IDEAS Workshop, Bangkok, 8-9 Dec, 2009
Shefali Sharma, Third World Network
Overview of Services trade and Inv
 World Services Exports in 2007: 3.3 trillion USD
(UNCTAD 08)
 DCs share in world services exports unchanged at
25.4%
 Asia 18.9% growth in services exports
 But trade highly concentrated in select countries and
regions (top five exporters = 50% of all DC services
exports); Asia= 75% of DC exports
 Concentrated sectors: travel and transport (2/3 of DC
exports); business, info & communication and financial
& insurance services (1/3 of DC exports)
Importance of South-South
 94% of Asian services exports in South-South trade
 Intraregional exports extremely important (similar to
trade in goods)
 45% of total DC trade to other DCs;
 S-S comprises 11% of world services trade;
 Shows enormous potential there; but also that
industrialized countries dominate in Services and
Investment transactions
EU: ~¾ of EU GDP from Services trade
Inflow of FDI
$1248 billion inflows to US, Uk, NL, Canada, EU
Two thirds going to EU;
Outward FDI
$1692 bill outflow (top five countries account for
64% of outward FDI: US, UK, Fr, Germany, spain)
Flows mainly b/w ICs
DCs: $500 bill inflows;
Outflows from DCs $253 bill (Asian TNCs)
(UNCTAD WIR 2008)
FDI to and from Ind Countries expected to fall—
financial crisis and weaker econ. growth
Importance of Services for DCs
 Important source of informal and growing formal
sector jobs in Asia
 Strategic for development, national security, public
goods and social needs
(i.e. Water and Sanitation, Education, Health Finance,
Distribution, Energy, Power, Telecom, Transport,
Postal)
Do services and investment lib. rules
attract more FDI?
 Those with BITS not more likely to receive FDI than
other countries (World Bank 03)
 No quantitative relationship b/w BITs and FDI flows
(Lesher, Miroudot, OECD 2007)
 Difficult to create causal link between Int Inv
Agreements and increased FDI flows in services (WIR 04)
 No empirical evidence of significant increase in FDI
flows to DCs after conclusion of GATS (UNCTAD 2000)
And does FDI lead to development outcomes?
Services Lib leads to Develop?
 General consensus that ROBUST regulatory
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frameworks essential for trade in Services;
development outcomes depend on regulatory regime
and end goal, not on liberalization
Pacing, sequencing essential; modification over time is
often necessary of such regulations; complex tradeoffs
involved
DCs in need of infrastructure services; but these are
also the same services that face numerous disputes in
investment agreements when opened (WIR 08);
multiple needs have to be met across all sectors of
society (telecom, water and sanitation, roads, power)
EC FTAs and GATS
 Both trade liberalization agreement (eliminating barriers to
trade)
 Similar in structure—framework agreement plus liberalization
schedule
 Common elements: “scope and coverage; specific and general
obligations; exceptions; definitions; institutional provisions
GATS: crafted by US and EU services lobbies, negotiated over
several years; first multilateral agreement on trade in services
(and investment since lg # of services transactions are
investment oriented—2/3)
EU FTAs: EU template---natural progression of EU interests (going
beyond commitments in WTO)
GATS
 GATS has four modes (M1:crossborder, M2:consumption
abroad, M3: commercial presence, M4: temporary
movement of natural persons) and positive list; negotiated
multilaterally
M1/Cross border: Service crosses border
M2/Consumption abroad: Consumer crosses border to
Service across border
M3/Commercial Presence: Service provider sets up
commercial presence across border (investment)
M4/temporary movement: Service provider sends employees
across border
EU FTAs
 New structure (Cross border, Establishment, e commerce)
FTA Cross border=Mode 1, 2 and limited Mode 4)
 New way of scheduling (EU has three different schedules)
 Must have “substantial coverage” (Art. V of GATS) in volume, # of
sectors, modes of supply
 Definitions taken from GATS but expanded in scope in many
different ways (GATS+) and GATS- in terms of flexibilities for DCs
 Includes Establishment (WTO plus): Investment rules for
establishment and post-establishment of foreign investors
(services and non-services)
Imbalance of power b/w N-S: expertise, experience, bargaining
power (lack of adequate and appropriate data a big handicap in
Services transactions according to Modes)
Service Definition
 any service in any sector except services supplied in
exercise of governmental authority; and
 supplied neither on a commercial basis, nor in
competition with one or more service suppliers
How many services in Asia not supplied on commercial
basis or in competition with at least one supplier; how
many under “pure” governmental authority? Not
clear what “commercial basis is”—do user charges
count? Public-private partnerships?
