate them, could be interpreted by enterprises as "a clear indication of lack of determination of governments to deal with anti-competitive practices," says UNCTAD.

For a number of sectors, international trade in services is distorted by anti-competitive practices and it would be difficult for more vulnerable developing countries to include such sectors in their schedules in the absence of more stringent disciplines. There should be clear obligations for control of anti-competitive practices by parties to the agreement taking all possible measures, legislation or otherwise, "to ensure that service suppliers from their territories do not engage in unfair trade practices".

This, UNCTAD suggests, could be the subject of a GATS work programme and dealt with in a second round of negotiations along with subsidies, safeguards and government procurement etc.

The WTO's DSU (integrated disputes settlements understanding) enables cross-retaliations, under certain conditions, in trade disputes on services by withdrawal of concessions on goods or intellectual property.

But the "commercial presence" aspect of concessions in services introduces an element peculiar to services and not to trade in goods. It might not always be clear in services as to who has the right to invoke the DSU and on behalf of whom.

UNCTAD asks: If a foreign-owned firm is incorporated domestically and becomes, for national law, a domestic firm, would it not have to relinquish the right to have a foreign government intervene on its behalf under the DSU? If not, would not such a firm receive more than 'national treatment'? Would it not be necessary to draw up a list of firms "covered by the agreements or concessions" to distinguish them from national firms.

The Agreement as it stands provides no guidance as to who is eligible to initiate the DSU mechanism or the relationship between local remedies and the DSU mechanism nor is it clear whether definition of 'juridical persons' is intended to provide guidelines on this. The lack of provisions on rules of origin might also lead to confusion and disputes.

The industrialized countries, UNCTAD points out, have sought more MFN exemptions than developing countries. This could be because developing countries were unable to identify, before the 15 December 1993 deadline given to them, the sectors and subsectors where they would need exemptions. But now they would have to fulfil the strict conditions of Art IX -- grant of waiver by three-fourth majority of WTO members, for time-bound periods etc.

The GATS negotiations have not been concluded in three sectors (financial, basic telecommunications and maritime transport) and one mode of supply (movement of natural persons). The Ministerial decision on these continuing negotiations provide MFN exemptions could be made in these sectors until conclusion of the negotiations -- six months after WTO entry for financial and basic telecommunications and till June 1996 for maritime services.

In the negotiations on financial services, the US tried to use the MFN exemption as a negotiating tactic to improve offers from some countries. It has also indicated it will maintain its derogation from Art II for basic long distance domestic and international telecom services pending liberalization in major telecom markets.

The annex on Art II exemptions, though it is supposed to specify the conditions under which a member is to be exempted from the MFN obligation has not done so. But all the MFN exemptions granted for more than five years is to be reviewed by the GATS Council, examine whether the conditions which created the need for exemption still prevailed and when the next review should take place. There is no provision however for review of the initial list of exemptions.

This lack of multilaterally agreed criteria, UNCTAD says, means that countries could abuse the open-ended possibility of entering exemptions and many exemptions could be put forward mainly to gain advantages in negotiations, and further undermine the functioning and credibility of the GATS.