Regulation of international trade within the framework of the world trade organization (WTO)
Regulation of International Trade under WTO rules: objectives, functions, principles, structure, decision-making procedure. Issues on market access: tariffs, safeguards, balance-of-payments provisions. Significance of liberalization of trade in services.
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Assuming that a measure is a subsidy within the meaning of the SCM Agreement, it nevertheless is not subject to SCM Agreement disciplines unless it has been specifically provided to an enterprise or industry or group of enterprises or industries within the jurisdiction of the authority granting the subsidy. In other words, only subsidy distorting the allocation of resources within an economy should be subject to SCM disciplines.
Types of specificity.
Enterprise-specificity: for a particular enterprise
Industry-specificity: for a particular sector or sectors
Regional-specificity: for producers in specified parts of a territory
Elements for adverse effect:
- material injury or threat of material injury (clearly foreseeable and imminent injury)
- nullification or impairment of benefits under GATT 1994 when the improved access to a market is undercut by subsidization in that market (see relevant sections concerning DSM)
- serious prejudice to the interests of another Member, or the threat of serious prejudice
Any one of the above three elements will be enough to get the action initiated.
Factors relevant to injury:
- volume of the subsidized imports: whether there has been a significant increase either in absolute terms or relative to production or consumption in the importing country
- the effect of the subsidized imports on the prices of like products in the domestic market: whether there has been significant price undercutting, depression or suppression, i.e., prevention of price increase which would have occurred in the absence of the subsidized imports
- the consequent impact of the imports on the domestic producers of these products, such as decline in output, sales or market share, profits, productivity, return on investments, cash flow, inventories, employment, wages, etc..
Criteria for serious prejudice.
Serious prejudice is considered to exist if at least one of the following conditions is fulfilled.
The subsidy displaces or impedes the import of a like product of another Member into the market of the subsidizing Member. In this case, the subsidy is given by an importing Member, and the adverse effect is on an exporting Member.
The subsidy displaces or impedes the export of a like product of another exporting Member in a third country market. In this case, the subsidy is given by an exporting Member, and the adverse effect is on another exporting Member sharing a common export market.
The subsidy results in significant price undercutting, significant price suppression (a situation in which prices are prevented from rising though normally they would have risen) or price depression (lowering of prices), or lost sales in a market. In this case, the subsidy is given by an exporting Member, and the adverse effect is on the importing Member in its market; or the subsidy is given by an importing Member, and the adverse effect is on an exporting Member in the market of the importing Member; or the subsidy is given by an exporting Member, and the adverse effect is on another exporting Member in a third country market.
The subsidy on a particular primary product or commodity results in an increase in the world market share of the subsidizing Member in that product or commodity as compared to the average share it had during the previous three years, and the increase follows a consistent trend over the period in which the subsidy has been granted.
Example of serious prejudice.
The Panel on European Community-Refunds on Exports of Sugar-Complaint by Brazil (Nov. 1980) considered the quantity of European Community sugar made available for export with maximum refunds and also the fact that the funds for export refunds did not have a limit. It concluded that the manner of application of the system of granting export refunds contributed to depress sugar prices in the world market, and this constituted a serious prejudice to Brazil.
Clarification of some terms.
Domestic industry: the whole of the domestic producers of the like products, or at least those of them whose collective output of the products constitutes a major proportion (normally more than half) of the total domestic production of those products, excluding related producers
If there are isolated markets for products in question in a country, the examination of injury can be conducted in relation to only the industry located in a specific isolated region, i.e., regional industry, not to the total or majority of the domestic producers.
Industry in a unified market of a customs union must be taken to be the domestic industry.
Like products: products identical, i.e., alike in all respects, to the product under consideration, or in the absence of such products, products which have characteristics closely resembling those of the product under consideration, even though they are not totally alike in all respects
The decision regarding the like product is important because it is the basis of determining which companies constitute the domestic industry, and that determination in turn governs the scope of the investigation and determination of injury and causal link.
For example: The Panel on US-Definition of Industry Concerning Wine and Grape Products (April 1992), examined whether wines and grapes were like products. It concluded that they were not because these two products had different physical characteristics and the production of grapes and the production of wine were two separate groups of industries in the US.
For prohibited and actionable subsidies, two types of remedy are possible, i.e., remedy through the dispute settlement mechanism at a multilateral level and remedy by imposing countervailing duty at a unilateral level. The route of countervailing duty can be taken only if material injury or a threat of material injury exists.
