WL DI24 3 loie Iqq4 243~ 3 World Bank D)iscussion Papers Lib eralizinlg Trade in Services Bemard Hoekman Pierre Sauve Recent World Bank Discussion Papers Nt. 1 Ni, Iffli IIrui y arid Si'.u,ntni'no iai lolIhdn Al.. t A I'.: trm t lsr-rc C a Stc Is'.I 1 l ) 1limi iid r .ii .1(\Ii lit i ( iid Wen11r.li Noi I 7 1I licl Stat I lolding 'rn;many ltrc. and r 4rori'l Agl:h Kin ilAr No INN lnidcnose I IrIiv.Si Io 4.315 1 adl ,[ft. I£rivsronyllrns Lditd I'v %ISItnIt..ri II I ). IV% NO 1I I) Aiverty. opI' rLmn i, arid thieI :rMnropir uif \repliehn I ) Mnilk Noi 1')I Natural C a1 .11 i 'do;re1 nv l Oi lifnIc' tq I :ralz.I thie It, hisl it. I' ic Inl ierog unrn il oli ih I 111(111t-1 Noi. I 'I .-IlAppropn.src A Lnroe, .11 ovmne I.snad'cmr, 111it rn IriS' a (C )s' I: L.'tOn'iy SALhq A uiiiim Nto 1 '112 7 'r ronivnni ro a on I I 'rltd Blank I L-x y no r ai Ii Stra.rr,} Iorri WeCII IIIII I AId oiier% No. I '3 Iolorpaorsw Sy intnw Stratr'ir tlor Paidsle i Ji.an,wl liilAIanrew I II vwrIl NI I ).ivirx. 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Eduardo Wicsncr D. (Continued on the inside back covter.) 243 1=1 World Bank Discussion Papers Lib eralizing Trade in Servlces Bernard Hoekman Pierre Sauve The World Bank Washington, D.C. Copyright 0 1994 The International Bank for Reconstruction and Development/ilnE WcORlDl) BANK 1818 H Strect, N.W. Washington, D.C. 20433. U.S.A. All rights reserved Manufactured in the United States of America First printingJune 1994 Discussion Papers present results of country analysis or research that are circulated to encourage discussion and comment within the development community. To present these results with the least possible delay, the typescript of this paper has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be infornal documents that are not readily avai!able. 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The World Bank encourages dissemnination of its work and will normally give permission prompdy and, when the reproduction is for noncommercial purposes, without asking a fee. Pernission to copy portions for classroom use is granted drouLgh the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvets, Massachusetts 01923, U.S.A. The complete backist of publications from the World Bank is shown in the annual Index of PRabications, which contains an alphabetical title list (with fiuD ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'lena, 75116 Paris, France. ISSN: 0259-21 OX Bemard Hoekman is a trade economist in the Private Sector Development and Finance Group of the World Bank's ECA/MNA Regions Technical Department. Pierre Sauve is principal administrator in the Policy Interrelations Division of the Trade Directorate in the Organization for Economic Cooperation and Development. library of Congress Cataloging-in-Publication Data Hoekman, Bemard M., 1959- Liberalizing trade in services I Bernard Hoekman, Pierre Sauve. p. an. - (World Bank discussion papers ; 243) Indudes bibliographical references (p. ). ISBN 0-8213-2858-1 1. Service industries-Deregulation. 2. International trade. 3. Free trade. I. Sauv6, Pierre, 1959- . 11. Tide. III. Series. HD9980.6.H64 1994 382'.4-dc2O 94-18072 CIP .m. Contents Foreword ............................. v Abstract ...................... vii Acknowledgements ...................... viii Executive Summary ........................ ix I. Introduction ...................... 1 II. Iternational Trade in Services 3 HI. The European Community.. 9 IV. The Canada-United States Free Trade Agreement ..13 V. The North American Free Trade Agreement ..IS VI. The Austrlia-New Zealand Closer Economic Relations Trade Agreement .... 25 VII. The General Agreement on Trade in Services ..30 1. The Framework .30 2. The Annexes .37 3. Understanding the Scope of the GATS .40 VII. Comparing the Agreements ............ ............ 43 1. Modalities and Instruments of Liberalization.44 2. Sectoral Coverage .51 3. Disciplines on Related Government Policies .52 4. Enforcement and Dispute Settlement .53 5. Rules of Origin .54 6. Safeguards .56 IX. Article V of the GATS: Multilateral Rules for Regional Agreements . .56 1. Implementing Article V .61 X. Regional Agreements and the GATS: Complements or Substitutes? . .63 XI. Conclutding Remarks ..72 ANNEX 1: Policy Instruments Affecting Market Access for Services ......... ... 76 ANNEX 2: GATS Article V: Economic Integration ...................... 80 References .............................................. 