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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


(Continued)

II. INTERNATIONAL TRANSACTIONS IN SERVICES

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 the MNEs.

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 prohibition.

 

 

 

 

 

 

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 SERVICES

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 consumer protection.

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 SERVICES

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.

e) Technology

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 issue.

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 1991.

 

II. INTERNATIONAL TRANSACTIONS IN SERVICES

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 of 1994.

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 LIBERALIZATION

1. NON-DISCRIMINATION

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 "unconditional" form.

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 LIBERALIZATION

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 stipulates:

"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, pp.281-291.

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 LIBERALIZATION

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 earned.

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 nationals."

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 LIBERALIZATION

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 LIBERALIZATION

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 taxation, etc.).

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. Chapter VII.

III. BASIC PRINCIPLES FOR LIBERALIZATION

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, p.20.

 

 

G. Russel Pipe, "Telecommunications" in The Uruguay Round: Services in the World Economy, op.cit., pp.105-113.


 

Snape, op.cit.

Continue on to III. Basic Principles for Liberalization

 
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