Countervailing Measures are usually duties imposed by the importing country to offset the effect of the subsidy on the product in question. They are a unilateral remedy, but may only be applied by a Member after an investigation by that Member and a determination that the criteria set forth in the SCM Agreement are satisfied.
Criteria: subsidized imports or the existence of a prohibited or actionable subsidy, injury to a domestic industry, a causal link between the subsidized imports and the injury
Countervailing duty process.
Application by domestic industry: If an application is supported by more than half of the total domestic producers of the like product, or if those supporting an application account for a higher level of production of the product than those opposing it, the application will be considered to be made by or on behalf of the domestic industry. For this purpose, those supporting an application should not account for less than 25% of the total domestic production of the product.
Preliminary examination by designated authorities of a Member: to determine whether the evidence given in the application is sufficient to justify the initiation of an investigation.
The application must be rejected and investigation terminated if the amount of subsidy is de minimis, or the volume of the subsidized import or the injury is negligible, i.e., less than 1% in general cases, or less than 3% for developing countries in Annex VI, or less than 2% for other developing countries, or less than 4% of the total import of the like product in the importing country in the case of a developing country under investigation ( but no more than 9% collectively for all developing countries).
Consultation: to be held between governments of importing and exporting countries after an application is accepted and before initiating the investigation so as to clarify facts in the application and arrive at a mutually agreed solution.
Investigation: If no agreement is reached in the consultation, the investigation may start. The time will normally be one year, but in no case should it exceed 18 months, and then a final determination will be made by the investigating authorities.
Interested Members and parties, i.e., foreign producers, exporters, importers and domestic producers whose products are the subject of investigation, as well as industrial users and consumers, will be informed of the investigation in order to provide relevant information and arguments.
The investigation is to determine whether the measure in question is a subsidy, the extent of the subsidy, whether material injury to the domestic industry has been caused and whether there is a causal link between the subsidy and the injury, i.e., whether the injury or the threat of it has been caused by the subsidy.
Provisional measures may be taken by the Member after the expiry of 60 days from the initiation of the investigation to prevent injury being caused during the investigation, but the period of application must not exceed 4 months.
Satisfactory Undertakings from the subsidizing Member or from the exporters in the course of the investigation to remove or limit the subsidy or to raise the price of the product may suspend or terminate the investigation.
Imposition of countervailing duty: If there has been a positive finding in relation to the subsidy, injury or linkage, countervailing duty may be imposed. But before the imposition, domestic consumers and industrial users should be given an opportunity to demonstrate the possible adverse effects of such duty on them.
The countervailing duty cannot be higher than or in excess of the subsidy found to exist. The Agreement provides a guideline that the duty should be less if such a smaller duty will be adequate to remove the injury to the domestic industry, i.e., the duty should be just enough to compensate for the injury margin.
The countervailing duty has to be applied on a non-discriminatory basis to the products of all countries satisfying the conditions of subsidy, injury and causal linkage.
Review and duration: A review may be undertaken by the authorities either on their own initiative or at the request of an interested party as to whether the continuance of the duty is necessary to offset subsidization or it is likely that injury will continue or recur if the duty is removed. A countervailing duty can be continued as long as is necessary to counteract injury-causing subsidization, i.e., less or more than the 5-year period.
Provisions for developing country Members.
Least developed country (LCD) Members and other developing country Members having gross national product (GNP) per capita less than US$1,000 per annum are permitted to provide export subsidies.
Country list: Bolivia, Cameroon, Congo, Egypt, Ghana, Guatemala, India, Indonesia, Kenya, Morocco, Nicaragua, Nigeria, Pakistan, Philippines, Senegal, Sri Lanka, Zimbabwe.
Other developing country Members are exempted from the prohibition of export subsidies for a period of eight years from 1 January 1995.
If a developing country Member has attained export competitiveness in a product, i.e., a share of at least 3.25% of world trade in that product and such share continues for two consecutive years, this Member will have to phase out export subsidies on this product over a period of eight years if it is included in the above list (Annex VII to Article 3.1 a), or two years otherwise.
Import Substitution Subsidy
LDC Members will be exempted from the prohibition of import substitution subsidies for 8 years from 1 January 1995. For other developing country Members, the prohibition will not apply for five years from 1 January 1995.