82 v Foreword Liberalization of trade in services has figured prominendy on the international economic policy agenda durmg the last decade. Many OECD counties created or expanded regional agreemen dat liberaized access to service markets. The North American Free Trade Agreement and the European Economic Area Agreement are important examples. Trade in services was also one of the key issues discussed in the Uruguay round of multilateral trade negodations. Of the many agreements reached in the round, the General Agreement on Trade in Services is of particuar interest It not only extends the reach of multilatea disciplines to services (the GATT only applies to goods), but it goes beyond the GATr by addressing investment policies and domestic regulatory regimes as well as trade policies. The question whedter regional trading or economic integration argements are a 'building or stumbling block' to a more liberal global trading system has attracted a great deal of aenion. The fos of this debate has largely been on the policy stance of regional trading angements visa-vis the rest of the world. The primary issue identified from a policy perspective is to ensure that protectionist forces in regionally integrated areas do not capture the policy process and succeed in implementing restictions against suppliers located in non-member countries. This is of great importance to developing countries, and was one of the reasons why such counties actively participated in tLe multateral negotans. The regional agreements involving OECD countries have many similarities with the Uruguay round agremn on trade in services. Wnatever the relationship between the various agreements wi tar out to be, a key point made in this paper is that explicit recognition of the services dimension underlying recent regional integration arangements suggests that regional inegratio is more likely to support multiltera liberaliation than to hinder it. The greater the success of a regional arangement in reducing barriers to exchange and provision of services, the greater will be the impact on fostering the cDmpetitveness of industies located within the region. This in turn should reduce the inwenve for both service firms and buyers of intermediate service inputs to attempt to close off regional markets. The policy issues associated with the opening of domestic service markets to foreign compeiton, and the role that regional as opposed to multilateral agreements might play in this connection, are especialy important for our client counies in the Middle East, North Africa, Europe and Central Asia The European Union is the most far-reaching regional agreemen in the world. Many counmtries neihboring the EU have negotated association agreements, are in the process of doing so, or are seously contemplating it They must decide at the same time what should be their policy stance regarding the rest of the world. With the creation of the General Agreement on Trade in Services, governments have at their disposal a mechanism that allows liberalization of service markets, whether achieved unilaterally or in the regional seting, to be granted to third parties as well. Active use of the new multilatera instrument will do much to ensure that the potential negative aspects of preferential liberalization will not materialize. It will also enhance ongoing adjustment and export-development programs supported by the Bank in the two regions. AnDI Sood Director, Technical Department Europe and Central Asia, Middle East and North Africa Regions The World Bank vii Abstract Regional agreements to liberalize intemational tansactions in services were prominent in the late 1980s and early 1990s. At the same, services were also introduced on the agenda of the last multilateal trade negodation, the Uruguay Round, which led to the creation of the General Agreement on Trade in Services. This paper asks whether the regional agreements and the multilateral prcess are complementary or substitute paths to liberalizing services markets. Six dimensions are employed for compariso purposes: the modalities used to liberalize trade; sectoral coverage; disciplines on subsidies and prOCUrement enforcement provisions; rules of origin; and safeguard provisions. It is concluded that the provisions and sectoral coverage of the agreements suggest that regional add multilateral liberalization are best viewed as complemntary. viii Adewledgenuent This paper is based in part on revisions of two background domans that were prepared for an OECD study on Regional Integration, and were circulated as TDITC(93)15/ANN2 and Supplement. We are gratefil to Denis Audet, Merid Bradford, Carlos Primo Braga, Serge Devos, Marie-Piere Faudemay, David Lee, Patrick Low, Petros Mavroidis, Peter Morrison, Gerhard Pohl, Geoffrey Raby, Richard Snape and Amenico Zampetti for helpful comments on earlier drafts. ix Execuive Summary Regional agreements to liberalize international transactions in services have been prominet in the late 1980s and early 1990s. Examples include the Canada-United States Free Trade Agreement (FTA), the Australia-New Zealand Closer Economic Relauions trade agreement (CER), the European Community's Single Market (EC-1992) programme, and the recenty concluded North American Free Trade Agreement (NAFTA). All of these agreements are of recent vintage, the oldest - the EC-1992 programme - initiated in 1987, the most recent - NAFrA - having been ratified in late 1993 by member countries' legislatures. At the same time that regional agreements to libelize trade in services have been pursued by industrialized countries, services were also introduced on the agenda of the latest multiateral trade negotiation, the Uruguay Round. In December 1993, this resulted in the establishment of a General Agreement on Trade in Services (GATS). This paper focuses chiefly on the issue of whether the regional agreements and the multiateral process are complementary or substitute paths to liberalizing services markets. It attempts to shed some light on this issue by