A BIBLIOGRAPHICAL NOTE ON TRADE IN SERVICES:
CONCEPTS AND LIBERALIZATION PRINCIPLES
Source: Economic Commission for Latin America and the Caribbean
II. INTERNATIONAL TRANSACTIONS IN
Rugman argues that economies of scale are characteristic
of manufacturing industries, therefore production can occur at the home nation, or in
geographically convenient locations, whereas service activity is marketing driven and the
economies of scope link marketing knowledge with flexibility in production. He contends
that service activities are the strong point of MNEs, "and since knowledge and skills
can be transferred internationally, there is no requirement to maximize production scale
economies in one country (p.3)". In other words, knowledge of service skills is an
internationally transferable asset, that has its roots in the institutional arrangement of
Other theoretical aspects of the role of MNEs in trade in service refers
to the ability of MNEs to internalise the public goods nature of knowledge and the
insights gained from the theory of intra-firm trade. MNEs are important promoters of trade
in services, either through the increase in contracting out of production activities and
services or through the selling of in-house produced services to foreign affiliates,
through the process of centralisation. Moreover, through contracting out MNEs have
developed the need to provide services of comparable quality throughout the world,
impelling the creation of global services networks that in the end serve as efficient
channels of trade for such services.
c) Mobility of capital
The issue of investments and trade in services has given rise to a
debate on the nature of access to foreign markets. The modes through which services can be
delivered abroad range from whole-owned affiliates of MNEs to joint-ventures and
agreements that do not imply asset ownership. However, usually the condition that defines
a foreign direct investment is that a company in one country controls assets in another
country. Nonetheless, the Group on Negotiations on Services (GNS) of the Uruguay Round had
to increase the coverage of the definition in order to satisfy the interests of developed
countries. The alternative was to consider that foreign providers present in a market for
a limited time and specific purpose could be considered as service A traders . Therefore,
the difference between services and permanent establishment was conceptualised under the
term A commercial presence .
The scope of government intervention on access to markets of foreign
direct investments and associated transactions can go from limitation to outright
See Geza Feketekuty, A Negotiating Strategies for Liberalizing Trade and
Investment in Services , in Robert M. Stern (ed.), Trade and Investment in Services:
Canada/U.S. Perspectives, Ontario Economic Council, Ontario, 1985, p. 205.
For the different definitions of investment see: UNCTC, Key Concepts in
International Investment Arrangements and Their Relevance to Negotiations on International
Transactions in Services, UNCTC Current Studies Serie A No. 13, U.N.sales nr.:
E.90.II.A.3, New York, February of 1990.
William J. Drake and Kalypso Nicola´dis, AIdeas, Interests and
institutionalization: A trade in services and the Uruguay Round , op.cit., p 72.
II. INTERNATIONAL TRANSACTIONS IN
The measures that may be applied can be classified in 3
groups: A market access related instruments , A national treatment related instruments and
A other measures .
A Instruments relating to market access refer to the rules that control
the entry and establishment of foreign enterprises in a host country. These measures can
range from total prohibition to total openness. AInstruments relating to national
treatment concern the treatment that foreign companies receive in relation to national
companies: they can be equal, inferior or superior. They comprise a wide range of areas
such as foreign exchange, loans, access to local markets, inputs, exports and imports,
etc. As a result MNEs investment decisions can be affected. The A other measures group
refers to measures that although not directly affecting the market access or national
treatment in the host country in practice could do so. These instruments can include the
rules on the safety of assets and the right of exit of foreign companies, including
protection measures and guarantees, and rules governing expropriation, compensation and
dispute settlement. The instruments related to the general regulatory framework of country
that can indirectly influence FDI and the activities of MNEs include: regulation of
monopoly, competition policy, prudential regulations, intellectual property rights and
d) Mobility of labour
Another issue of high relevance for the development of trade in
services refers to the mobility of labour. In the case of services industries in many
opportunities it is required the movement of one or more production factor to allow the
production and consuming of a service, except for the occasion when it is the consumer who
moves. In some cases the movement of labour, i.e. of workers, can be the most important
element in the delivery of a service. However, the mobility of skilled and unskilled
labour is a very sensitive element for many governments. Labour as a mode of service
delivery frequently is subject to restrictions to temporary migration or to the prior
identification of jobs before the relocation of the service providing person. The
liberalisation of measures concerning the movement of labour usually exclude permanent
migration or temporary migration for purpose of job-seeking. The measures that affect the
market access of foreign service providers are classified in 3 classes: (i) measures
related to visas and work licences; licensing, certification regulations and limitations
on the A right of practice; (ii) measures related to
UNCTAD, World Bank, Liberalizing International Transactions in
Services: A Handbook, U.N. sales nr.: E.94.II.A.11, Ginebra, 1994.
