Services and Trade Agreements: Whither the GATS? Bernard Hoekman* World Bank November 20, 2006 * Views expressed are personal and not to be attributed to the World Bank

Genesis of the GATS Tradability of services increases Contestability of markets increase –Deregulation, privatization –Technological changes Large gains from liberalization –Services often inputs –Protection generates not just deadweight losses US: comparative advantage in services –AIG, American Express, ATT … Confluence of forces supports creation of GATS

The Basic Rules & Approach 4 modes of supply – includes factor movement MFN & transparency 2 specific commitments (“positive list”) –National treatment –Market access (mostly QR type policy constraints) Weak rules on regulation, but focus of much attention –Reference paper for telecom; talks on professional services Uruguay Round: limited to partial scheduling of already implemented liberalization Weighted average coverage < 50% for OECD; full commitment < 20%; less for most other countries

Post-2000 Negotiations/Doha Little progress to expand GATS (so far 6 years …) Bit of a puzzle: –Services should matter to governments for themselves –Services should also matter for overall Doha Round progress: (Developing) countries seeking agriculture & manufactures liberalization in North need to offer a quid pro quo North tends to be demandeur in services – a main area of interest to EU, post-demise of new issues

Why such limited traction? Less “need” for trade agreements? –Lot of unilateral reform been implemented Uncertainty re: costs/benefits of commitments? –E.g., spillover effects of Telmex and Gambling cases Backlash of offshoring; Services Directive; anti- migration? Complexity of services agenda? –Mix of regulation and discriminatory policies –Regulators worry about trade negotiators A “reciprocity problem”? –Stylized fact: export lobbies are missing in action

Harnessing reciprocity MTNs are driven by reciprocity dynamics –Need export interests to push for national reforms For many developing countries, services export interests nonexistent, not constrained, or confront non-negotiable barriers –Mode 1: few effective policy barriers –Mode 2 (tourism): own policies matter most –Mode 3: few export interests –Mode 4: very little prospect of market opening

Scope for reciprocity limited Mostly a large-firm agenda; intra-OECD and emerging market affair Mostly a matter of mode 3 (FDI) and related complementary inputs Given weak mode 3 interests of most developing countries, assuming mode 4 is too hard, cross-issue linkage needed: –Mode 3 access in South for merchandise access in North

Further complications In addition to standard political economy forces opposing reform (firms, unions, less-skilled workers), in services have: –Regulators –More skilled workers – “white collar” –NGOs, civil society Regulators worry about autonomy and negative spillovers of a market access driven negotiation Civil society worries about realization of social objectives, ownership, immigration, etc.

What could be done? (1) Remove regulatory opposition by removing generally applicable regulation from the table How? Focus only on discriminatory policies, e.g., full national treatment on a sectoral basis –Implies likely opportunity cost if regulation id the problem, but recognition/harmonization not feasible in any event Adopt a “formula approach” limited to critical mass of large players; allow free riding of rest

What could be done? (2) Engage poor countries differently: instead of request-offer reciprocity, shift to other instruments Constructive engagement to satisfy preconditions to benefit from liberalization –Policy dialogue and monitoring –incl. linkages to IFIs –“Aid for trade” support from donor nations –Greater accountability via an enhanced TPRM-type mechanism May alleviate problem of limited enforcement incentives re: commitments of poor countries

What about regionalism? Alternative explanation for limited GATS traction Can you get what you want in a PTA? Clearly revealed preferred by many governments May well be only effective vehicle for mode 4 May also be more feasible mechanism for regulatory harmonization/recognition To date, more talk than action—have only limited commitments in most PTAs and little information on implementation

Conclusions GATS not doomed to fail But do need a change in modus operandi: –Formula-based, limited group approach with the focus on discriminatory policies –A “development” approach towards poorer countries, combining dialogue/engagement, assistance, and monitoring/accountability Open question remains whether services can help mobilize agricultural reform in North But the services agenda dominates in any event