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A BIBLIOGRAPHICAL NOTE ON TRADE IN SERVICES:
CONCEPTS AND LIBERALIZATION PRINCIPLES


Source: Economic Commission for Latin America and the Caribbean
            Note

SUMMARY

The present document does not intend to review the whole literature existent on trade in services, but rather it attempts to present the diverse viewpoints from which the main conceptual topics can be analyzed.

The document is composed of four parts. The first presents different ways to define services. The second section refers to international transactions in services, examining the existent literature on the categories of these transactions, the evolution that has had the concept of trade in services, and its process of internationalization.

The third part of the document reviews the basic principles that govern the liberalization of services regarding non discrimination as well as the discriminatory aspects of liberalization. Finally, the fourth part examines the measures which affect the access to the services market.

PRESENTATION

In 1995, under the framework of the process toward the formation of the Free Trade Area of the Americas, the ministers of Trade of the Hemisphere, gathered in Denver, requested to the Tripartite Committee, conformed by the IDB, the OAS and ECLAC, that it provide analytic support, technical assistance and studies as requested by the working groups created to advance that process.

In their first meeting, the Working Group on Services, referring to the mandate emanated from the Ministerial Meeting of Cartagena of India that indicated among the attributions of the Group the one of Acarrying out works at the conceptual level on the nature of the trade in services", requested the Tripartite Committee to prepare a brief bibliographical note. It was suggested that the note should take advantage of the existent literature on such aspects as coverage, definition of the trade in services and liberalization principles, without excluding a priori any sector or mode of delivery of services.

The present document, written by Mikio Kuwayama and José Carlos Mattos of the Unit of International Trade of ECLAC, tries to respond to this request of the Working Group. The document was presented to the Group in its second meeting, and in the sixth meeting it decided to publish it in electronic and printed form.

 
 

I. DEFINITION OF SERVICES

 

Services are conventionally portrayed as intangible, invisible and perishable, requiring simultaneous production and consumption, while goods are tangible, visible and storable, not requiring direct interaction between producers and consumers.

This way of characterizing services as "immaterial goods" can be questioned because some services have elements of tangibility (e.g., the printed report of a consultant or a computer program on a diskette), visibility (e.g., haircuts or theater plays), storability (e.g., automatic telephone-answering systems) and may not require face-to-face contact between producers and consumers (e.g., automated teller machines). Neither, transience is a clear criterion for separating goods and services, as may be illustrated cases of an ice cream (a good) and the long-lasting effect of a medical surgery (a service).

By contrast, Hill (1977, p.318) defines a service as "a change in the condition of a person, or of a good belonging to some economic unit, which is brought about as the result of the activity of some other economic unit with the prior agreement of the former person or economic unit".

UNCTAD and World Bank, Liberalizing International Transactions in Services: Handbook, Geneva, United Nations Publication (Sales No. E.94.II.A.11), 1994. For detailed analyses of the differences between goods and services, see Victor R. Fuchs, The Service Economy, National Bureau of Economic Research, General Series No.87 (New York, NBER, 1968; and T.P. Hill, "On goods and services", Review of Income and Wealth, 23 December, 1977 pp.315-338.

For the debate on the nature of services and alternative definitions, see Dorothy I. Riddle, Service-Led Growth: The Role of the Service Sector in World Development, New York, Praeger, 1986; Jadish N. Bhagwati, "Splintering and disembodiment of services and developing nations", The World Economy, 7, June 1984, pp.133-143; and Phedon Nicolaides, Liberalizing Service Trade: Strategies for Success, London, Routledge for the Royal Institute of International Affairs, 1989. ECLAC, "El Acuerdo General sobre el Comercio de Servicios: retos y oportunidades para América Latina y el Caribe", Chapter II, (LC/R.1588), December 30, 1995, Santiago de Chile.

The focus on change, therefore, avoids characterizing services as intangible. Hill also distinguishes the production of a service from its output; the output of a service activity "is the change in the condition of person or good affected, distinct from the process of production of the service, which is "the activity which affects the person or goods belonging to some economic unit" (p.318).

The fact that the production process for many services is transient should not be taken as an indication that the output of such activity is also transient. However, hill's definition is also open to criticism, since it does not capture some services which are devoted to prevent change (e.g., social security services and preventive medicine). For other services (e.g., insurance policies), the link between provision and the change in the condition of the consumer is difficult to establish. Furthermore, in some non-market services (e.g, national defense and the provision of law and order), the condition of freely participation in the transaction between the consumer and producer is not met unless one introduces the concept of a social contract.