See UNCTAD, World Bank, Liberalizing International Transactions in
Services: A Handbook, op.cit.
II. INTERNATIONAL TRANSACTIONS IN
national treatment (such as: restrictions on living
conditions and civil rights, restrictions on the rights of dependants, restrictions on
overseas remittances by foreign workers, taxation of foreign services providers); finally,
there are (iii) other measures, that usually refer to repatriation and cultural barriers.
Technology is among the issues of higher prominence in relation to
trade in services. The increasing internationalisation of the economic activities together
with the emergence of new styles of production and of organisation and the new role of the
information technology necessitates a new focus on the role of services. This is so
because services are important users of technology and, on the other hand, due to the
process of internationalisation and the growing technology-intensity of services, they are
potential agents of technology transfer and sources of innovations. The delivery of
services to a receiving country (or the production of services inside the boundaries of a
consumer country) can imply the use of new technologies. This can raise questions on the
effects on local providers of services and equipment, and on the local accumulation of
technical capabilities. The selection of technologies and the development of technical
capabilities to benefit from this choice is perhaps one of the fundamental aspects of this
Four main areas of decision may be identified in this sense: (i) purchase
of services and technology-related services; (ii) importation via the physical presence of
foreign service facilities (joint-ventures, franchising or through FDI; (iii) purchase of
information services (delivered through new telematics media or through electronic and
audio-visual media); (iv) purchase for local service organisation of information
technology based software and hardware.
Another way of classifying technological services transactions is dividing
them in 3 groups: (i) transfer of proprietary and non-proprietary technology ( technical
assistance agreements and licensing); (ii) delivery of specific technical services
(feasibility studies, maintenance and training); (iii) provision of information on the
economic and technical characteristics of a certain technology (either included or not in
a equipment) as well as alternative technologies available on the market (catalogues,
personal contacts or computer systems)
These points are mentioned extensively in: UNCTAD, Technological change
in services and international trade competitiveness, (UNCTAD/ITP/TEC/29), 21 July
II. INTERNATIONAL TRANSACTIONS IN
The increasing international competition in tradable
services can lead to an extension in the concentration at the international level, which
could affect the strength of national policies.
f) Intellectual Property Rights
Intellectual Property Rights (IPRs) have direct interaction with the
field of technology and technology transfer in the sense that strengthening its protection
may have some benefitial effects on the depth and speed of technology transfer,
particularly to developing countries. However, an investigation by Edwin Mansfield has
determined that not all sectors are equally sensitive to the strength of intellectual
property rights in the moment of deciding the destination of an investment. In order to
protect their technology, some industries will prefer to establish whole owned
subsidiaries, instead of joint-ventures or other type of association with local
enterprises. In other cases, the investments will be oriented towards marketing and
distribution, without any R&D.
UNCTAD, Transfer and Development of Technology in a Changing World
Environment: The Challenges of the 1990s, (TD/B/C.6/153), 25 January 1991, p.12.
See Edwin Mansfield, Intelllectual Property Protection, Foreign Direct
Investment and Technology Transfer, IFC Discussion Paper nr.19, Washington, February
For a complete discussion of these issues see A. Yusuf, A Developing
countries and trade-related aspects of intellectual property rigths in Uruguay Round
Papers on Selected Issues, (UNCTAD/ITP/10), United Nations, New York, 1989.
III. BASIC PRINCIPLES FOR
The term, non-discrimination, refers to two different concepts: one is
most-favored nation treatment, defined by Grey (p.17) as "a policy or
objective, or treaty rule, that there shall be no difference in the treatment accorded by
one country to the companies, nationals, goods, etc. of anther country as compared with
the treatment accorded by that country to companies, nationals, goods, etc. of any third
country"; the other refers to national treatment which relates to "the
treatment accorded by a country to the companies, nationals, goods etc. as compared with
the treatment accorded the companies, nationals, goods, etc. of the country itself."