Absence of presumption of serious prejudice
For developed country Members, there is a presumption of the existence of serious prejudice if any of the following four situations exists:
- the subsidy on a product exceeds 5% of the value of production;
- the subsidy is given to cover the operating losses of an industry
- repeating subsidy is given to cover the operating losses of an enterprise;
- direct forgiveness of debt, including grants to cover debt repayment.
The burden of proof lies on the subsidizing Member to demonstrate that in spite of the existence of these situations, the elements of serious prejudice do not exist. In the case of developing country Members, however, there is no presumption of serious prejudice in these circumstances. Thus, there is a shift of the burden of proof, i.e., the burden of proof is on the complaining Member to demonstrate that serious prejudice exists. Furthermore, adverse effect in a third country market caused by the subsidized exports from developing countries will be exempted from any countermeasures.
Besides, subsidies linked to and granted within a privatization program of a developing country Member will be free from any remedial action.
Special provisions for Member countries in transition.
For Member countries in transition from a centrally planned economy to a market, free-enterprise economy, the following flexibilities have been laid down in the Agreement:
- such Members have seven years to phase out the prohibited subsidies, i.e., export subsidies and import-substitution subsidies;
- remedies through the dispute settlement process cannot be taken against direct forgiveness of debt for seven years;
- regarding remedies through the dispute settlement process against other actionable subsidies, such Members have the same seven-year flexibility as the developing country Members in general.
2. Dumping and Anti-dumping
Definition: Dumping is a situation of international price discrimination, where the price of a product, when sold in the importing country, i.e., the export price, is less than the price of that product in the market of the exporting country, i.e., the normal value.
Dumping vs Subsidy.
Dumping is adopted by firms and enterprises, whereas subsidy by Member governments;
The remedial action in respect of subsidies is targeted at the subsidizing Member, i.e., is taken against the subsidized product exported by the various enterprises of the subsidizing country, whereas the action in respect of dumping is taken only against the enterprises that resort to the practice. Those enterprises which do not dump the product are not covered by the anti-dumping action.
Effects of Dumping.
The low prices of the imported products may harm the domestic industry which is producing like products;
The consumers and industrial users of the product in the importing country may benefit from such low prices.
Impact on trade.
Generally, the very initiation of an investigation on dumping gives rise to uncertainty in the exports from the country under investigation to the investigating importing country. Importers may start shifting their sources of supply. Usually, the investigation takes a long time, and even if finally there is a negative determination of injury of dumping, some damage would already have been done, with some loss of market for the exporting country.
Developing countries are exposed to a considerable degree of uncertainty about their export prospects as they have been facing a large number of anti-dumping investigations.
Persistent dumping or international price discrimination, is the continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market than internationally.
Predatory dumping is the temporary sale of a commodity at below cost or at a lower price abroad in order to drive foreign producers out of business, after which prices are raised to take advantage of the newly acquired monopoly power abroad.
Sporadic dumping is the occasional sale of a commodity at below cost or at a lower price abroad than domestically in order to unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices.
Cases in history
In the late twentieth century, Japan was accused of dumping steel and television sets in the US, and European nations of dumping cars, steel, and agricultural products. With the development of international trade, however, more and more developing countries are exposed to charges of dumping by developed countries.
Disciplines regarding anti-dumping measures.
Existence of dumping
- Existence of material injury or threat of material injury to domestic industry producing like products
- Causal link between dumping and injury
- Margin of dumping
If an enterprise is found to be dumping its products and if such dumping is causing injury to the domestic industry in the importing country, the importing Members can impose a countervailing duty on the imports up to the maximum extent of the margin of dumping, i.e., the quantum of dumping.
Three steps in determining the existence of dumping
1. determination of the export price
2. determination of the normal value
3. comparison of the export price and the normal value
The major importing countries have enacted very complex procedures to adjust the available data for the export price and the normal value so as to make them reasonably comparable.
Generally, the export price will be based on the transaction price at which the foreign producers sells the product to an importer in the importing country. In some cases, however, this price may not be available or reliable:
- the export transaction is an internal transfer
- the product is exchanged in a barter transaction
- the exporter and the importer may be associated
- the exporter and the importer may have some mutual compensatory arrangement between them or a third party.
In such cases, an alternative method of determining an appropriate export price or calculating a constructed export price for comparison is needed.
Constructed export price: The basis for calculating the constructed export price is the price at which the imported product is first sold to an independent buyer. If the product is not resold to an independent buyer or is not resold in its original imported condition, the authorities in the importing country may determine the constructed export price on some reasonable alternative basis.