GATS Definition of “Measures”
affecting services:
 Law, regulation, rule, procedure, decision, administrative
action or any other form (breadth)
Applies to measures “taken by”:
 Central, regional or local governments and authorities and
 Non-govt bodies in the exercise of powers delegated by
central, regional or local govts (depth)
(same definitions in EU FTAs and leads to enormous
implications on governance based on commitments made)
“Measures Affecting Services” expanded in
Korea-EU to Include:
 Production, distribution, marketing, sale and delivery of a service
(in GATS this is def. of “supply of service”)
Implication: GATS referred to the supply up and down a value
chain; EU-Korea talks about measures that can either directly
or indirectly “affect” the value chain
Considerably expands scope of challenges against domestic
rules, laws, decisions etc
 In the GATS, these “measures affecting services” refer to:
 the purchase, payment or use of a service;
 access to, use of, in connection with the supply of a service,
networks or services offered to the public
 Presence (incl. commercial presence) of a service supplier in the
other party’s territory
Flexibilities: GATS Minus
GATS: Art. XIX flexibilities(mutually advantageous basis, overall balance of
rights and obligations, national policy objectives, flexibility for indiv DCs,
fewer sectors, fewer types of transactions, dev situation, negotiating
guidelines)
FTAs: “Substantial sectoral coverage” as per GATS Art. V---no flexibilities,
reciprocal behavior; expected to progressively liberalize
What are tradeoffs with development and other social objectives; pace,
sequencing; regulatory capabilities; capacity to understand scheduling
implications for future?
Market Access
 GATS Approach: limitations and conditions agreed in
schedule (positive list—list where you give access)
 FTA also applies to “establishment”—services and nonservices (EU pushed for this in WTO but denied,
denied also in MAI)
 Korea-EU excludes “inputs” into the supply of cross
border services (same as GATS)
 But not excluded in CARIFORUM EPA and some African
EPAs
 Cannot limit # of service supplies (quotas, monopolies,
exclusive service supplies or Econ. Needs Tests)
 Cannot limit total value of service transactions, assets
(numerical quotas or require ENTs)
 Cannot limit # of service operations, quantity of
service output (i.e. num value or quotas), no ENTs
Establishment: No limits on # of establishments,
operations, value of transactions, quantity of output,
participation of foreign capital or max % of
shareholding, on specific type of legal entity or joint
venture, # of natural persons needed (No ENTs)
National Treatment
 To all measures affecting the supply of cross-border services;
and establishment
 Treatment no less favourable than that it accords to its own like
services and service suppliers, like establishments and investors
 NT = a negative list (must put limitations and conditions where
this does not apply)
Implications: GATS is “technology neutral”; so how do we
understand “like” services? Scope extremely broad, covers
all kinds of investments (must know what to list as
exemptions)
Progressive Liberalization
 Stand still clause (in Korea-EU, interim EPAs i.e.
SADC)
 No “new or more discriminatory measures” may be
adopted once commitments made
 GATS allows review; option of removal of
commitment though must provide equivalent mkt
access in another service (quite cumbersome)
 Review of investment legal framework to
progressively liberalize after 3 years
List of Commitments
 EC has three separate schedules Cross-Border;
establishment; Key personnel graduate trainees and
business service seller
 Korea has a 72 pg. list including all modes and
limitations
Classification and Scheduling: Apples
and Oranges?
 EC used ISEC Rev 3 (International Standard Industrial Classification of
all Economic Activities ‘02), CPC (91) and CPC ver 1.0 (98)
 Korea used CPC code (91) for classifying services sectors and sub-
sectors in one list and ISEC Rev 3;
 Margin for Error (did we schedule the correct sectors and sub-sectors?
Adequately prepared limitations and conditions? Taking into account
future services industries? Multiple governance concerns?)
 WTO Sec noted that 1740 out of 7040 market access commitments
scheduled incorrectly in GATS (‘99)
 US Gambling Case: Online gambling ban challenged. US didn’t realize
that online gambling is part of recreational services
How do countries reconcile measures “affecting” production, distribution,
marketing, sale and delivery when they schedule their services sectors?
MFN: Implications for S-S?