The MFN clause in treaties take two forms. One is the "conditional" form which
has frequently been a cover for discrimination, and, historically, has been closely
related to the interest in securing "reciprocity". The other is the
a) Most Favored Nation (MFN)
The principle of MFN has been adopted in numerous international
agreements with respect to various fields ranging from imports and exports of goods,
customs tariffs, maritime transport, investment, establishment of foreign jurisdiction
persons, intellectual property rights, administration of justice, access to courts and
administrative tribunals, diplomatic and consular privileges is:
"...treatment accorded by the granting State to the beneficiary
State, or to the person or things in a determined relationship with that State, no less
favorable than treatment extended by the granting State to a third State or to persons or
things in the same relationship with that third State."
Strictly in the area of trade, non-discrimination in the GATT is expressed
in the MFN principle in its unconditional form (article I of the GATT).
The useful and extensive literature on the treatment of distinct concepts
with respect to trade in services includes: Rodney de C. Grey, Concepts of Trade
Diplomacy and Trade in Services, Thames Essay No. 56, Trade Policy Research Centre,
Gower, 1989, London; UNCTC, Key concepts in International Investment Arrangements and
their Relevance to Negotiations on International Transactions in Services, UNCTC
Current Studies Series A, No.13, United Nations, New York, February 1990. A more brief
treatment of the subject is offered in Richard H. Snape, "Principles in Trade in
Services", The Uruguay Round: Services in the World Economy edited by Patrick
A. Messerlin and Karl P. Sauvant, World Bank and UNCTC, 1990.
The literature which analyzes the history of the MFN clause and its
application include, among others: R. de C. Grey, concepts of Trade Diplomacy and Trade
in Services, op.cit.; H. Davis, America's Trade Equality Policy, 1942.
G. Schwarzenberger, "The Most-Favored Nation Standard in British State
Practice", in The British Yearbook of International Law, Geoffrey Cumberlage,
Oxford University Press, Vol. 22., London, 1945; International Law as Applied by
International Courts and Tribunals, 3rd edition, Vol.I, Stevens & Sons Ltd.,
London, 1957; E. Sauvignon, La clause de la nation la plus favorisÚe, Presses
universitaires de Grenoble, Grenoble, 1972; J.H. Jackson, World Trade and the Law of
GATT: A Legal Analysis of the General Agreement on Tariffs and Trade, Bobbs-Merrill,
Virginia, 1969; Yi Wang, "Most-Favored-Nation Treatment under the General Agreement
on Trade in Services--and its Implication in Financial Services", Journal of World
Trade, February, No. 1, 1996, pp. 90-124.
International Law Commission of the United Nations (Yearbook of the
International Law Commission 1978, Vol. II. Part Two, United Nations, New York, p. 21)
III. BASIC PRINCIPLES FOR
The principle requires not only that a trading partner of
the agreement be treated no less favorably than any other member, but also that any
advantage that is withdrawn from any member has to be withdrawn from all. So long as entry
is prohibited to foreigners, the question of MFN does not arise. If entry is allowed, MFN
would imply equal opportunity of access for nationals of all other member countries.
The exceptions to this GATT principle relate to customs unions and free
trade areas and preferences for developing countries.
Though it is a basic principle of GATT, the MFN has been also one of the
principal principles of several bilateral or plurilateral agreements ((e.g., The
Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA) and North
American Free Trade Agreement (NAFTA)). The GATS incorporates it, for the first time, in a
multilateral trade agreement framework dealing with services. Article II of the GATS
"With respect to any measure covered by this Agreement, each Member
shall accord immediately and unconditionally to services and service suppliers of any
other Member treatment no less favorable than it accords to like services and service
suppliers of any other country."