comparing the effective liberalization of service markets achieved under regional auspices with each other and with the General Agreement on Trade in Services (GATS). If the magnitude of liberalization achieved under regional agreements is limited, the effects on both member and non- member countries will be small, and the issue of the relationship between the regional agreements and the GATS loses much of its potential for controversy. Conversely, if intra-regional lization is more extensive, or if there are major differences in the nature of the trade liberalizing rules and disciplines, the relationship between regional and multilateral agreements becomes more intestng. An important issue, then, concerns the differences between regional agreements and the GATS, as this will determine the degree of effective di n of regional agreements against non-members. To help determine how the regional agreements and the GATS 'score with respect to the liberlization of service markets, six dimensions or criteria are employed for purposes of comparison: (i) the modalities and insments that are employed to govern and liberalize trade in services; (ii) the sectoral coverage of the various agreements; Cxii) the scope of disciplines on government policies such as subsidies and goverment procurement; (iv) the comprehensiveness of the enforcement provisions of the various agreements; (v) the rules of origin ta are applied; and (vi) the nature and scope of safeguard provisions allowing govermnents to renege, subject to certain conditions, on specific liberalization commitment. The agreements reviewed in this paper are all broadly similar insofar as the basic instuments of liberalization are concemed. Key principles that are found in most or all agreements include tnspency (publication of regulations, etc.), national teatment, most-favored-nation (M teatment, and freedom in principle for providers of services to use any mode of supply (i.e., cross-border trade, temporary movement of supplier/consumer, and longer term establishment of suppliers). However, there are fairly significant architeural differences between agreements. One such difference relates to the ectent to which the reach of liberaization instruments and principles is restricted for individual sectors or measures. In the GATS, for example, national treatment, market access or the right of non-establishment (i.e. the right to provide cross-border services without an established presence) are not general obligations, whereas they are under the FrA, the NAFTA and the CER. Both the EC and the NAFTA experiences suggest that the application of principles such as national teatment and nondisaio may not suffice to open service markets to foreign providers. To be effective, trade lb n in services wil often need to be accompanied by the harmonizaon or mutual recognition of licensing and certification systems and of goods and services standards, as well as a reduction in othr non- x discrminatory measures that restrict access to specific sevice markets. While all the agreements recognize the potential importance of non-discriminatory market access restrictions, disciplines in this regard tend on the whole to be fairly limited. Architectural differences are also reflected in the approach taken towards detemining the sectoral coverage of agreements. The CER and the NAFrA employ negative lists (i.e. all services are covered unless they are explicitly excluded in an annex); tie FrA and the GATS employ positive lists (i.e., obligations apply only to listed services). While either approach can lead to the same liberalization outcome, a negative list is significantly more ausparet because it forces Parties to reveal all non- conforming measures and excluded sectors. Thus, the freedom of GATS Members not to list particular service sectors virually excludes 'sensitive' industries from its coverage without shedding light on the discriminatory practices they maintain in such sectors. Notwit i this substantive archiectural difference, the four trade agreements tend to be broadly similar as regards the sectoral coverage of liberalization of investment and cross-border trade in services. Indeed, the agreemens show a tendency to exclude the same broad range of sectors: among which are basic telecommunications, broadcasting, air and maritime transport, and government services. These are sectors where the EC has also encountered difficulties in liberalizing market access. The fact that, with few exceptions, broadly the same sectors seem to remain immune to liberalization regardless of the negodating seting would appear to suggest that regional agreements are not generally viewed by member countries as a substitute path to faster or significantly more comprehensive liberalization of trade in services. With the exception of the EC, none of the agreements impose significant general disciplines on subsidization practices targeted towards service industries. The only exceptions are the CER, which bans new export subsidies, and the GATS, which subjects subsidies to the Agreement's genera obligations (i.e. transparency, most-favored-nation treatment and dispute settlement). Government procuremnt also tends to be excluded from the purview of most of the