Demystifying regional services trade agreements

By Subhashini Abeysinghe

Introduction

Sri Lanka’s current regional and bilateral trade agreements only deal with trade in goods and not services

Services trade liberalisation at regional level is a new concept to Sri Lanka. Sri Lanka have undertaken liberalisation commitments in telecommunication, banking, insurance and tourism services at the WTO, however, most of these commitments are below Sri Lanka’s current level of openness.

The current regional and bilateral trade agreements of Sri Lanka only deal with trade in goods and not services. However, regional/bilateral services trade agreements are a common feature of international trading regime today. According to the WTO, there are 85 regional agreements that include services trade liberalisation notified to the WTO as at December 2010.

The barriers to trade in goods have come down over the last few decades as a result of unilateral, regional and multilateral efforts. However, barriers to trade in services between countries still remain high.

With the collapse of WTO negotiations, and with the growing realisation of the importance of services trade, countries are trying to eliminate barriers to trade in services between them through regional and bilateral negotiations. Hence, all modern regional trade agreements today cover trade in services in addition to trade in goods.

The first agreement involving Sri Lanka that proposes to covers trade in Services is the India-Sri Lanka Comprehensive Economic Partnership Agreement widely known as Indo-Lanka CEPA. Proposed in 2002, the Indo-Lanka CEPA has missed several deadlines, the last being August, 2008. In the meantime, Sri Lanka has entered into an agreement that cover services in 2010, i.e. the SAARC Agreement on Trade in Services (SATIS).

The countries party to SATIS is Afghanistan, Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka. These countries have only signed the framework agreement, they are yet to negotiate and decide which sectors to be liberalised and to what extent.

The SAARC negotiation process is lengthy and slow, and generally the outcome is very shallow liberalisation commitments that make very little commercial sense. This has been the experience of SAARC when it comes to trade in goods agreements.

Given the technical and legal complexities and political sensitivities involved in services trade agreements, it is unrealistic to expect anything better in services trade liberalisation from SAARC negotiating process.

In trade in goods, Sri Lanka has embarked on negotiating bilateral agreements to fast track removal of barriers by signing separate bilateral agreements with India and Pakistan, in addition to being a party to South Asian Free Trade Area (SAFTA). Sri Lanka has been able to get better product coverage and better concessions for trade in goods at bilateral level than at SAARC level. It is assumed that the same logic is followed in negotiating a bilateral services trade agreement with India.

Services trade agreements are different from goods trade agreements. This difference can mainly be attributed to the intangible nature of services. This feature makes it difficult to measure flow of services trade in and out of a country, making it difficult to evaluate the exact impact trade in services liberalisation will have.

The main barrier to trade in goods is tariffs, which is imposed at the border whereas the services trade barriers are mostly regulations and these are mainly imposed behind the border, not at the border. Removing tariffs at the border is relatively easier compared to removing domestic regulatory barriers. However, in services, since there are no tariffs involved, liberalisation does not entail loss of revenue, which is a main concern for the Government when liberalising trade in goods.

Another difference between trade in goods and trade in services is that goods production and consumption can take place at different locations; however, most services to be provided, the services supplier and the consumer must be in proximity. (e.g. a patient undergoing surgery and the surgeon).

Hence, unlike in goods, services trade involves two sensitive modes of delivering a service: foreign investments and movement of people across borders. These differences between trade in services and trade in goods make the architecture of regional services trade agreements different from that of regional goods trade agreements.

The objective of this short article is to discuss some of the basic features of regional services agreements. This will help stakeholders interested and concerned about the impact of regional services agreements on their particular sector or the national economy to become constructive critiques of the process.

It is also hoped that the stakeholders will be able to not only be constructive critiques but also constructive contributors to the negotiating process to help shape the agreement to suit the needs of the country.

First step in understanding trade in services agreements is to understand four modes of delivering a service across the border. Box 1 defines the four modes of services supply. The services liberalisation in regional agreements takes place according to these four modes of supply.

Scheduling approach

There are two types of regional services agreements; NAFTA type and GATS type agreements. These two types have similarities as well as differences. NAFTA type agreements follow the architecture of the North American Free Trade Agreement (signed between USA, Canada and Mexico) and the GATS type agreements follow the architecture of WTO General Agreement on Trade in Services.

The main difference between the two approaches is NAFTA type agreements follow a negative list approach; meaning all sectors other than the sectors in the negative list are open. The GATS type agreements follow the positive list approach where all sectors that are listed are open and everything else is not.

NAFTA type agreements require countries to list all existing non conforming measures (meaning existing barriers to trade in services) in sectors where they have not undertaken liberalisation commitments (i.e. negative list sectors) whereas GATS type agreements do not require countries to list current barriers to trade in sectors where they have not taken liberalisation commitments.