The application of unconditional MFN is relatively easy and visible for
those services in which the providers and receivers do not have to come together and
barriers to trade resemble tariffs or other measures that are converted into tariff-like
levies. The same tariff-like charges would be applied to all parties to the agreement, and
reduction in the charges imposed on the imports from any source would be granted to all,
whether or not they gave any concessions in return. On the other hand, in cases where
entry to an industry is restricted by licensing arrangements, for example, MFN implies
equal opportunity for all foreign suppliers when licenses are issued. When a local
presence --that is, when the provider needs labor or capital (financial or physical) in
the host country-- is involved, requiring visas, work permits and compliance with foreign
investment regulations, the MFN principal implies that the labor and capital of all
parties to an agreement should be treated equally with respect to entry and, for labor,
with respect to professional and related qualifications.
Article XXIV provides an exception to the MFN
rule of Article I in the case of the formation of customs unions or free trade areas, or
interim agreements leading to such arrangements.
Article XXV provides that the Contracting Party (by a two-third majority)
may "waive" the obligations of a contracting party, including the MFN
obligations of Article I.
Bernard Hoekman, Trade Laws and Institutions: Good Practices and the
World Trade Organization, Supplementary Paper for the Conference on the Uruguay Round
and the Developing Economies, January 26-27, 1995, World Bank.
A detailed analysis of the MFN principle under the GATS is offered in
Wang, op.cit., pp.91-124. A more general discussion on the GATS' core rules is
found in Harry G. Broadman, "GATS: The Uruguay Round Accord on International Trade
and Investment in Services", The World Economy, vol.17, No.3, May 1994,
For the meanings and implications of the terms, "immediately",
"unconditionally", "treatment", "no less favourable than
that...", "any other country", "like services and service
suppliers", see Wang, op.cit., pp.96-99.
III. BASIC PRINCIPLES FOR
The foregoing does not mean that all types of labor should
be treated equally --only that nationality should not be a criterion for differentiation.
Neither, it implies that if a professional qualification is a condition for practice in
the host country, qualifications obtained in all countries should be treated equally; it
is the quality of the training that is the criterion, not the country in which it is
b) National Treatment
A complementary nondiscrimination principle is the national treatment
rule, but should be distinguished from MFN in the sense that it refers to the treatment of
foreign products (or suppliers) not with respect to each other but with respect to
national products or suppliers. This principle is expressed, directly or indirectly, in
several service-industry agreements (e.g., International Civil Aviation Organization), in
many bilateral treaties of friendship, commerce and navigation, in GATT Article III (with
respect to goods) and, for the OECD, in the Decision on National Treatment (with regard to
firms, including those in service industries).
Article III of the GATT requires that foreign goods, once they have passed
the customs formalities and paid whatever duties are applicable, be treated no less
favorably in terms of taxes, and measures with equivalent effect than domestic firms. In
fact, the GATT authorizes or legitimatize certain forms of discrimination against goods
produced by foreigners, usually by an import tariff, though in some circumstances
quantitative restrictions on imports. Defined this way, national treatment implies that
once the authorized form of discrimination has been imposed on a product, there should be
no further discrimination according to national source (Snape, 1990, p. 9).
With respect to trade in services, Grey (1989, p.39) defines the principle
in the following manner:
"the rule that, apart from specified exemptions or with regard to
particular measures or forms of regulation, the imported product, the foreign-controlled
firm which is , established- and the foreign national doing business or carrying
on a commercial activity within the domestic jurisdiction are to be treated on the same
basis as the domestic or national product, the domestically-controlled firm and
Richard H. Snape, "Principles in Trade
in Services", The Uguruay Round: Services in the World Economy in edited by
Patrick A. Messerlin and Karl P. Sauvant, World Bank and UNCTC, 1990.
Detailed analysis on the principle of national treatment includes: from an
American viewpoint, John H. Jackson, World Trade and the Law of GATT, Indianapolis,
Bobbs-Merrill, 1969, ch. 12, pp. 273-303.; John H. Jackson, Legal Problems of
International Economic Relations: Cases, Materials and Texts, American Casebook
Series, St. Paul, Minnesota, West Publishing ch. 10, pp. 573-614. For the OECD Decision of
21 June 1976, and subsequent examination, see, National Treatment for
Foreign-controlled Enterprises Established in OECD Countries, Paris, OECD Secretariat,
1978; International Investment and Multinational Enterprises: the 1984 Review of the
1976 Declarations and Decisions, Paris, OECD Secretariat, 1984. UNCTC, Key Concepts
in International Investment Arrangements and Their Relevance to Negotiations on
International Transactions in Services, UNCTC Current Studies, Series A. No. 13,
United Nations, February, 1990, Chapter I.