General rule for the determination of normal value:
The normal value is generally the price of the product at issue or the price of the like product, in the ordinary course of trade, when destined for consumption in the exporting country market.
Sometimes, it may not be possible to consider the sale price in the exporting country because:
- there is no sale of the like product in the exporting country
- the sale is made in a particular market situation
- sales volume in the domestic market of the exporting country is less than 5% of the sale of the product to the importing country
- sales in the domestic market of the exporter are made below cost
Ordinary course of trade
This concept has been clarified by citing negative situations:
- the exporters and importers are related
- the sale price is consistently below the cost price
- the product is made for a single and specific purpose according to exclusive specifications
Particular market situation:
- there may be strict government control on prices and prices may not be determined based on market conditions, but on several other social and political considerations
- there may be different patterns of demand for the product in the exporting and importing countries
Sales below cost.
Prices consist of fixed costs, variable costs, plus the amounts for administrative, selling and general costs/expenses and amounts for profits. This issue has particular significance as it has a bearing on the calculation of the dumping margin. If prices below cost in the exporting countries are left out while calculating the normal value, there will be a bias towards arriving at a higher normal value and therefore a higher dumping margin. Generally, prices below cost will be included in calculating the normal value. When there is evidence of persistent sales at lower prices and when large quantities are involved, sales below cost will be excluded from the calculation of normal value.
Conditions for exclusion of sales below cost from calculation
- such sales are made within one year, and in no case less than six months
- the volume of such sales is 20% or more of the volume under consideration in determining normal value
- the weighted average selling price of the transaction under consideration is below the weighted average per unit cost, and therefore cannot provide for the recovery of all costs within a reasonable period of time
Cost of production
Normally, the cost will be calculated based on the records kept by the exporter or producers under investigation if:
- such records have been kept in accordance with the generally accepted accounting principles of the exporting country, and
- the records reflect reasonably the costs associated with the production and sale of the product.
Some adjustments in the cost will be required as there may be some items of cost which are spread over products beyond those which have been exported, such as R&D costs, costs relating to start-up operations.
Alternative Methods for Calculating Normal Value
If the recorded sale price for the product in the exporting country cannot be taken for the purpose o of calculating the normal value, the normal value will be determined as:
a comparable price of the like product when exported to an appropriate third country
a constructed normal value based on the cost of production in the country of origin plus administrative, selling and general costs/expenses and profits
Which of the two alternatives should be adopted will depend on the discretion of the importing country.
According to GATT 1994 and the Agreement, importing countries have exercised significant discretion in the calculation of normal value of products exported from non-market economies where the governments have a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by states.
Comparison of Export Price and Normal Value (Calculation of Dumping Margins)
The comparison must be made at the same level of trade, normally the ex-factory level, and the comparison must be of sales made at as nearly as possible the same time. Due adjustments should be made for differences which affect price comparability, such as differences in conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, etc.
In cases where the export price is constructed on the basis of sale to the first independent buyer, adjustments should be made for costs incurred between importation and resale, such as duties and taxes, and also for profits. In most cases, the comparison of the export price and the normal value will involve conversion of currencies. The rate of exchange on the date of sale (i.e., the date of the instrument which establishes the material terms of sale) will be considered.
Level of trade refers to the stage of transaction, e.g., whether the sale is to retailers, to local distributors, or to regional distributors. If levels other than ex-factory level have entered into the calculations, they will have to be reduced to ex-factory level by making suitable adjustments.
Normal method for comparison of prices
After having made all the relevant calculations, the actual comparison will normally be made according to the following methods:
- a weighted average normal value will be compared with a weighted average of the prices of all export transactions
- the normal value will be compared with the export price on a transaction-to-transaction basis
This parity in comparison is important as it ensures a degree of fairness. If the average normal value were to be compared with the export prices in individual transactions, it will generally result in a higher dumping margin. In averaging the export prices of various transactions, the higher export prices get balanced with the lower prices and, the margin becomes smaller.
A weighted average normal value may be compared with the export prices of individual transactions when there is a pattern of export prices differing significantly among purchasers, regions or time periods. To prove a pattern in respect of regions, for example, it will be necessary to show that the prices of products exported to a particular region in the importing country are usually different from the prices for other regions.
Determination of Injury
In order to impose anti-dumping duties, the investigating authorities of the importing Member must make a determination of injury.
