Services and the Doha Development Agenda Carlos A. Primo Braga Kjersti Brokhaug1 Introduction The Doha Development Agenda (DDA) negotiations were launched in Doha, Qatar in November 2001. This is the first full-fledged multilateral trade negotiations round under the WTO. Expectations about the chances of a successful conclusion of the round remain mixed. The August 1, 2004 WTO General Council decisions – the socalled “July package” – re-energized the process after the failure of the WTO Ministerial in Cancun (September 2003). The July package narrowed the issues under negotiations and introduced revised deadlines for the process, while establishing more detailed frameworks for the negotiations. In the case of services, a new date for the submission of revised offers (May 2005) was established. The services negotiations under the DDA have progressed slowly thus far. The market access negotiations, for example, involve ongoing exchanges of requests and offers among WTO Members. As of February 2005, only 51 initial offers (representing 75 countries) had been presented. In addition, multilateral negotiations on rules (encompassing issues such as subsidies, emergency safeguard measures, government procurement and domestic regulation) have yet to achieve any concrete progress. If things do not speed up, it will be difficult to achieve a critical mass of market opening offers by the next WTO Ministerial Conference in Hong Kong in December 2005. Services and the world economy The services sector is the largest, fastest growing and most complex part of economic activity in most developed and developing countries. Services account for roughly two-thirds of global output (69 per cent in high-income economies, 55 per cent in middle-income economies, and 44 per cent in low-income economies) and a significant share of global employment (70 per cent in high-income economies, but less than 30 per cent in most low-income economies). Moreover, as economies become more services oriented around the world, their overall productivity performance is increasingly influenced by what happens in the services sector. Services include activities as different as transport of goods and people, health care, advertising, banking, insurance, accounting, engineering, sanitation, hotels and restaurants, distribution, education and communications.2 In any country, the services 1 This note was prepared as background information for the debate on trade in services organized by the Working Group on Trade of the Parliamentary Network on the World Bank (PNoWB). C. A. Primo Braga is Senior Adviser, International Trade Department, The World Bank and K. Brokhaug is a consultant with the same department. Comments from A. Jara and from participants in the videoconference of the PNoWB on services (February 28, 2005) are gratefully acknowledged. The views expressed in this note are those of the authors and they should not be attributed to the World Bank Group. 2 WTO listing of broad services groups encompass: business and related professional services, communications, construction and related engineering, distribution, education, energy, environmental, financial, health and other social services, recreational, cultural and sporting, tourism and travel related,

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industries are essential in providing the basic economic, financial and social infrastructure and support to business. Availability of essential services, such as water supply, sanitation, power supply, transportation, education and health is associated with higher productivity and earnings.3 Trade in services The principle of international trade in goods is simple: a product is transported from one country to another and consumed abroad (cross-border trade). Trade in services, however, is understood to encompass not only cross-border transactions, but also other ways of service delivery on an international basis. In the context of the General Agreement on Trade in Services (GATS) – one of the main results of the Uruguay Round of multilateral trade negotiations (1986-94) – trade in services encompasses the following four ways or “modes” of delivery: Cross-border supply. Services supplied from one country to another (i.e., only the service crosses the border). For example, software services supplied by a firm in one country via electronic means to consumers in another country. (Mode 1) Consumption abroad. Services supplied in the territory of one Member to the consumers of another. For example, when people move abroad to consume tourism or education. (Mode 2) Commercial presence. Services supplied through any type of business or professional establishment of one Member in the territory of another. For example, a foreign company setting up a subsidiary or branches to provide services in another country. (Mode 3) Presence of natural persons. Services supplied by nationals of one Member in the territory of another. It includes both self-employed service suppliers and the employees of the service suppliers of another Member that have moved temporarily into the territory of the consumer. For example, fashion models or consultants supplying through their physical presence services in another country. (Mode 4) Trade in services has been growing at a fast pace over the last two decades.4 Over the period 1980-90, the expansion of trade in services – as captured by balance-ofpayments statistics, covering modes 1 (cross-border) and 2 (consumption abroad) of delivery – occurred at an annual growth rate of 8.3 per cent, as compared to 5.7 per cent for merchandise trade. And over the period 1990-2002, it grew at an annual rate of 6.1 per cent (compared to 5.6 for merchandise trade). By 2002, trade in commercial services (total exports) amounted to $1,570 billion representing roughly 20 per cent of global trade (goods plus commercial services) – it represented 16 per cent of global trade in 1980.

transport, other services not included elsewhere. For full listing, see http://www.wto.org/english/tratop_e/serv_e/serv_e.htm 3 See, for example, Marchetti (2004) and Mattoo (2005) 4 Figures provided in the text are from Marchetti (2004).