It is said that because NAFTA type agreements list all existing barriers to entry in non-liberalised sectors they are much more transparent agreements than GATS type agreements.

NAFTA type agreements generally compel countries to reveal status quo policies and bind status quo; meaning take commitments at the current level of unilateral liberalisation. The GATS type agreements do not require countries to reveal status quo policies nor to bind at the current level of unilateral liberalisation. This means GATS type agreements can make liberalisation commitments at regional level which are below the current unilateral level of liberalisation.

For example, unilaterally Sri Lanka may allow 100 per cent foreign ownership in Insurance companies, but at regional level, may restrict foreign ownership to 40 per cent. Such commitments make little commercial sense, however, leaves very high level of policy flexibility to individual governments to change regulations if and when they want.

GATS type agreements are said to have high level of policy flexibility, which leads to high level of policy discretion, hence low level of credibility in binding commitments. In contrast, NAFTA type agreements are said to have low level of policy flexibility, which leads to low level of policy discretion and hence high level of credibility of binding commitments. The general trend observed is that regional services agreements signed by Asian countries largely follow the GATS type approach and countries in North America and Western hemisphere follow the NAFTA type approach.

India has currently signed two comprehensive economic partnership agreements covering services with Singapore (since 2005) and Korea (since 2010). Almost all current bilateral/regional trade agreements India is negotiating are comprehensive trade agreements covering goods and services as well as many other sectors.

These agreements follow the GATS type approach. It is most likely that all future agreements of India will follow a similar format. The current SAARC Agreement on Trade in Services (SATIS) also follows the GATS type architecture.

Scope of the agreement

It is common for most agreements to carve out certain sectors and measures from the scope of the agreement, this is true for both NAFTA type and GATS type agreements. The most common sector carved out in almost all agreements is ‘services supplied in the exercise of government authority’.

Another sector carved out is the air services. In SAARC as well as India-Singapore and India-Korea Agreements both these sectors have been carved out of the scope of the agreement. Another sensitive sector is Government Procurement, in both SAARC Agreement and India-Korea Agreement this sector also fall outside the scope of the services agreement.

Rules of origin

Free trade agreements (FTA) in goods have rules of origin criteria to ensure that products eligible for concessions actually originate in the countries who are members of the FTA. In goods, it is relatively easier to determine rules of origin (ROO) through methods such as ascertaining domestic value addition, production processes and change of HS classification of the product.

However, given the intangible nature of services, it is very difficult to ascertain domestic value addition of a service. Further, it is nearly impossible to observe and verify the production process of a service. In most services, production and consumption happens at the same time (e.g. hair cut).

Unlike in goods, there is no internationally-accepted well developed coding system which is used when trading services. Further definition of trade in services is broader than trade in goods, because it encompasses investments and movement of people. All this makes ROO in services quite different from that of trade in goods.

(The writer is an Economist at the Ceylon Chamber of Commerce.)

ROO in services is normally found in the denial of benefit clauses in a services agreement. For example in SAARC Agreement, if a service is supplied through Mode 1, from the territory of a non-party, then the concessions granted under the agreement will be denied. This means for example to be eligible for concessions provided for services provided via online the service must originate in the territory of a Partner country to the agreement.

In case of services supplied through commercial presence, if the service supplier is owned or controlled by a non-Party, then such services suppliers will not be eligible for concessions. In addition to that to prevent shell companies from making use of concessions, the services supplier in addition to ownership or control, also must have substantial business operations in the territory of the Partner country.

Most regional services agreements follow WTO definition in determining ownership/control, which is having more than 50 percent of equity control or power to name majority of directors. In terms of movement of persons, the ROO is the nationality of the individual whether they reside in the Partner country or not.

Mode 4 – Movement of people

This is a highly sensitive mode of delivering services across borders because of the impact such movement of persons can have on employment and wages in a country. The Comprehensive Economic Partnership Agreements in most instances have a separate chapter dealing with the rules and regulations governing movement of natural persons (MNP).

For example current India – Singapore and India – Korea Agreements have a separate chapter on Movement of People. However, the current SAARC framework agreement on services does not have a separate chapter on MNP.

Generally in GATS type agreements access to the employment market of contracting parties, permanent migration and the regulation of entry of natural persons fall outside the scope of the agreement. For example SAARC Agreement as well as India – Singapore and India – Korea Agreements has carved out these elements from the scope of the agreement.

However, it is very important to understand the relationship between the chapter on MNP and the actual level of liberalisation. The chapter on MNP only gives general framework, the actual liberalisation of movement of people depend on the commitments taken on the schedule of commitments, which lists out the sectors liberalised by each mode of supply.

