Restoring balance to services

Of the various WTO agreements, the GATS and TRIPS agreements are especially asymmetrical, in respect of the rights and obligations between developed and developing countries. To redress this imbalance, especially in the GATS, the continuing negotiations within the current GATS framework should take on board the concerns of developing countries. In this regard, developing countries should pursue areas of interest to them, particularly in the movement of labour, and seek enforcable commitments from developed countries on use of developing-country services.

by Bhagirath Lal Das

NEW DELHI: Though there are several imbalances in the rights and obligations in various WTO agreements, the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) are particularly characterized by the severity of imbalances as between the rights and obligations of developed countries and those of developing countries.

Two significant imbalances are immediately noticed in the GATS.

First, by providing a framework for the liberalization of the supply of services, it directly benefits such countries which are endowed with a relatively more developed level of services. The down-stream effects of services on production and other economic activities can be beneficial also for the importing countries. But the direct positive effects on the export earnings accrue to the exporting countries. And in this area, developed countries are the main exporters.

Hence, in terms of sharing of direct gains as between developed and developing countries, the liberalization of services is very much in favour of the developed countries.

Capital, but not labour, mobility

Second, the movement of capital has been specifically included in the obligations, but the same special treatment has not been given to the movement of labour, the other factor of production. Article XI of the GATS says that restrictions must not be applied on international transfers and payments for current transactions relating to specific sectoral commitments. Further, it says that there must not be any restriction on capital transactions which is inconsistent with the specific sectoral commitments.

And according to the footnote to Article XVI.1, where cross- border movement of capital is an essential part of the movement of service in which a commitment has been made by a country, that country is committed to allowing such movement. Further, when the commitment in respect of the supply of service is through commercial presence, a country is committed to allowing related transfers of capital.

Considering that the very existence of such an agreement gives relatively more benefits to developed countries than to developing countries, it is necessary, in the interest of balance and equity in the WTO system, to incorporate provisions to take special care of the interests of developing countries. This should be seen as an exercise in restoring balance to the system, rather than providing special and differential treatment to the developing countries.

But instead of taking such rational steps, the follow-up to the agreement after Marrakesh has further aggravated the imbalance.

Agreements have been finalized on a priority basis in sectors like financial services and telecommunication services which are primarily of importance to the developed countries. The developing countries have been pressured to make high levels of commitments in these sectors. In fact, the US remained out of the first agreement on financial services mainly because it thought that some developing countries had not made adequate commitments of liberalization. These two sectoral agreements have tilted the balance further in favour of the developed countries, as they are the major providers of services in these sectors, and developing countries have hardly any supply capacity in these sectors.

There is a potential of further tilt in favour of the developed countries in the process of recognition of standards of educational qualifications and experience, covered by Article VII, which is an important element in the GATS. It has considerable implication for the market access of services. Through limited recognition in developed countries of qualification and experience obtained in developing countries, the prospects for the services and service suppliers of developing countries can be effectively curtailed. The WTO Member countries are engaged in the process of formulating mutual recognition provisions; and it is very likely that the developing countries may lose out on market access if the qualification and experience obtained in these countries are not fully recognized.

A lot of care is needed in this area to ensure that the elements and operation of the GATS do not aggravate the imbalance further. Besides, special efforts are needed to reduce and eliminate the imbalances. Needs of balance and fairplay would require that:

  • any moves towards further imbalance be stopped forthwith;

  • the special concessions made by developing countries be immediately balanced by specific concessions and commitments from developed countries; and

  • fresh new steps be taken to provide benefits to the developing countries for balancing the inherent imbalance in the very existence of such an agreement.

General framework negotiations

This concern must be fully reflected in the ongoing negotiations in the three areas in the general framework, viz., subsidy, safeguards and government procurement. Essentially, the interests of developing countries would lie in adopting measures which would help develop their services sectors. For this purpose, subsidy and safeguards will be necessary.

Developing countries will need flexibility to give subsidy to their services sector. Any multilateral constraint on this flexibility may be restrictive to their development process. A developing country should itself decide on its policies in this regard, based on its national developmental objectives, availability of resources and developmental priorities. The obligations in this area should be limited to providing information to the WTO on the subsidy policies and measures.

An important point regarding subsidy in services is that the GATS does not provide for exclusion of subsidy from the obligation of national treatment, as is provided by Article III.8(b) of GATT 1994 in respect of trade in goods. The implication is that subsidies given to domestic services and service providers will be deemed to be violating the national treatment obligation contained in Article XVII.1 in respect of sectors covered by the schedule of a country under this article, if appropriate conditions and qualifications have not been made by the country. In this context, it will be desirable and necessary to have a general provision that subsidies will not be covered by the obligation of national treatment.

Criteria for taking safeguard measures also have to be evolved. There could be surveillance on such measures through some appropriate mechanism in the GATS Council. Simple procedures (unlike the complicated procedure for goods) should be worked out which should take fully into account the problems and resources of developing countries.

For government procurement, full flexibility is necessary for developing countries to give preference to domestic services and to choose among the foreign services depending on the need and development objective.

