Global Trends by Martin Khor

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 proposals.

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 firms.

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  appropriate).

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 restrictions.

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.