May 3, 1988

MTNS ON OLD BASIS COULD BECOME 'ZERO-SUM' GAME - UNCTAD

GENEVA APRIL 29 (IFDA/CHAKRAVARTHI RAGHAVAN)— Liberalisation of trade in services could not be undertaken on basis of principles and concepts used in past decades in multilateral trade negotiations on goods, and negotiators should concentrate on achieving "balanced results rather than reciprocity', the UN conference on trade and development has suggested.

In a report (td/b/-1162) on 'services' to the trade and development board, now in session here, the UNCTAD secretariat notes that the MTNS in goods and services would be complicated by growing perception that underlying economic assumptions have changed.

According to theories of comparative advantage, all parties are assumed to benefit from efficiency effects of international specialisation.

But under the new technological paradigm, there might well be a 'zero-sum negotiation', where those retaining advantage in knowledge-based production of goods and services would 'win' while others would 'lose'.

To prevent such on effect, negotiators should concentrate on 'balanced results rather than reciprocity', and redistributional and strategic, aspects of trade liberalisation would have to be taken into account so that no country or group of countries would be required to incur an inordinate degree of loss, and no country's future ability to compete in international trade would be crippled.

If liberalisation foreseen in the Punta del Este ministerial declaration is to promote the expansion of services trade of Third World countries and their development, negotiators must address measures impeding expansion of such trade, and not undermine implementation of measures aimed at strengthening the domestic service sector and its contribution to the development process.

For this end, the definition of 'trade' in services should be such as to cover all modes of delivery of services. Regulations interfering with various modes of delivery of services should receive equal priority, and selection of sectors should cover those of interest to Third World countries.

Negotiations should not merely address 'regulatory barriers' facing service exports, but also the non-regulatory barriers facing service exports of Third World countries, and establish guidelines for multilateral cooperation in a variety of areas, including those falling within the competence of various organisations.

Governments should also assume responsibility for taking various forms of action supportive of expansion of the services trade of Third World countries.

A multilateral framework for trade in services should also contain a recognition by governments of measures that could be applies to provide access to markets for services, in bilateral and sectoral negotiations.

It should also be recognised that in their negotiations with individual firms, Third World countries would have the sovereign right to make such access conditional upon acceptance of certain obligations by the firms to take actions consistent with the development objectives of the Third World country concerned.

Also, a strong domestic producer services sector is essential ton the development of Third World countries, and it should hence be legitimate for such countries to take measures aimed at this objective.

The Uruguay round negotiations on services should also include solutions to problems facing Third World countries in exporting or 'delivering' their services to world markets.

Liberalisation measures primarily directed to solving problems of the services TNCS of industrial countries would not accomplish the needs of the Third World exports.

The package that could emerge out of the Uruguay round should hence ensure that Third World efforts to develop crucial service sectors, particularly those related to production process, are not only not hindered but are actively stimulated by the results of the negotiations.

There was a need to improve definitions and categories of services for analytical purposes, and need to define 'trade in services' for delineating scope of the Uruguay round negotiations.

On the definitional aspects of services, UNCTAD notes that in the case of goods 'trade' has been seen as an indirect exchange between countries of immobile factors of production embodied in goads, and international factor movements seen as an alternative to trade in goods.

In the case of services, factor movements represent an embodiment of the service itself, and thus complementary to trade.

Thus, an approach to defining 'trade' in services using the analogy of 'trade' in goods is unlikely to result in a workable definition.

An alternate approach could be to build on the simple concept that for ' trade' to take place ' something' - which could be physical persons, capital, goods or information - had to move across borders, either to receive or provide a service.

In this light, defining 'trade in services' would involve setting criteria whether the cross-border movement of persons, capital, goods or information actually involve receiving or providing services, and not merely immigration, investment or import of goods.

Even for this it would be extremely difficult to arrive at a general definition of 'trade in services' which could be applied with equal relevance to all four 'modes of delivery', and a pragmatic approach could be to define ' trade' with respect to each made.

Even this UNCTAD suggests could best be achieved through a process of elimination by agreeing on "what is not trade'.

Services, UNCTAD notes, have always been crucial to the development process, and infrastructural services have always been 'the prerequisite for, and not the result of, development'.

But recent technological changes in information and communications have enabled the infrastructural services to be integrated into 'services infrastructure'.

Also, new elements have expanded and modified the role of services in the economy, to the extent that a rethinking of economic theories and development strategies are called for.

International trade flaws can no longer be explained by resource allocation or relative abundance of factors of production, but by 'technological competitiveness of a country - its capacity to adopt, appropriate, accumulate and use knowledge and know-how associated with new technologies.

Services have also become directly integrated into the production process, whether of manufactures, agricultural products or other services.

Producer services are acting as the interface between improvements in technological and physical infrastructure and the producer. They translate improvements in infrastructural services into production, and derive value added from this function.

As in the case of energy in the past, information is becoming the 'key element' in the productive process. There would hence be a tendency for governments to adopt 'strategic' trade policies aimed, not at liberalisation per se, but at securing a larger 'rent' on production and export of information, while affecting the competitive position of rival producers.

Such actions could be aimed at achieving improved and secure access to world markets for 'knowledge-intensive' services, particularly through investment, while restricting the bargaining leverage of host countries in negotiations with foreign investors, particularly in transfer of technology.

While advances in information and communications technology enable Third World countries to obtain access to sophisticated services from industrial countries, over-reliance on such imported services could undermine their possibilities for developing a strong domestic producer services sector - necessary to develop a national capacity and infrastructure for production of higher-value-added manufacturing goods.

Since TNCS have become leaders in development of new technologies and processes, the ability of governments to ensure a transfer of these 'resources' to the domestic producer service sector would be a crucial factor in future development strategies.

Statements that industrial countries have a comparative advantage in services and Third World countries in goods do not take account of fundamental changes taking place in the production process.

A new international division of labour based on reallocation of skilled activities is evolving, and knowledge-based services increasingly provide a critical part of the foundation and infrastructure for production of higher-value added manufactures.

'Knowledge-wealth’, the report notes, is not a natural resource endowment, but rather a product of history, culture and level of development. Knowledge poor countries could hence have little comfort in arguments based -in comparative advantage.

Such a situation could lead to strengthening of the dominant position of service TNCS, exacerbating the dependent position of Third World countries and worsening their international competitive position for both goods and services.

While it might also be possible for such countries to 'leapfrog in the technological sense, the outcome would depend on policy decisions of individual countries, as well as an actions by the international community supportive of this process and strengthening the hands of Third World negotiators vis-à-vis the TNCS in transfer of technology and purchase of domestic services in the host country.

Much of the dominant position of TNCS in trade, production and investment in services could be attributed to the fact that they have both found it necessary to develop, and have been capable of providing themselves with their 'infrastructures'.

But to enable the smaller enterprises of Third World countries to compete with TNCS in their own markets, publicly accessible services infrastructure is needed, UNCTAD notes.

Similarly, world telecommunications infrastructures as envisaged in the international telecommunications union and the UN general assembly resolution on communications infrastructure, would enable these countries to compete effectively in international service markets._