agreements. The major exceptions here are the EC and the NAFTA. Services and constuction are subject to NAFTA disciplines on government procurement, which require covered entities to open public contracts to North America-wide tendering. The European Court of Justice and the bi-national panel process embedded in the FTA and the NAFTA illustrate that enforcement provisions under regional agreements can go beyond what has been agreed at the multilateral level. However, this may not necessarily always be the case, as is ilustrted by dLe CER which merely provides for a consultation mechanism. Dispute setlement procedures under the GATS are identical to those of the GAIT, as amended by the Uruguay Round. The availability of significantly strengthened multilateral dispute setdement procedures may give rise to another source of complementarity between regional and multilateral agreements. The rules of origin for investment and services adopted in the agreements reviewed in this pape are generally similar. They are much more transparent and uniform than those applying to goods, and tend on the whole to be more liberal as well. With the exception of the Canada-US FrA, all of the agreements extend benefits to all investors and service providers that are nationals or permanent residents of a member country or are incorporated under the laws of a Party. In addiionto incorporation, theEC and the GATS also require that entities conduct substantial business operations within member countries. The NAFTA contains the most liberal rule, merely requiring service providers, regardless of nationality, either to carry out substantial business operations within a member country (cross-border trade in services) or to be inoorporated (investment) in a NAFTA country in order to receive NAFTA treatment xi Ihe regional agreements and the GATS differ substaially with respect to safeguad provisio. None of the regional agreements reviewed in this paper contains service-specific safepard mechanism. In contrast, the GATS includes a nunber of articles of a safeguard nature. These largely duplicate those contained in the GATr, with the notable and welcome omission of antidumping rles. Specific rules with respect to emergency protection of service industries and subsidies/coumervail are to be the subject of future GATS discussions. In conclusion, while there are certainly major differences between regional agreements and between these agreements and the GATS, these are essentially 'architectural' in nature. The broad similarity of the specific rules and disciplines found in the vaious agreements suggests dutt regional agreements are generally quite complementary to the multilateral process. An important consideration in this regard is that regional agreements have proven usefil laboratories in which to experiment with ever more sophisticated services, investmet and procrment rules and disciplines. Indeed, agrm to negotiate the GATS was influenced by the EC-92 programme and the NAFTA. The progress that was made in the multilateral discussions was in part driven by the existence of regional liberaization agreements and/or negotiations. Not only did the threat of trade and investment diversion increase the incentives to engage in multilateral negotiations, but the regional developments constied a source of information and know-how for both participant and outsiders. Complementarity is further evidenced by the observed tendency for both liberlized and excluded sectors to be broadly similar in the various agreements. Libealizion of cross-border serices and associated investment is generally progressive under all of the we_. Aside from the possible exception of the EC which continues itself to encounter resistance to liberization in a number of sects (basic telecommunications, air transportation, investment services), significant market access limitations (both discrm ry and non-discriminatory) will remain in place for the foreseeable fuure under al trade agreements. The inmenal nature of liberalization in boih the regional and multilat contexts supports the conclusion that both negotiating settings may be viewed as exhibiting strong complem y. Although the existing agreements reviewed in this paper are likely to be complementary to the multilateral process, the weak disciplines imposed on regional integration in the GATS and the approach taken in the GATS with respect to scheduling specific commitments are offsetng sources of conern It appears that virtally any type of agreement, even one with only limited sectoral coverage and no more than a standstill commitmet could satisfy the conditions imposed by the GATS. Very much therefore depends on the inteDtions and objectives of the countries that negodae integration yre_ for service sectors. Litle can be expected as far as the exercise of multlatera disciplines is concerned. The distinction made in the GATS between general commn (e.g., MFN) and specific - - I (market access, national treaent), and the decision to schedule specific on a secor-by- sector and mode of supply basis provides governments with significant opporunies to 'fine tune' the market access conditions that apply to foreign service suppliers. For example, it allows governments to grant market access/national