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The most dynamic component of services trade has been the item identified as “other commercial services,” which in essence comprises “business services” including information technology services and financial services. This performance reflects the impact of the “communications revolution” and the growing opportunities for outsourcing (cross-border trade) services. Developing countries have been increasing their share in world exports of services. By 2002, they accounted for 23.5 per cent of global exports, as compared to 19 per cent by 1990. The bulk of cross-border trade in “business services” still occurs among high-income economies, but the growth rate of these exports from some developing countries has been dramatic – as much as 43 per cent over the period 1995-2000 in the case of India.5 Liberalization of trade in services can be pursued in each of the four modes of supply identified above. There are, however, fewer consensual prescriptions or rules of thumb with respect to services liberalization – as compared to goods liberalization. This reflects not only the complexities of the services sector, but also the interaction between domestic regulation and international competition.6 Liberalizing reforms might, for example, involve removing restrictions to majority ownership, simplifying procedures for approval of new services, or granting foreign players distribution rights within a country. It is worth noting that the GATS does not require governments to deregulate services. Governments maintain their right, for example, to set qualification requirements for lawyers or doctors and set standards to ensure the health and safety of consumers. Moreover, it is important to underscore that governmental services are “carved out” of the agreement and that there is nothing in the GATS that requires a government to privatize its service industries.7 The GATS provided the first multilateral set of rules covering trade in services. However, this was only the first step in a long-term effort to liberalize trade in services. Since January 2000, services have become again the subject of multilateral trade negotiations. In November 2001, the services negotiations were incorporated into the Doha Development Agenda. Members have committed to pursue “progressive liberalization” in services. In short, this is a commitment to gradually expand the opportunities for foreign service-providers to contest national markets (market access commitments), while assuring that domestic and foreign players are treated in a non-discriminatory fashion (national treatment).

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See Mattoo and Wunsch (2004). See Mattoo (2003) For further details about the GATS see the WTO web site.

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The process of multilateral trade liberalization Services negotiations have to a large extend been overshadowed by the focus on agricultural negotiations so far in the DDA.8 However, the potential gains from liberalization of services are substantial. Countries that have successfully reformed their telecommunications and financial sectors, for example, have been growing 1.0 percentage point faster on average than other countries. Services such as finance, transport and telecommunications play a key role in determining economic performance. In principle, multilateral negotiations can motivate reforms in services by making mutual agreements to reduce costly protection. Legally binding commitments in a multilateral framework may also lend credibility to reforms in services sectors.9 In the past (e.g., during the Uruguay Round negotiations), liberalization of trade in services was pushed mainly by industrialized countries such as the United States, with emerging markets like Brazil and India being reluctant to open their markets. However, in the last few years, developing countries, such as India, have increasingly become major service suppliers to wealthy countries – e.g., IT services and business process outsourcing -- and have a growing interest in increased access to foreign markets for these services. The liberalization of trade in services often requires the involvement and coordination of various departments and agencies, changes of laws and assessment of a number of technical issues in the home countries of the negotiating parties. The negotiating process is comprised of a series of bilateral requests and offers, where a Member requests that its trading partners open their markets and in a parallel effort offers access to its own market, making specific commitments structured across modes of delivery and services sectors. At the end of the process, these agreements on market access and national treatment are “multilateralized” to include all WTO members. In addition, there are parallel multilateral negotiations on GATS rules. The ongoing negotiations The negotiations on services have achieved limited progress so far. By the end of February, only 51 WTO members (counting the EU-25 as one) have submitted initial offers. With initial offers from Madagascar and Uganda announced to be issued shortly, and excluding least developed countries, more than 40 Members have yet to submit initial offers (including countries such as the Philippines and the Republic of South Africa). Although most of the offers remain confidential at this stage, the generalized perception is that in most cases they are characterized by a low level of ambition in terms of additional services liberalization. As mentioned before, a new date (May 2005) has been agreed upon for presenting revised offers. The developing countries remain particularly interested in Mode 4 (Movement of natural persons), and especially the liberalization of the US market for business personnel. However, it is unlikely that the USA will improve its offer in this area 8 For details about the current status of the agricultural negotiations, for example, see Primo Braga and Brokhaug (2005). 9 See Hoekman and Primo Braga (1997) and Mattoo (2003).