Services are often classified in accordance with their function and/or their intrinsic value to consumers or providers. For instance, the distinction can be made: i) between market (private) services and non-market (public) services; ii) between intermediate and final use; iii) among the former between distributive (e.g., wholesale and retail trade, transport, storage and warehousing, and communications) and producer services (e.g., financial, business and professional services); and the latter between social (health, education, sanitary services) and personal services (household services, recreational and cultural services, hotels and restaurants. The Handbook adopts a broad definition of the services sector that encompasses professional, community, social and personal services, trade and finance, transport and communication, public administration, and defense, as well as construction and public utilities.

For alternative classifications used in studies of services, see, for instance, M.A. Katouzian, "The development of the services sector; a new approach", Oxford Economic Papers, 22, November, 1970, pp.362-382; Harley L. Browning and Joachim Singlemann, The Emergence of a Service Society: Demographic and Sociological Aspects of the Sectoral Transformation of the Labor Force in the U.S.A., Springfield, VA, National Technical Information Service, 1975; United States, Congress, Office of Technology Assessment, International Competition in Services, Washington D.C., U.S. Government Printing Office, 1987.

II. INTERNATIONAL TRANSACTIONS IN SERVICES

1. The Categories of Transactions

Particularly relevant for trade in services is the attribute of non-storability since it presents a strong argument against their tradability. As Hill (1977) states:

"Services are consumed as they are produced in the sense that the change in the condition of the consumer unit must occur simultaneously with the production of that change by the producer: they are one, and the same change...the fact that services must be acquired by consumers as they are produced means that they cannot be put into stock by producers" (p.377).

Another characteristic associated to transactions in services concerns the necessary interaction between producer and consumer. Bhagwati (1984) distinguishes two types of interaction:

"Basically one has to draw a distinction between services as embodied in the supplier of the services and requiring their physical presence where the user happens to be and services which can be disembodied from the supplier and provided without a physical presence being necessary" (p.101).

However, services characteristics may be changed by technological developments, such as: use of modern communication technologies, computerised storage of data, etc..

Three categories may be found in relation to the services where physical proximity is required:

Category 1: Mobile-Producer, Immobile User.

Category 2: Mobile User, Immobile Provider.

Category 3: Mobile User, Mobile Provider (Bhagwati, 1987, pp. 7-8).

Finally, Bhagwati refers to the category of services where the proximity of producer and consumer is not required, although it could be useful, and he calls this type of services: long distance services.

UNCTAD (1985) considers five modes of service transactions:


T.P. Hill "On goods and services", Review of Income and Wealth, vol.23, December, 1977, pp.315-338.

 

 


J. N. Bhagwati, "Splintering and Disembodiment of Services and Developing Nations" The World Economy, June, 1984.

 

 

 

 

 

J. N. Bhagwati, "International Trade in Services and its Relevance for Economic Development" in Orio Giarini, The Emerging Service Economy, Pergamon Press, Oxford, 1987. Gary Sampson and Richard Snape in "Identifying the issues in trade in services", The World Economy, vol.8, June of 1985 proposed a similar classification, as did Robert M. Stern and Bernard M. Hoeckman in "Issues and data for GATT negotiations in services", The World Economy, vol.10, marzo de 1987.

UNCTAD, Production and trade in services: policies and their underlying factors bearing upon international services transactions, (TD/B/941/Rev.1), UN sales nr.: E.84.II.D.2, New York, 1985.

II. INTERNATIONAL TRANSACTIONS IN SERVICES
(1) services provided and consumed by residents of a country that do not enter into the international market-place; (2) services provided within national boundaries, but to non-residents; (3) services provided by resident firms or individuals across their national boundaries to non-resident firms or individuals abroad; (4) services provided through contractual relationships; (5) services provided through overseas affiliates of a parent company.

The General Agreement on Trade in Services, negotiated as part of the Uruguay Round identifies 4 modes of delivery for services: (1) cross-border supply of a service (that does not require the physical movement of supplier or consumer); (2) provision implying movement of the consumer to the location of the supplier; (3) services sold in the territory of a Member by (legal) entities that have established a presence there but originate in the territory of another Member; and (4) provision of services requiring the temporary movement of natural persons (service suppliers or persons employed by a service supplier who is a national of a country that is a party to the Agreement).