III. BASIC PRINCIPLES FOR
Therefore, a general agreement on services could include a
provision for specifying particular means of discrimination against foreign-produced
services. "Sector-specific agreements could then identify the particular form
or forms of authorized discrimination for the services in that sector, and
particular levels of the forms of discrimination could be bound among the parties to that
agreement. National treatment would then imply that in all other respects domestic and
foreign producers should be treated equally." For instance, though the Chicago
Convention establishing the ICAO provides for national treatment in regard to the use of
aviation facilities and charges for the use of airports and other facilities, it does not
provide for national treatment in regard to route sharing. It should be reminded, however,
that such treatment may or may not be identical to that applying to domestic firms, in
recognition of the fact that identical treatment may actually worsen the conditions of
competition for foreign-based firms (e.g., a requirement for insurance firms that reserves
be held locally).
For cross-border services, the concept of treatment "no less
favorable" in respect of all regulations than that accorded to domestic services in
the same market has a clear meaning, because those instruments which affect national
treatment are priced-based (i.e. tariffs, taxes and subsidies), aimed at giving a domestic
producer or supplier a price advantage relative to a foreign product or supplier. But this
definition is plagued by many problems when services are "traded" through the
establishment of suppliers in "importing" countries. For example, it might
exclude situations in which the domestic provider in the importing country is a monopoly.
Another problem arises when one trade partner imposes stricter regulations on its domestic
firms than another partner.
The EC faced with this problem in the specific context of the banking
sector in a debate with the United States and Japan, given that under article 58 of the
Treaty of Rome, subsidiaries of non-EC banks benefit from all the rights accorded by
Community law. Such cases have led the EC to expand the definition of national treatment
(the "no less favorable" clause) by a provision that takes into account the mode
of delivery of services in foreign markets. The EC forged the concept of "effective
market access" defined as the situation in which service providers of the two
countries enjoy "comparable competitive opportunities" in the two markets.
Bernard Hoekman, "Tentative First Steps:
An Assessment of the Uruguay Round Agreement on Services", Policy Research Working
Paper 1455, European and Central Asia, and Middle East and North Africa Technical
Department, Finance and Private Sector Development Team, World Bank, May 1995.
Snape, 1990, p.9.
Grey, 1989, p.51.
Hoekman, 1995, p.8.
UNCTAD and World Bank, Liberalizing International Transctions in
Services: Handbook, op.cit.
UNCTAD an World Bank 1994, ch.VI.
Patrick A. Messerlin, "The European Community", in World Bank
and UNCTC, The Uruguay Round, Services in the World Economy, Washington, D.C. and
New York, 1990.
III. BASIC PRINCIPLES FOR
The measures that condition national treatment regarding foreign
direct investment are well known. The measures which are particularly relevant to
services include: i) limits to the scope of business operations, in terms of the type of
activities, the geographical location, or the expansion of business operation, and access
to local finance; ii) performance requirements which might take form of local content
requirement, export requirements, transfer-of-technology requirements, domestic-sales
requirements, trade-balancing requirements, employment, personnel and training
requirements, etc; iii) investment incentives(e.g., tax holidays, accelerated
depreciation, etc.), which are often related to performance requirements, to guide
investments to certain sectors; iv) rules relating to external financial transfer (e.g.,
exchange controls on current account transactions, controls and restrictions on transfers
related to FDI, capital movements other than FDI, etc.); and v) tax measures (general
taxes, direct and indirect, treatment of FDI, measures to eliminate or reduce double
Also, the limitations on national treatment involving labor movement
may include: i) restrictions on living conditions and civil rights; ii) restrictions on
the rights of dependents; iii) restrictions on overseas remittances by foreign workers;
iv) taxation of foreign providers; v) restrictions on benefits enjoyed by foreign workers;
vi) discrimination against foreign workers in the work place; and vii) restrictions on
local government procurement and subsidies.
