Global Trends by Martin
Monday 26 September 2005
Services threat at the WTO
The local services firms
and suppliers of developing countries could face new challenges to their
survival and market share if a new offensive by the developed countries
succeed at the WTO. Their new “benchmarking” proposal would force developing
countries to open up in more sectors and at a faster pace, putting the
local firms on the defensive.
The developed countries have
launched a joint offensive to introduce new methods of getting developing
countries to liberalise their services sectors in the World Trade Organisation
and to have these endorsed at the WTO’s Ministerial conference in Hong
Kong in December.
This has alarmed and upset
many developing countries, whose delegations see it as an attempt to subvert
the present system in which each country can decide on its own pace of
liberalisation, and in sectors of their own choosing.
The offensive came at a meeting
on 13 September at the WTO when members (including the European Union,
Japan, Switzerland, Australia and Korea) presented six papers calling
for additional ways to accelerate the pace of services liberalisation
before the Hong Kong Ministerial. The US and Canada also supported the
The proposals were coolly received
by the developing countries. At another meeting, on 23 September, many
of them stated their objections, criticising the proposals for attempting
to change the nature of the WTO’s services agreement and negotiating methods,
and for removing the policy flexibilities now available to the countries
to choose their pace and degree of liberalisation in the various sectors.
Among the countries speaking
up were Brazil, Indonesia, the Philippines, South Africa, the Caribbean
countries, and the least developed countries.
At stake in this debate is
the fate of the domestic enterprises and service providers in the developing
countries. If the countries open up their markets too rapidly, these
small and medium sized local enterprises risk being overwhelmed by the
much bigger foreign companies of the rich countries.
The service sector includes
banks, insurance companies and other financial institutions, wholesale
and retail trade, utilities (such as electricity, energy, water and telecommunications),
transportation, postal services, education and professional services (including
lawyers, doctors, architects).
In many developing countries,
services comprise the most important sector in terms of contribution to
the Gross Domestic Product, income and jobs. It is also the sector where
local institutions and professionals are most entrenched, with a high
degree of local ownership and participation.
It was with the aim of breaking
into the markets of developing countries that the huge service enterprises
of the United States, Europe and Japan persuaded their governments to
inject a services agreement into the trade system during the Uruguay Round
of trade talks.
Many developing countries were
against this, arguing that services is not essentially a trade issue and
trade rules cannot be appropriately applied to the sector. They were
concerned that opening up of their services would lead to local banks,
wholesale and retail shops and telecom services being taken over by foreign
They finally agreed only when
safeguards and freedom of policy choice were built into the services agreement.
These include the “positive
list approach” (only those sectors that are listed down are deemed to
have been committed for liberalisation), the ability to also list restrictions
to full liberalisation in the sectors chosen, and the bilateral “request-offer”
system of negotiations (in which other countries can request a country
to liberalise in various sectors, but the country is free to offer to
commit in whichever sector of its choice and to whatever extent it deems
Developing countries were assured
during the negotiations that they could after all choose whether or not
to liberalise, and if so, then at which pace and in which sectors. This
flexibility was also built into provisions (such as Articles 4 and 19)
of the General Agreement on Trade in Services (GATS), which came into
force in 1995.
However, this “compact” now
risks being broken, with the developed countries demanding that a new
approach (called “benchmarking” as well as “multilateral method”) be introduced,
in which developing countries are required to commit to liberalise in
a certain specified number of sectors, and to a certain minimum degree.
Particularly targeted is liberalisation
of “commercial presence”, or Mode 3 of the GATS. The developing countries
are asked to open up a minimum percentage of sub-sectors for participation
of foreign service enterprises and providers. Some proposals call for
developing countries to bind existing levels of actual liberalisation,
and then go further by committing to liberalise even more deeply.
The proposals go counter to
the policy flexibilities in the GATS. For example, in one version of
the proposals, ten sectors (the most economically important) may be chosen
in the new “benchmarking” or “multilateral method.”
From among the ten sectors,
developing countries may be required to open up in five or six, while
developed countries open in eight.
A particular developing country
may not have intended to open up in six of the ten sectors. It may have
considered opening in only one or two, for instance. It is now required
however to open up in six.
Moreover, in the six chosen
sectors, the country may be required to liberalise to an extent to be
specified. For example, restrictions on the degree of foreign ownership
may not be allowed, or limits may be placed on the number and degree of
Another flexibility that will
be eroded is the policy space that many countries keep between their actual
liberalisation measures and the commitment they make at the WTO.
Countries may have chosen to
liberalise in several sub-sectors, but do not want to make commitments
on some of the measures in the WTO, as such commitments are legally binding.
In this way, a country that has liberalised in a sector can still “backtrack”
or increase the restrictions if circumstances were to change (for example,
during a financial crisis).
In some of the “benchmarking”
proposals, countries will be required to “bind” their present level of
liberalisation, or to make commitments in the GATS in the sectors in which
they have already opened up. This would remove the present flexibilities
for a country to “backtrack” when the situation necessitates this.
The developed countries have
argued that the developing countries have made few offers to commit, and
thus the new method is needed to get them to accelerate their liberalisation.
Developing countries counter-argue
that it is the rich countries that are lagging behind, as they have not
offered to liberalise the movement of labour, which is the key service
in which the poorer countries have an interest.
They also believe that it is
their right under the GATS to liberalise at their own chosen pace, and
that developed countries are not respecting this principle of because
their companies are impatient to get market access and take over the business
in the developing countries.
This battle has serious implications
for development. If the rich countries have their way, the developing
countries may be forced to open up their services faster than the rate
at which their local enterprises can face the foreign competition.
The share of locals in their
economy could then erode and many vital sectors could fall under the control
of foreign firms.
It is thus crucial that the
policy makers, politicians and public alike (as well as the companies
that will be affected, of course) wake up to the challenge facing them,
and participate in the discussions now taking place at the WTO.
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