Sectors of interest to developing countries

Developed countries have already got agreements on liberalization in the important services sectors of interest to them, for example, financial services and telecommunication services. Hence, it should be natural, in the interest of balance, to give priority emphasis on the sectors of interest to developing countries. One area which was identified in Marrakesh, but was not pursued diligently, is the movement of labour.

This is a sector in which the developing countries clearly have an advantage; but there is a spontaneous resistance to its liberalization in developed countries. It gets immediately mixed up with the problems of their immigration policies. There is, however, full justification for taking up this area for liberalization in developed countries for several reasons.

First, the enhancement of earnings of developing countries through the economic activities of their labour force in developed countries can be an important component of their foreign exchange resources for further development. Second, it can be an important example of economic partnership between the developed and developing countries. It can provide the developed countries with a trained workforce, and at the same time, it can be a source of additional income for developing countries and also an opportunity for upgrading the technical awareness and knowledge of their workforce. Third, freer movement of labour across borders can improve efficiency of production in manufacturing and services sectors around the world, particularly in the developed countries. Here lies an economic justification of this course in the interest of increasing world efficiency and welfare.

As against these advantages, there could be apprehensions with regard to erosion of sovereignty in matters of immigration; but freer movement of labour will hardly erode sovereignty any more than more liberalized flow of financial services or telecommunication services will.

There is a need for immediately engaging in negotiations for liberalization of movement of labour. There is also a need for initiating negotiations in some other services sectors which are of interest to the developing countries. The choice of sectors will depend on the current and potential attributes and capacity of individual developing countries. Based on current information, one can identify some sectors which can be of interest to a number of developing countries, though not to all of them at the same time.

For example, one may include in this list medical (diagnostic, treatment and surgical) services, accountancy and auditing services, consultancy services, construction services, publication and printing services, repair services for mechanical, electrical and electronic equipment, and so on.

Apart from these elements relating to the continuing negotiations within the current framework of the GATS, there is a need for improvement in the agreement itself to restore balance.

As mentioned earlier, the sharing of direct gains as between developed and developing countries through the liberalization of services is very much in favour of developed countries. To reduce this imbalance, it is necessary that the agreement have provisions for commitments by developed countries to import services from developing countries whenever the latter are in a position to supply such services. There should also be commitments by developed countries for specific measures to enhance the supply capacity of developing countries. These commitments should not be in the nature of a "best-endeavour" clause. Rather, they should be enforceable commitments.

For example, some of the commitments could be in respect of:

  • exemption of developing countries from the application of the limitations, conditions and qualifications mentioned by developed countries in their schedules for Articles XVI and XVII of the GATS;

  • enhanced degree of access and entry facilities for the service providers of developing countries in the developed countries (at present, in several cases, there is less facility of access to the developed countries for the service providers of developing countries);

  • positive structural adjustment in the services sectors in developed countries so as to encourage the use of particular services in respect of which the developing countries have supply capacity;

  • reservation of a predetermined portion of specified services used by the governments in developed countries for supplies from developing countries;

  • incentives by governments to public and private entities for use of services supplied by developing countries.

Commitment on movement of labour

As mentioned above, there are commitments in the agreement on the movement of capital, but no commitment on the movement of labour. There is a need for commitments on the movement of labour. It should be distinguished from the liberalization of movement of labour in general which was discussed earlier.

The analogous commitment to that on capital would be for the free movement of labour needed for the supply of services across the border in accordance with the liberalization commitments of countries in different sectors under Articles XVI and XVII. There should be a provision in the agreement that there must not be any restriction on the movement of labour which is inconsistent with the specific sectoral commitments and where cross-border movement of labour is an essential part of the supply of service for which commitments have been made in Article XVI.

Another area for action is the need for excluding subsidies from the discipline of national treatment. There should be a provision in either Article XVII or XV of the GATS, laying down that subsidies to domestic services or service providers will be exempt from the obligation of national treatment.

The issue of recognition of educational qualification, experience, licences, certificates, and so on can make a major difference to the market access of services, and there is a clear risk for developing countries in this regard. There is a need for quick solutions to the problems faced by developing countries in this area. The GATS should have a provision for the Council for Trade in Services to attend to the problems faced by Members, particularly the developing countries, and to resolve them so that complete fairness in the process of recognition is ensured.

Articles IV and XIX.2 of the GATS have special provisions for the developing countries. These provisions have, however, not been put into practice. Instead of being given special consideration, developing countries have in fact been targeted for extraction of commitments in important sectors like financial services, as mentioned earlier.

There is a need for serious and sincere implementation of the special provisions for developing countries as envisaged in the agreement.

Towards this end, the GATS should have a specific provision for monitoring the implementation of these commitments. For example, the Council for Trade in Services may have periodic consultations with individual developed countries to examine how they are implementing these provisions. Besides, a developing country may be encouraged to bring before the Council, cases of non-implementation which should be considered in the format of consultation with the particular developed country. (Third World Economics No. 199, 16-31 December 1998)

(Mr. Bhagirath Lal Das is a former Indian Ambassador and Representative to the GATT, and later headed the Trade Programmes Division at the UN Conference on Trade and Development. He is also the author of An Introduction to the WTO Agreements and The WTO Agreements: Deficiencies, Imbalances and Required Changes , both of which have been published by Third World Network. The above article first appeared in the SUNS)