Coverage of injury: Injury covers material injury to a domestic industry, or threat of material injury to a domestic industry, or material retardation of the establishment of a domestic industry.
Elements of analysis: To confirm the determination of injury, a Member must examine the volume of dumped imports either in absolute terms or relative to production or consumption in the domestic industry, and price effects of dumped imports on the domestic market such as significant price undercutting by the dumped imports as compared with the price of a like product of the importing Member or price depression or prevention of price increase of domestic like products evaluate the impact of dumped imports on the domestic industry, such as actual or potential declines in sales, profits, output, market share, productivity, return on investment, utilization of capacity, actual or potential effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investment
Demonstration of Causal Link.
A demonstration based on an examination of all relevant evidence must be given to show that there is a causal relationship between the dumped imports and the injury to the domestic industry. Apart from dumping, other factors such as changes in the pattern of demand or developments in technology may cause injury to domestic producers. Injury caused by such factors must not be attributed to dumped imports.
Procedures for Imposition of Anti-dumping Duties
Initiation of investigations: Generally, investigations should be initiated on the basis of written request submitted by or on behalf of a domestic industry, stating evidence of dumping, injury, and causality, as well as information regarding the product, industry, importers, exporters, and other matters.
Investigation: collection of evidence, use of sampling techniques, confidentiality of sensitive information, transparency of proceedings, on-the-spot investigations, use of best information available, etc. Investigations should be completed within one year, and in no case more than 18 months after initiation.
All interested parties should be given an opportunity to present evidence and to comment.
Anti-dumping investigations are to end immediately in cases where the authorities determine that the margin of dumping is de minimis, i.e., less than 2% of the export price, or that the volume of dumped imports is negligible, i.e., less than 3% of the imports of the like product in the importing country individually and no more than 7% collectively.
Provisional measures: Provisional measures preferably in the form of a security through cash deposit of bond may be applied if there is a preliminary affirmative determination of dumping, injury and causality 60 days after initiation of an investigation. The time limit is usually 4 months, with a possible extension to 6 months. The period of provisional measures for a Member imposing anti-dumping duties lower than the margin of dumping is 6 and 9 months respectively.
Price undertaking: In the case of preliminary affirmative determination of dumping, injury and causality, undertaking from exporters may be acceptable by revising prices to remove the effects of dumping or by ceasing exports at dumped prices to the area in question.
Imposition of anti-dumping duties: Members should collect duties on a non-discriminatory basis on imports from all sources found to be dumped and causing injury, except with respect to sources from which a price undertaking has been accepted. Moreover, the amount of the duty collected may not exceed the dumping margin, although it may be a lesser amount.
Retroactive duty: Anti-dumping duty can be imposed on products imported up to 90 days prior to the date of application of provisional measures in the following cases:
- there is a history of dumping causing injury
- the importer was, or should have been, aware that the exporter practices dumping which would cause injury
- the injury is caused by a massive volume of dumped imports in a relatively short time, which is likely to seriously undermine the remedial effect of the prospective final anti-dumping duty.
Duration and termination: The `sunset' requirement establishes that dumping duties shall normally terminate no later than 5 years after first being applied, unless a review investigation prior to that date establishes that expiry of the duty would be likely to lead to continuation or recurrence of dumping and injury. This 5-year `sunset' provision also applies to price undertakings.
Article 12 sets forth detailed requirements for public notice by investigating authorities of the initiation of investigations, preliminary and final determinations, and undertakings. The public notice must disclose non-confidential information concerning the parties, the product, the margins of dumping, the facts revealed during the investigation, and the reasons for the determinations made by the authorities, including the reasons for accepting and rejecting relevant arguments or claims made by exporters or importers.
Members may challenge the imposition of anti-dumping measures, in some cases may challenge the imposition of preliminary anti-dumping measures, and can raise all issues of compliance with the requirements of the Anti-dumping Agreement, before a panel established under the Dispute Settlement Understanding.
But, the role of the panel is very much restricted in the field of anti-dumping. It will only determine whether the authorities of the importing Member established the facts properly and whether they evaluated the facts in an unbiased and objective manner.
Third Country Action
When the domestic industry of a third country (also an exporting country) suffers injury because of the dumping practices of the enterprises of a Member in an importing Member country, the third country Member has to request the importing country Member to conduct an investigation and to take further action for anti-dumping measures. The decision whether to initiate and proceed with an investigation rests with the importing country.