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when they issue their revised offer by the May deadline. There is significant reluctance from industrialized countries to be more forthcoming with respect to greater freedom of movement of natural persons in view of economic and political considerations (concerns about links between temporary movement and permanent migration as well as potential implications for labor markets), not to mention increased security concerns. There is, however, scope for creative thinking in this area fostering not only greater transparency and faster procedures, but also increasing opportunities for market access. In addition to market access (and national treatment) issues, the negotiations also address rules on subsidies, government procurement, domestic regulations and emergency safeguard measures (ESM). So far the debate on subsidies and government procurement has been quite limited. Discussions on ESM remain characterized by a wide gulf among those that believe that such a mechanism is fundamental (the position of some East Asian developing countries) and those that dispute the feasibility of introducing this type of safeguard under the GATS. The debate on domestic regulations has focused mainly on issues of transparency so far. The complexity of the services negotiations – often involving/affecting Ministries that are not directly engaged in trade issues – and the mechanics (based on bilateral request/offer procedures) of the negotiations contribute to the difficulties faced by negotiators in advancing this agenda. Moreover, technical difficulties (e.g., lack of consensus on services classification for certain sectors – telecommunications versus computer services) and the lack of specificity in some of the requests (e.g., many mode 4 requests are too generic) add to the problems faced by the negotiators in advancing this agenda. In a simplified manner, one can characterize industrialized countries as the main “demandeurs” of mode 3 (commercial presence) liberalization, while a subset of developing countries (e.g., India, China, The Philippines, Thailand, Indonesia, Pakistan and most Latin American countries) emphasizing the importance of mode 4 liberalization. Not surprisingly, India has also been active in voicing concerns about growing protectionist threats with respect to cross-border trade (mode 1). The EU has recently indicated its willingness to adopt a more flexible position in terms of its requests vis-à-vis developing countries (allowing them to choose only two sectors for liberalization among five key sectors: telecommunications, financial services, transport, construction and environmental services). This may help energize the process, but unless “capitals” engage more actively in supporting the Geneva negotiations the level of participation of developing countries – particularly leastdeveloped countries – will remain limited. Concluding remarks As recently as December 2004, a senior WTO official sounded the alarm over what he described as the “crisis” facing the ongoing negotiations on liberalization of trade in services in the Doha Round.10 As the current (February 2005) cluster of services negotiations comes to an end, it is increasingly clear that unless a renewed 10

See “WTO Services talks said to be in “crisis”; Chair remains hopeful” Bridges Weekly 8 December, 2004. http://www.ictsd.org/weekly/04-12-08/story3.htm

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engagement from the private sector (as interested parties in the liberalization process) and from high level politicians in capitals occur, it is difficult to envisage substantive progress on this front by the Hong Kong Ministerial.

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References Hoekman, Bernard and C.A. Primo Braga. 1997. “Protection and Trade in Services,” Open Economies Review 8 (3): 285-308. Marchetti, Juan A. 2004. “Developing Countries in the WTO Services Negotiations” (Geneva: WTO). Mattoo, Aaditya. 2003. “Services in the Development Round” Trade Note 11 (Washington, DC: The World Bank). Mattoo, Aaditya. 2005. “Economics and Law of Trade in Services” (Washington, DC: The World Bank). Mattoo, Aaditya and S. Wunsch. 2004. “Pre-empting Protectionism in Services: The WTO and Outsourcing 2005” World Bank Policy Research Working Paper No. 3237 (Washington, DC: The World Bank). Primo Braga, C.A. and K. Brokhaug. 2005. “Agriculture and the Doha development Agenda,” Background paper prepared for the Working Group on Trade of the PNoWB, mimeo. WTO web site “Understanding the WTO: The Agreements” available at http://www.wto.org/english/thewto_e/whatis_e/tif_e/agrm6_e.htm

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