 Concept framed for multilateral arrangements; has
certain exceptions, exemptions
 MFN clauses can vary—cond; unconditional; binding
or best endeavour; intra or extra regional
In GATS: immediate and unconditional; but allows list of
exemptions; applies to “like services”
EU FTA (Korea): also immediate and unconditional;
applies to Mode 1 and 2 and establishment; allows for
list of exemptions and exceptions; applies to “like
services “
MFN in Korea-EU
No less favourable than that it accords to like services and service
suppliers of any third country in the context of an economic
integration agreement signed after the entry into force of this
Agreement
Could MFN clause violate Art V GATS (flexibilities for DCs,
accordance with level of development for sectors and subsectors)? Enabling Clause of the GATT?
Hamper South-South Trade, what happens to S-S agreements?
Reduce bargaining power in future agreements?
First Mover syndrome? Exclusive relationship w EU?
MFN Excludes
 measures providing for recognition of qualifications,
licenses or prudential measures in accordance with
Article VII of GATS or its Annex on Financial Services;
 Taxation agreements
 Does not “prevent any Party from conferring or
according advantages to adjacent countries in order to
facilitate exchanges limited to contiguous frontier zone
of services that are both locally produced and
consumed
 EC lists 14 pages of MFN exemptions; Korea lists 3 pgs
 Carveout for EC’s deep regional integration agreements
within Europe (Annex 7B); common internal market
GATS vs EU FTAS
GATS Plus: Establishment; Regulatory Chapters;
“Substantial” Coverage
GATS Minus: Flexibilities for DCs (reciprocal), Mode 4
constrained
Makes sense for EC; but does it for DCs, even so-called
advanced Asian economies?
Mode 4 (section D EU-Korea)
 Applies to “key personnel”, graduate trainees, business
services seller, contractual service suppliers, indep prof
 Key personnel: setting up establishment, intracorporate transfers (senior positions), managers,
specialists
 3 years for intra-corporate transferees; Business
services 90 days in a year; 1 yr for graduate trainee
 Korea-EU will apply GATS commitments on contractual
service suppliers and indep. professionals; will update
2 years after Doha comes into force
 Cannot designate specific nationality or residency
requirements for Sr. positions unless specified in
schedule
Right to Regulate
“each Party retains the right to regulate and to
introduce new regulations to meet legitimate
policy objectives.”
What is considered “Legitimate?”
More onerous qualification--GATS does not
include reference to “legitimate policy
objectives”; refers to national policy objectives
Regulatory Framework
 General obligations (MRA, transparency, DR, governance) and
specific sectors (EU had pushed hard for prior comment in WTO
discussions on transparency in DR)
 Mutual Recognition: Joint bodies to submit recommendations to
the Trade Committee created by agreement
 with a view to implementing that recommendation, negotiate,
through their competent authorities, an MRA of requirements,
qualifications, licenses etc
 Working Group on MRA under Trade Committee formed as an
institutional structure for the FTA
Onerous Provisions for
Transparency for Mkt Access
 Tell applicant why rejected; what status; within 120 days
etc.; make available requirements for applications
Domestic Reg
 Updated after DR neg in GATS completed
 institute or maintain judicial, arbitral or administrative
tribunals or procedures
 at the request of an affected investor or service supplier,
 prompt review
 appropriate remedies for,
 administrative decisions affecting establishment, cross-
border supply of services or temporary presence of natural
persons for business purpose
What Internationally Agreed
Standards?
 regulation and supervision in the financial services
sector and for the fight against tax evasion
 (OECD standards and those of interest to EU financial
lobbies)
Financial Services
 EU DEMANDS: a Conglomeration of Fin Services Annex and
Understanding on Commitments in Financial Services
 GATS plus: FS pushed for aggressively by financial sector lobbies
in EU and US. Parties to the Understanding some 33 countries,
OECD. No Asian country has signed up to the Understanding (SL
for insurance)
Applies to cross-border, establishment and Mode 4; broad range of
instruments
 Insurance and insurance-related services (life and non-life i.e.