1. What is Dumping and how is it countered by countries?
2. Outline the Procedure of Imposing Anti-Dumping Duties.
3. Which measures may count as subsidies?
4. How are subsidies treated in WTO system?
5. Give examples of “unfair trade practices”.
6. Does the GATT allow unilateral action against “unfair trade practices”?
1. John H. Jackson, The World Trading System: Law and Policy of International Economic Relations (2nd ed., Cambridge, MA: MIT Press, 1997). p. 247-277
2. Jackson/Davey/Sykes, 666-756, 757-814, 815-843.
Lecture 6. Trade in Services
1. Significance of Liberalization of Trade in Services
Trade liberalization, and even economic growth, are not ends in themselves. The ultimate aim of Government is to promote human welfare in the broadest sense, and trade policy is only one of many instruments Governments use in pursuing this goal. But trade policy is nevertheless very important, both in promoting growth and in preventing conflict. The building of the multilateral trading system over the past 50 years has been one of the most remarkable achievements of international cooperation in history. The system is certainly imperfect--that is one of the reasons why periodic negotiations are necessary--but the world would be a far poorer and more dangerous place without it.
In January 2000, WTO Member Governments started a new round of negotiations to promote the progressive liberalization of trade in services. The GATS agreement specifically states that the negotiations “shall take place with a view to promoting the interests of all participants on a mutually advantageous basis” and “with due respect for national policy objectives and the level of development of individual Members”. The pace and extent of these negotiations are set by the WTO's 149 Member Governments themselves according to their different national policy priorities.
It is impossible for any country to prosper today under the burden of an inefficient and expensive services infrastructure. Producers and exporters of textiles, tomatoes or any other product will not be competitive without access to efficient banking, insurance, accountancy, telecoms and transport systems. In markets where supply is inadequate, imports of essential services can be as vital as imports of basic commodities. The benefits of services liberalization extend far beyond the service industries themselves; they are felt through their effects on all other economic activities.
The production and distribution of services, like any other economic activity, is ultimately destined to satisfy individual demand and social needs. The latter element--social needs--is particularly relevant in sectors like health or education which in many, if not all, countries are viewed as a core governmental responsibility. They are subject to close regulation, supervision and control. Although social policy concepts--including equity and universal access--do not necessarily imply that Governments also act as producers, public facilities have traditionally been, and continue to be, the main suppliers of services such as health and education in most countries.
In 1999, the value of cross-border trade in services amounted to US$1350 billion, or about 20% of total cross-border trade. This understates the true size of international trade in services, much of which takes place through establishment in the export market, and is not recorded in balance-of-payments statistics. For the past two decades trade in services has grown faster than merchandise trade. Developing countries have a keen interest in many services areas including tourism, health and construction. According to the World Travel and Tourism Council, tourism is the world's largest employer accounting for one in ten workers worldwide. According to IMF data for 1999, tourism exports, estimated at US$443 billion, were 33% of global services exports and 6.5% of total exports.
The liberalization of trade in goods, which has been promoted through negotiations in the GATT over the past 50 years, has been one of the greatest contributors to economic growth and the relief of poverty in mankind's history. Following the catastrophic experience of the first half of the 20th century, Governments deliberately turned away from the policies of economic nationalism and protectionism which had helped to produce disaster, and towards economic cooperation based on international law. Growth in this period was not uniformly shared, but there is no doubt that those countries which chose deeper involvement in the multilateral trading system through liberalization benefited greatly from doing so.
There was no parallel movement of multilateral liberalization of services trade until the negotiation of the GATS and its entry into force in 1995. Since the services sector is the largest and fastest-growing sector of the world economy, providing more than 60% of global output and in many countries an even larger share of employment, the lack of a legal framework for international services trade was anomalous and dangerous--anomalous because the potential benefits of services liberalization are at least as great as in the goods sector, and dangerous because there was no legal basis on which to resolve conflicting national interests.
Benefits of Service Liberalization.
1. Economic performance
An efficient services infrastructure is a precondition for economic success. Services such as telecommunications, banking, insurance and transport supply strategically important inputs for all sectors, goods and services. Without the spur of competition they are unlikely to excel in this role - to the detriment of overall economic efficiency and growth. An increasing number of Governments thus rely on an open and transparent environment for the provision of services.
Access to world-class services helps exporters and producers in developing countries to capitalize on their competitive strength, whatever the goods and services they are selling. A number of developing countries have also been able, building on foreign investment and expertise, to advance in international services markets - from tourism and construction to software development and health care. Services liberalization has thus become a key element of many development strategies.