treatment for a sector, but to require that establishmn be used as the mode of supply by not scheduling cross-border trade. There is some danger that the archtctur s m ot the GATS approach to scheduling specific commitments may prove to be an obstacle to substatial multilateral liberaization of access to semce markets in future negotiations, and thus constitute an indirect incentive to pursue regional options. I. Introdution Agreements to liberalize international truasactions in services on a regional basis have boee prominent in the late 1980s and early 1990s. Examples include the Canada-United Sttes Froe Trade Agreement (FTA), the Australia-New Zealand Closer Economic Relations trade agreement (CER), the European Community's Single Market (EC-1992) progrmme, and the recenty concluded North American Free Trade Agreement (NAFTA). All of these agreements are of recnt vintage, the oldest - - the EC-1992 programme - initiated in 1987, the most recent - NAFTA - having been ratified in lae 1993 by member countries' legislatures. At the same time that regional agreements to liberaliz trde in services have been pursued by industrialized countries, services were also introduced on the agenda of the latest multilateral trade negotiation, the Uruguay Round. In December 1993, this resuted in the establishment of a General Agreement on Trade in Services (GATS). The topic of this paper is the relationship between regional agreements between certain OECD countries to liberalize trade in services and the General Agreement on Trade in Services (GATS) negotiated under Uruguay Round auspices. The paper focuses chiefly on the issue of whether regional agreements and the multilateral process are complementary or substitte paths to liberaize services markets. While interesting in and of itself, the answer to this question will also be an important element in addressing the larger issue of whether regional agreements are building or stumbling blocks to global trade liberalization. The subject of services has become increasingly important in regional agreements among certain OECD countries. In part this is because intra-OECD merchandise trade is subject to relatively low ad decliing barriers, at least for non-agricultural products. More importantly, it reflects the growing importance and heightened awareness of the central role played by senrices in production, employment, investment and trade in the economies of all industrialized and most developing countries. Services account for between 60 and 75 per cent of GDP and employment in OECD countrie and have in recent years become the fastest growing component of iternatonal trade and imvestmenL' This paper seeks to compare the treatment of services in the major existing regional agrement involvig OECD counties in an attempt to determine the ;xtent to which they go beyond the GATS in terms of effecatve liberalization of service markets. If the magnitude of libalization achieved under regional agreements is limited, the effects on both member and non-member counties wi be small, and 1/ Sema:s accmt for an estimated 20 per cae of wodd trade and for closw to 50 per cat of uanal flws of foi direct investmt. Whle not eni into trade satstcs, for comuu ch ta e United Stes dtt collect da on e sales of servces by US-owd affilidtes, such sl an approtima1tey oequa to the amI value of crossborder sales of commeria mrAce. I the issue of the relationship betweon the regional agreements and the GATS loses much of its potoi for controversy. Conversdy, if intra-regional liberalization is more extensive, or if tere are major differences in the nature of the trade liberalizing ru's and disciplines, the relationship between regional and multilateral agreements becomes more interesting. An important issue, then, concerns the differces between regional agreements and the GATS, as this will determine the degree of effective disciminaton of regional agreements against non-members. To help determine how regional agreements and the GATS 'score' with respect to the liberalization of service markets, six criteria are employed. The first caiterion relates to the rules and disciplines that have been developed to govern trade in services and achieve liberalization of trade in services. Key principles in this regard include national treatment, most-favored-nation (MFN) treatment, the right of non-establishment, mutual recognition of licensing and certification requirements, as well as the treatment of non-discriminatory market access restrictions. A second criterion relates to the coverage of the various agreements, both in terms of the approach taken towards determining sectoral coverage and in regard to the depTee to which 'covered' services markets are liberalized as a result of negotiated commitments.2 A thir i criterion fccuses on the impacts of various agreements on government policies that may substantially affect the openness of services markets and where discrimination typically rems the rule rather th}n the exception, such as subsidies and government procurement. A fourth criterion relates to the comprehensiveness of the various agreements' enforcement provisions (e.g. dispute settlement). A fifkh criterion concems the rmles of origin applying within the regional