Beyond the definitions of services other classifications can be found: for instance, that of intangibility (or invisibility) of output. This approach considers that international transactions of a number of services can be identified and measured only in terms of the international financial flows associated with payments for the services. Another classification refers to the form of participation in the foreign markets: some services participate in the foreign markets through investments (accounting, advertising, leasing, banks, placement agencies, hotels and motels and legal services); others use a combination of investments and exports: communication, computer services, construction and engineering, education, franchising, health, movies and insurance; finally, two sectors refer directly to exports: air and maritime transportation. Another way of looking into services is through their final use: final services (or consumer services) and intermediary services (or producer services).

The modes of supply for services in foreign markets also can be classified in two categories: cross-border trade, and establishment trade. Three elements can be identified in relation to cross-border trade : (1) logistic services (necessary for the international transportation and supply of goods, of people, of information or other services);

 

 

 

 

GATT, "Final Act Embodying the Results of the Uruguay Round of Multilateral Negotiations", (MTN.FA), 15 de diciembre de 1993.

 

Bernard Hoekman, "General Agreement on Trade in Services", in OECD, The New World Trading System: Readings, Paris, 1994.

See Raymond J. Krommenacker, World-Traded Services: The Challenges for the Eighties, Artech House Inc., Dedham, MA, 1984, Part I.

 

 

Brian Griffiths, Invisible Barriers to Invisible Trade, Macmillan, London, 1975.

U.S. Department of Commerce, United States Services Industries in World Markets, 1976.

M.A. Katouzian, "The Development of the Service Sector: A New Approach", Oxford Economic Papers, vol.22, No.3, 1970, pp.362-382.

II. INTERNATIONAL TRANSACTIONS IN SERVICES

(2) producer services necessary to foreign production of goods and services (investment, management services, technological services, provision of intangible assets to final producers, and franchising) and (3) other directly traded services (engineering, commercial lines insurance, merchant making, film services, information services). The functional structure of establishment trade is composed of two elements: (1) services provided in the importing country by the foreign-controlled producer and (2) services provided in the exporting country to visitors.

However, the basic statistical data to measure the international trade in services continues to originate in the balance of payments. In this sense International Monetary Fund (IMF) statistics on "invisibles" trading still lack all the conditions of accurate measure. For the IMF commercial services include three categories: transportation, travel and other private-sector services. This last, residual, category corresponds to the following components: (1) communication services; (2) construction services; (3) insurance services; (4) financial services; (5) computer and information services; (6) royalties and license fees which are payments and receipts for the use of intangible non-financial assets and proprietary rights, such as patents, copyrights, trademarks, industrial processes and franchises; (7) other business services and (8) personal, cultural and recreational services (including audio-visual services).

2. From Invisible Trade to Trade in Services - The evolution of the concept

As mentioned before, the 3 peculiarities of services (intangibility, invisibility and non-storability) were the original reasons for trade specialists to discard services as tradable among countries. Moreover, the trend was to consider services as unproductive. Adam Smith, for instance, considered services activities as unproductive labour. This lack of attention to services stemmed from four common limiting assumptions: (1) contrary to commodities and manufacturing, services didn't make any "real" and visible contribution to wealth, therefore services were unproductive; (2) services were ancillary to or derivative of goods. Without goods production, there would be little demand for services. (3) as services were performed in house by manufacturers rather than by outside vendors, they contributed to wealth only as inputs to the"real" economy; (4) finally, due to their invisibility and temporary existence services were insignificant, compared with physical objects.

The difficulties in estimating the production and value of services translated in a policy gap at the government level.

 

Gordon J. Cloney II, "The Composition and Role of Trade in Services", background paper presented to the round table on liberalization of trade in services organized by the International Chamber of Commerce, Paris, June of 1981.

 

 

 

 

 

IMF, Balance of Payments Manual, 5th ed., Washington, 1993, chapter XIII.

 

 

 

 

 

 

Adam Smith, The Wealth of Nations, Random House, New York, 1937, p.315.

William J. Drake and Kalypso Nicolaïdis, "Ideas, Interests and institutionalization: trade in services and the Uruguay Round", International Organization, vol.46, nr.1, winter of 1992.

II. INTERNATIONAL TRANSACTIONS IN SERVICES

Until recently governments referred to service as the tertiary sector, comprising all the activities not classified as manufacturing and agriculture. Each services activity was treated as discrete, with different regulatory issues and also subject to different civil codes and authorities. At the international level services transactions were classified as "invisible" in national accounts. Each service sector was managed under separate agreements or international organisations. As service was not considered tradable, it was left out of the GATT regime, and under institutions that gave preference to regulatory rather than market based rules. The first essays on establishing pan-industry norms did not consider the case of trade concepts or rules for services. In 1960 the OECD convention called for the elimination of obstacle to the "exchange" of services, but the instruments that followed dealed primarily with foreign direct investment (FDI) and payments.