3. Consumer savings
There is strong evidence in many services, not least telecoms that liberalization leads to lower prices, better quality and wider choice for consumers. Such benefits, in turn, work their way through the economic system and help to improve supply conditions for many other products. Thus, even if some prices rise during liberalization, for example the cost of local calls, this tends to be outweighed by price reductions and quality gains elsewhere. Moreover, governments remain perfectly able under the GATS, even in a fully liberalized environment, to apply universal-service obligations and similar measures on social policy grounds.
4. Faster innovation
Countries with liberalized services markets have seen greater product and process innovation. The explosive growth of the Internet in the US is in marked contrast to its slower take-off in many Continental European countries which have been more hesitant to embrace telecom reform. Similar contrasts can be drawn in financial services and information technology.
5. Greater transparency and predictability
A country's commitments in its WTO services schedule amount to a legally binding guarantee that foreign firms will be allowed to supply their services under stable conditions. This gives everyone with a stake in the sector--producers, investors, workers and users--a clear idea of the rules of the game. They are able to plan for the future with greater certainty, which encourages long-term investment.
6. Technology transfer
Services commitments at the WTO help to encourage foreign direct investment (FDI). Such FDI typically brings with it new skills and technologies that spill over into the wider economy in various ways. Domestic employees learn the new skills (and spread them when they leave the firm). Domestic firms adopt the new techniques. And firms in other sectors that use services-sector inputs such as telecoms and finance benefit too.
2. Main Purpose of the GATS
The creation of the GATS was one of the landmark achievements of the Uruguay Round. The GATS was inspired by essentially the same objectives as its counterpart in merchandise trade (GATT):
· creating a credible and reliable system of international trade rules;
· ensuring fair and equitable treatment of all participants;
· stimulating economic activity through guaranteed policy bindings;
· promoting trade and development through progressive liberalization.
While services currently account for over 60 percent of global production and employment, they represent no more than 20% of total trade (BOP basis). This seemingly modest share should not be underestimated, however. Many services, which have long been considered genuine domestic activities, have increasingly become internationally mobile. This trend is likely to continue, owing to the introduction of new transmission technologies (e.g. electronic banking, tele-health or tele-education services), the opening up in many countries of long-entrenched monopolies (e.g. voice telephony and postal services), and regulatory reforms in hitherto tightly regulated sectors such as transport. Combined with changing consumer preferences, such technical and regulatory innovations have enhanced the “tradability” of services and, thus, created a need for multilateral disciplines.
3. Frame of Commitments of GATS
GATS establishes a framework within which liberalization commitments in the area of services are to be undertaken and implemented. GATS provides a frame for initial commitments, and also for progressively increasing commitments through successive rounds of negotiations. There are broadly two types of obligations and commitments, i.e., general obligations and specific commitments. The general commitments are applicable to all Members and all sectors of services trade. The specific commitments in services sectors are those undertaken by individual Members in particular sectors. Some specific commitments had been negotiated by Members before 1 January 1995 when the Agreement went into effect; further specific commitments will be added through negotiations in the future.
Scope of Application of GATS
GATS applies to any measures by a Member, which affects trade in services. “Measure” covers any actions taken by any level of government as well as by authorized non-governmental bodies, and could take any form: a law, regulation, administrative decision or guideline. “Affect” means that the scope of GATS encompasses not only measures designed to regulate trade in services directly, but also any other measures that might be designed to regulate other matters but incidentally affect the supply of a service.
Modes of Service Supply
The mode of supply refers to the manner in which the service is supplied. Four modes of supply of service have been specified in the Agreement.
Box A: Examples of the four Modes of Supply (from the perspective of an "importing" country A)
Mode 1: Cross_border
A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings.
Mode 2: Consumption abroad
Nationals of A have moved abroad as tourists, students, or patients to consume the respective services.
Mode 3: Commercial presence
The service is provided within A by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and - controlled company (bank, hotel group, construction company, etc.)
Mode 4: Movement of natural persons
A foreign national provides a service within A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, construction company).
4. Specific Commitments of GATS
Specific commitments in services sectors are those undertaken by individual Members in particular sectors of services. Individual countries' commitments to open markets in specific sectors -- and how open those markets will be -- are the outcome of negotiations. Each Member of the WTO is required to have a schedule. The commitments appear in the “schedules” that list the sectors being opened (i.e., market access), the extent of market access being given in those sectors (i.e., market access limitation, e.g. whether there are any restrictions on foreign ownership), and any limitations on national treatment (whether some rights granted to local companies will not be granted to foreign companies.)