For example, the categories of people allowed to enter a country may be very generous in the Chapter on MNP, however, when you look at actual liberalisation commitments; these could very well be restricted to very few very senior and highly qualified persons in very few sectors. For example in India – Singapore and India – Korea Agreements, the chapter on MNP have a generous definition on what categories of persons are covered by the agreement; by extending coverage to all services suppliers, services sellers, sellers of goods, investors and employees of investors.

However, actual liberalisation commitments undertaken by India on movement of people under both agreements are not so generous. It is quite possible to have a very liberal scope in the chapter on MNP but make actual liberalisation very shallow and restrictive, and given the sensitivity of MNP, most countries do so.

Schedule of commitments

Normally in FTAs dealing with trade in goods, the products are identified by a classification number known as the Harmonised System of Classification. This is an internationally accepted coding system for goods. For services, the only international classification available is the UN services classification and most countries use this classification system to identify services that are to be liberalised.

For example, WTO has developed a list of services which comprises of 12 main services sectors and 154 sub sectors based on the UN classification system. Table 1 shows as an example the UN central produce classification for architectural services. (a detailed definition of the coverage of each code is given by the UN as well).

A GATS type schedule has two types of commitments; horizontal and sector specific. The horizontal commitments apply to all sectors where liberalisation commitments are undertaken. They are commitments that cut across all listed sectors. The sector specific commitments apply only to that particular sector.

Table 2 shows as an example India’s sector specific commitments in architectural services under India – Korea CEPA. In trade jargon, ‘None’ in a schedule mans fully liberalised and ‘Unbound’ means not liberalised. For example while India has fully liberalised Mode 1 and 2, it has subjected Mode 3 – investments in architectural services to some restrictions.

India has not undertaken any sector specific liberalisation commitments on Mode 4 movement of architects, it says it is ‘unbound’, and is subject to horizontal commitments of India. The horizontal commitment of India in Mode 4 says that entry of persons is governed by the commitments undertaken by India in the chapter on Movement of Natural persons. Generally the chapter on MNP outlines very broad rules governing entry of persons to a country, and mostly these are aligned to the current practice of a country with minor variations.

In GATS type schedules, a country can maintain certain types of restrictions while giving market access to services suppliers of a Partner country. However, these restrictions have to be listed in the schedule. Listing a sector in a schedule does not mean it has to be 100% liberalised.

A schedule can have two types of restrictions; market access and national treatment. The market access limitations for example can be foreign ownership limitations, such as only 40% of a services company can be owned by a foreign services supplier. Further market access in terms of Mode 4 can be restricted only to high skilled categories, a practice followed by many countries.

For example in a specific sector movement of persons may be restricted to only senior managers with specified years of experience. National treatment in trade jargon refers to non discriminatory treatment of foreign and domestic services suppliers; in other words foreign services suppliers cannot be treated less favourably than domestic like service suppliers.

However, the GATS type schedules allow countries to take exceptions to this by listing the discriminatory treatment that is in existence, in the schedule. By doing so the country can treat its domestic services suppliers more favourably compared to foreign like services suppliers.

If a country wishes, it may also not take any commitments on national treatment for a specific sector by simply listing ‘unbound’ in the national treatment column of the schedule, thereby retaining the flexibility to continue whatever discriminatory measures in existence, or even introduce such measures in future.

Conclusion

This article gives a very brief and basic synopsis of a few main features of a regional services agreement. Sometimes ignorance can be the main cause of fear and resistance to introduction of something new and unfamiliar. Such fears may very well lead to exaggeration of costs and challenges and of undermining benefits and opportunities.

As indicated above, the architecture of GATS type regional services trade agreements have many built in flexibilities to accommodate the concerns of the domestic services industry as well as political and social sensitivities associated with services trade liberalisation. These flexibilities can be wisely used to address genuine national and sectoral concerns countries have when liberalising services.

However, it is also important to be aware that these flexibilities carry the risk of being excessively used to accommodate protectionist and vested interests of a few influential groups in a country to the detriment of the national welfare of that country and its people.

Four modes of trading in services

Mode 1: Cross-border supply is defined to cover services flows from the territory of one Member into the territory of another Member (e.g. banking or architectural services transmitted via telecommunications or mail);

Mode 2: Consumption abroad refers to situations where a service consumer (e.g. tourist or patient) moves into another Member’s territory to obtain a service;

Mode 3: Commercial presence implies that a service supplier of one Member establishes a territorial presence, including through ownership or lease of premises, in another Member’s territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or hotel chains); and

Mode 4: Presence of natural persons consists of persons of one Member entering the territory of another Member to supply a service (e.g. accountants, doctors or teachers).

Source: www.wto.org