Similarly, when the movement of consumers or buyers to the producing
country is involved, the major instruments which condition national treatment are:
i)limits on foreign currency available to the traveller (country of origin); ii) taxes on
travel (country of origin); iii) regulations relating to transborder medical insurance
(country of origin); iv) rules relating to the recognition of educational standards and
certificates obtained abroad (country of origin and country of destination); v)
restrictions on land ownership (country of destination); vi) restrictions on freedom of
movement (country of destination); vi) price discrimination (country of destination); and
vii) measures relating to gainful employment (country of destination).
On the instruments relating to national
treatment, see: UNCTAD and World Bank, Liberalizing International Transctions in
Services: Handbook, op. cit. Chapter IV.
For further discussion on TRIMs, see: UNCTC, The Impact of Trade
Related Investment Measures, United Nations, New York, 1991.
A concise discussion on the limitations on national treatment in labor
movement is provided in, UNCTAD and World Bank, Liberalizing International Transations
in Services: Handbook, op.cit., Chapter V. For further study, consult, Thierry
Noyelle, Katlen Bl÷cker, Devak; Chandra Ani Beth Redfield, Trade in labor Services and
Temporary Movement of Personnel, Eisenhower Center, Working Paper No.91-08. The
Eisenhower Center for the Conservation of Human Resources, Columbia University, 1992.
On the measures which might restrict national treatment, see: UNCTAD and
World Bank, Liberalizing International Transctions in Services: Handbook, op.cit.
III. BASIC PRINCIPLES FOR
c) Liberalization and Transparency
Another GATT-like principle pertaining to trade in goods relevant to services, embodied in the Declaration of Punta del Este
and is common in the OECD instruments in services, is "progressive"
liberalization. The connotation of the word, "progressive", is that services
structures and capacities vary widely across countries, and that countries would differ in
their capacity to liberalize their markets of services. This is to acknowledge that an
international agreement on services should respect the policy objectives of national laws
and regulations applying to services. Based on this principle, all members should
undertake a firm commitment to the objective of liberalization and submit to a regular
examination procedure that encourages steady progress toward that goal. This requires that
liberalization, once achieved, is irreversible (Standstill), and remaining
restrictions are subject to examination with a view toward their gradual elimination (Rollback).
Therefore, all members should subscribe to common rules of the game and submit to
international surveillance of the way in which they carry out their obligations.
For these purposes, the negotiations need to create rules and procedures
for formulating disciplines. They also require to establish exceptions that take into
account national policy objectives and provisions for further negotiations. Therefore, the term is understood as "the facilitation
and promotion of trade across borders and the stimulation of international competition,
especially by increasing market access, but with due respect for national policy
objectives". (Pipe, 1990, p.111). They also require procedures for withdrawing
concessions and for raising barriers, while these measures are seen as temporary
deviations from the norm.
It is generally known that reductions in tariffs are easier than those in
non-tariff barriers, because the former are the most easily identified and the effects of
reduction are relatively predictable. However, as Snape argues (1990, p. 10), that
non-tariff barriers are the norm for services creates difficulties for liberalization,
since it is hard to get agreement for exchanges of concessions on a range of products when
the forms of barriers are disparate and the levels often unquantifiable. Standstill
applied in services often incorporate important qualifications and limitations, such as on
the category of persons, that may supply services, their nationality and residency
requirements, limited equity participation, exclusion of acquisition, etc.
For the understanding and implication of the concepts, progressive
liberalization and transparency, for the distinct services sectors, consult the individual
sector studies in: The Uruguay Round:Services in the World Economy, edited by
Patrick A. Messerlin and Karl P. Sauvant, World Bank and UNCTC, 1990; UNCTAD, Trade in
Services: Sectoral Issues, New York, 1989; Rainer Geiger, "Lessons from the
Experience of the OECD", The Uruguay Round:Services in the World Economy,
edited by Patrick A. Messerlin and Karl P. Sauvant, World Bank and UNCTC, 1990; UNCTAD, Trade
in Services: Sectoral Issues, op.cit.
(Mario Marconini, "The Uruguay Round Negotiations on Services: An
Overview", in The Uruguay Round:Services in the World Economy, op.cit,
G. Russel Pipe, "Telecommunications" in The Uruguay Round:
Services in the World Economy, op.cit., pp.105-113.
Continue on to III. Basic Principles for Liberalization