As an example, if a government commits itself to allow foreign banks to operate in its domestic market, that is a market access commitment. And if the government limits the number of licenses it will issue, then that is a market access limitation. If it also says foreign banks are only allowed one branch while domestic banks are allowed numerous branches, it is an exception to the national treatment principle.
These commitments are “bound”: like bound tariffs, they can only be modified or withdrawn after negotiations with affected countries -- which would probably lead to compensation. However, new commitments and improvements to existing ones can be added at any time. Because “unbinding” is difficult, the commitments are virtually guaranteed conditions for foreign exporters and importers of services and investors in the sector to do business. In each of the selected sectors of services, a Member will have taken commitments in three areas, i.e., market access, national treatment, and other commitments.
Market access is a negotiated commitment in specified sectors. In the frame of the Agreement, a Member has to select the sector in which it makes commitments and grants free market access. The sectors left out by the Member will not be granted any market access. Market access may be made subject to some terms, conditions and various types of limitations. Limitations may be imposed on:
· the number of services suppliers (e.g. annual quota on the establishment of branches of banks and licenses for new restaurants based on an economic needs test),
· the total value of transactions or the total assets of service transactions (e.g., limitation of the transactions or assets of branches of banks to a specified percentage of the total domestic transactions or assets of all banks),
· total number of service operations or the total quantity of service output (e.g., prescribing the maximum weekly duration of the telecast of films),
· total number of employees in the sector (e.g., in computer software service, only a prescribed maximum number of workers can be employed in a year),
· requirement regarding the type of the legal form of the service supplier (e.g., in a particular sector, commercial presence can only be in the form of a company in which the citizens of the country must have a majority shareholding),
· the participation of foreign capital.
The lists of market access commitments (along with any limitations and exemptions from national treatment) are negotiated as multilateral packages, although bilateral bargaining sessions are needed to develop the packages. The commitments therefore contain the negotiated and guaranteed conditions for conducting international trade in services. If a recorded condition is to be changed for the worse, then the government has to give at least three months' notice and it has to negotiate compensation with affected countries. But the commitments can be improved at any time. They will be subject to further liberalization through the future negotiations already committed under GATS.
National treatment means treating one's own nationals and foreigners equally. In services, it means that once a foreign company has been allowed to supply a service in one's country there should be no discrimination between the foreign and local companies. In this context, the treatment accorded by a Member to the services and service suppliers of any other Member must not be less favorable than what the Member accords to its own services and service suppliers. The key requirement is not to modify, in law or in fact, the conditions of competition in favor of the Member's own service industry.
National treatment is treated differently for services. For goods (GATT) and intellectual property (TRIPS) it is a general principle. In that case, once a product has crossed a border and been cleared by customs it has to be given national treatment even if the importing country has not made any commitment under the WTO to bind the tariff rate. Under GATS, a country only has to apply this principle when it has made a specific commitment to provide foreigners access to its services market. It does not have to apply national treatment in sectors where it has made no commitment.
GATS allows some limits on national treatment. Again, the extension of national treatment in any particular sector may be made subject to conditions and qualifications. Members are free to tailor the sector coverage and substantive content of such commitments as they see fit. The commitments thus tend to reflect national policy objectives and constraints, overall and in individual sectors.
While some Members have scheduled less than a handful of services, others have assumed market access and national treatment disciplines in over 120 out of a total of 160-odd services. The existence of specific commitments triggers further obligations concerning, inter alia, the notification of new measures that have a significant impact on trade and the avoidance of restrictions on international payments and transfers.
Other/additional commitments: commitments relating measures other than those subject to scheduling under market access or national treatment, involving competition policy, or qualifications, technical standards or licensing in respect of trade in services.
Schedules of specific commitments
Normally, a Member offers low levels of commitments, expands its commitments through a series of bilateral and plurilateral (involving a limited number of Members) negotiations, and finally reaches a balance of costs and benefits and have an overall reciprocity among the Members as a whole.
Box B: Sample Schedule of Commitments: Arcadia
Modes of supply: (1) Cross-border supply; (2) Consumption supply; (3) Commercial presence; (4) Presence of natural persons
Sector or sub-sector
Limitations on market access
Limitations on national treatment
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