HEALTH)
 Reinsurance; brokerage and agency; services auxiliary to insurance,
such as consultancy, actuarial, risk assessment and claim settlement
services
EU negotiated additional commitments for
regulatory oversight by a Fin. Services
Commission (FSC) on insurance underwriting
activities of Korean postal service (NT)
Within 3 years of FTA, solvency matters related
to the sale of insurance by the National
Agricultural Cooperative Federation, the
National Federation of Fisheries Cooperatives,
the Korea Federation of Community Credit
Cooperatives and the National Credit Union be
subject to regulations of FSC
Banking and Financial Services
 Deposits, lending of all types, financial leasing, money
transmission services (credit cards, travelers checks)
 Guarantees, money mkt instruments, for ex,
 Derivatives, futures trading, xchange and interest rate
instruments—swaps, transferrable securities
 underwriting, money broking, asset and portfolio
management, financial data processing
 Dispute Settlement Applicable to this chapter through the
Trade Committee (15 indiv.—5 from each party and 5
from neither party)
 Allow “New Financial services” into the other territory (more
nuanced than the Understanding—don’t have to change existing
laws), but opens door for more risky instruments—
”authorization refused only for prudential reasons” and decision
reached w/in “reasonable time”
FS commitments import risky instruments, behavior; lead to
deregulation of financial sector
Pro-FS lib would say, does not de-regulate but HOW you regulate;
But purpose of FS lib is to facilitate FS transactions
Could many EU and US efforts at bailouts and re-regulations begin
to be subject to GATS challenges because of their actions taken
during the Financial Crisis?
Are their choices restricted by their commitments in the GATS?
(Ban on certain types of products, limits on how big?, firewalls
b/w transactions etc)
Prudential Carveout
 protection of investors, depositors, policy-holders or
persons to whom a fiduciary duty is owed by a financial
service supplier; and
 ensuring the integrity and stability of the Party’s financial
system.
 not be more burdensome than necessary to achieve their
aim
 But if violating provisions of the FTA, then should not be
used as a way to avoid commitments
“necessity test”
Korea-EU footnotes on carveout
 Carve-out (ALSO? Or ONLY?) pertains to financial
services “not regulated and supervised by the financial
supervisory authority of that Party”, and must abide by
rules of the “carveout” article
 “prudential reasons” may include the maintenance of
the safety, soundness, integrity or financial
responsibility of individual financial service suppliers
Pensions and Social security
 Excluded unless state allows it to be in competition
with one or more public or private entity, then subject
to Fin Services Regulatory Chapter and the FTA rules
 And if scheduled and as per domestic regulations
Payments and Capital Movement Chapter
Payments: No restrictions on payments and transfers
from current account; free convertible currency
Capital Movement: Free Movement of capital (in
accordance with host country laws for direct
investment); for commitments in S&E chapter;
“host laws” reference likely not apply to repatriation and
liquidation of profits or those commitments in S&E
chapter
Mvmt of capital from host country also applies to credits
on fin. transactions, financial loans and credit, capital
participation
No new restrictions on capital and making existing
arrangements more restrictive (prevention of crisis?)
Consultations for further movement of capital
Exceptions and safeguards?
Exceptions: In order to secure laws and reg (as long as
they are in line with this chapter and not
“unjustifiable” discrimination or “disguised” restriction
on capital) –for public safety, morals etc; measures on
futures, derivatives, securities, defaults
Safeguards: 4 footnotes with conditions on when and
how safeguards can be applied and how to interpret
 not applied to FDI; only for six months
 “do not otherwise interfere with investors’ ability to
earn a market rate of return”
 Seems you cannot use to prevent a crisis; only when
crisis is there
Reg Chapters on other Sectors
 Telecom
 Postal and Courier (in Korea-EU, after 3 years of entry
into force)
 Computer Services
 Int. Maritime Export Services
NOTE:
Chapter on Trade and Sustainable Development” –Govt
consultations, Panel of Experts (some from nonparties)—Not Dispute Settlement, lot of best endeavor
language
Overall Exceptions of S&E chptr
 necessary to protect public security or public morals or
to maintain public order
(invoked only where a genuine and sufficiently serious
threat is posed to one of the fundamental interests of
society)
 necessary to protect human, animal or plant life or
health etc.
Implications for Asia?
 EU matched concessions with US (from US-Korea deal)
and got more in 1-2 sectors, Maritime services
 Korea has more negotiating power relative to EU’s
other Southern partners; but still faces unequal terrain
in Services and Investment
 EU services and establishment chapter—ambitious, far
reaching, legal minefield for governance, key lens is
market access for service providers and investors
 All other social, cultural, political, env., gender, dev.
interests secondary
Implications
Services and Investment highly concentrated—mergers and
acquisitions dominated by ICs; anti-competitive behavior
FTA includes entry of investors in both goods and services
DR rules still being negotiated in WTO;
No clear link that such agreements bring the investment and
trade wanted—can do so without binding
These concessions in addition to BITs, TRIMs, GATS
Technological neutrality forecloses options for governments
in the future once commitments are made
What role of local, state governments? (India has state,
centre, concurrent subjects)
What lessons from current financial and food crises?