A report by a high-level group convened by OECD to study the long-term perspectives of trade under the new industrial structures and the coming Tokyo Round made reference, for the first time, to the term "trade in services". Therefore, this group took the leap to suggest that transactions in services could be considered trade, that the principles and norms of trade in goods could be applied to services, and that the challenge ahead was to avert "protectionism". Two years later the Trade Policy Research Centre in London published a book directly linking services to the principles and rules of trade.

3. The internationalisation of services

According to UNCTAD (1990) to qualify as an international service transaction a service transaction requires that at least one of the following categories (or a combination of them) cross the border of a country: (i) goods; (ii) capital; (iii) people; and, (iv) information. Each and all of them may move to receive or to offer a service.

The movement of goods may occur in order to receive a service (i.e., repair or transformation) or to give a service ( through leasing or rental). In the case of capital, there is an ongoing debate between what could be the adequate classification for capital services and investments. Therefore, capital movements may be a complement to trade in services or an alternative to them.

 

 

OCDE, Code of Liberalization of Current Invisible Operations, Paris, 1961.

OCDE, Declaration of National Treatment, Paris, 1976.

OCDE, Report by the High Level Group on Trade and Related Problems, Paris, 1973.

 

 

 

 

Brian Griffiths, Invisible Barriers to Invisible Trade, op.cit..

 

 

 

UNCTAD, Trade and Development Report, 1988, (UNCTAD/TDR/8) UN sales nr.: E.88.II.D.8, New York, 1988.

II. INTERNATIONAL TRANSACTIONS IN SERVICES

In consequence, the study of the process of transnationalisation of services doesn't refer to the movements of factors of production, but to the analysis of the activities of firms, and of the mechanisms that they use for penetrating foreign markets.

a) Transborder data flows

The issue of transborder data flows has acquired more importance as a result of the accelerated improvements of the computing and communication technologies. This development has allowed for the use of remote transfer of data, voice and images, and even the direct offer of services (banking, insurance, consulting and engineering) instead of the movement of persons and equipment.

The commercialisation of services was enhanced by the use of telecommunications and telematics through a multiple level process that includes: (i) information services (data processing, software, access to computerised data bases); (ii) this improvement of the "transportability" of the information services has increased the tradability of services; and, (iii) eventually, the improved tradability of these services increases the confidence and profitability of other international services operations that depended on the offer of these services (of informatics and telecommunications). As a direct consequence of this evolution many services that were previously considered non-tradable are now subject to trade.

b) Multinational Enterprises

Multinational enterprises (MNEs) are the main agents of the internationalisation of services. According to Rugman (1987) MNEs have a peculiar characteristic that, through the use of their organisational structure, allows the control of affiliates in other nations. The major advantage of the organisational structure of MNEs is that they retain the control over the proprietary information, while the use of licensing, joint-ventures and other forms of contractual activities there is a risk of dissipation of this in-house know-how.

Rugman remarks that this risk is more acute in relation to services related activities. The quality control and customisation can be better achieved in this case through the control of affiliate activities.

 

 

 

For a discussion of the importance of these aspects of transborder data flows and information technology see: Bruno Lanvin, " International Trade in Services: Information Services, and Development: Some Issues" , UNCTAD, Discussion Paper nr.23, may of 1987 and UNCTAD, Technological change in services and international trade competitiveness, (UNCTAD/ITP/TEC/29), 21 July 1991 as well as UNCTAD, Trade and Development Report, 1988, op.cit.

Karl P. Sauvant, Trade and Foreign Investment in Data Services, Westview Press, Boulder Co., 1986 and UNCTC, Transnational corporations and transborder data flows: background and overview, North Holland/United Nations, Amsterdam, 1984.

 

 

 

 

 

Alan M. Rugman, A transaction cost approach to trade in services, Institute for Research on Public Policy, Discussion Paper, Series on Trade in Services, January of 1987.

 

John H. Dunning, "Multinational enterprises and the growth of services: some conceptual and theoretical issues" in Karl P. Sauvant y Padma Mallampally (eds.) Transnational corporations in services, Routledge, London, 1993, pp.33-74, vol.12 part of John H. Dunning (ed.) United Nations. Transnational Corporations and Management Division, The United Nations Library on Transnational Corporations; international business and the development of the world economy.

Continue on to II. International Transactions in Services

 
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