areas. These determine the extent to which non-member countries can share in - or be excluded from - the benefits of intra-regional liberalization, and also help determine the extent to which intra-regional trade is created or diverted. Finally, a sixth criterion relates to the nature and scope of safeguard provisions allowing governments, under specified circumstances, to exempt themselves from the negotiated commitments of the trade agreement in order to protect certain overriding interests. The paper is structured as follows. Section H starts with a brief review of the various restrictions to market access that govenments employ and the rules and disciplines that may be used to overcome them. Sections m to VH summarize the main services-related elements of the EC (Treaty of Rome; the Single European Act), the North American regional agreements (the FIA and NAFTA), the Ptotcol on Services of the Closer Economic Relations trade agreement between Australia and New Zealand, and the GATS. Among regional agreements, the paper devotes greater relative atention to the recently concluded North American Free Trade Agreement, both because of its status as the 'new kid on the block' and, 2,1 A quantitatve conWaism of dbe sectoma covosge of thc vaius ag_ments is not posible at the time of writing as conmitmets of GATS Members awe stfi confidntial, and in the ame of financial ad basic telecomunication. s ervicenrui under negobaton. 2 more importandy, because of its comprehensive treatment of services and its provisions related to investnent. A discussion of various approaches to services trade libeaization is summarized in Section Vm, which compares the key features of the regional agreements and the GATS. This section deliberately devotes less attenLion to the services dimension of the European Community. The main reason for this is that the process of European integration is in a quite different category, as it involves a degree of supranationality that goes much beyond what is contenplated in either the GATS or other regional agreements. However, the EC experience remains relevant by illustating how the liberalization of service markets may be difficult to achieve in practice, and how far-reaching the policy instruments required to do so may need to be. Section IX contains an analysis of the disciplines imposed in the GATS with respect to the formation of regional integration agreements among GATS Members. Section X briefly discusses the question of building vs. stumbling blocks. Section XI concludes. H. International Trade in Services Before turning to a comparison of the various international agreements aimed at liberalizing trade in services, it is useful to discuss briefly the major barriers encountered by service providers trying to sell their products in foreign markets. The reason for this is that the nature of the rules that have been developed to both 'civilize' and liberalize services trade among nations flow from the creriscs of the impediments - both natural and man-made (i.e. regulatory) - that typically impede services trade. Moreover, the design of such rules may be seen as an indicator of the degree to which regional agreements may have trade-liberaizing or trade-restricting effects, hence the degree to which regional agreements may be compatible with multilateralism. Service providers may contest foreign markets through a number of alternative 'modes of supply'. The three major options in this regard are: (i) cross-border provision through distribution networks, such as telecommunications media or postal services; (Ri) cross-border movement of the service provider to the country of the user/consumer; and (iii) cross-border movement of the consumer to the country of the service provider. For any particular service transaction, a firm's (or consumer's) preference will depend on the feasibility and relative costs of the alternative modes. In practice, technological limitations to the tradability of services often require providers to establish a physical presence in individual markets. The combination of non-tradability of many services and government policies restricting access to service market by foreign providers increases the 'economic distance' between agents in different countries. 'Economic distance' can be defined as the sum of the costs arising from geographic distance (transport 3 as well as trnsation costs of varkous kinds, including differences in culture, language, etc.) and regulatory barriers to the exchange of products and factors of production across frontiers? Reductions in economic distance may occur because of technological improvements that reduce the cost and enhance the quality of transport, communications and/or information. It may increase or decrease because of changes io regulatory regimes, whether of policies, laws and regulations that discriminate against foreign products and producers, or that apply equally to domestic and foreign producers. Technological advances in numerous services-producing activities - from aviation to banking and enhanced telecommunications- have played (and will continue to exert) a crucial role in reducing the impact of 'natural' barriers to trade. Until the early 1980s, trade in services was mostly ignored by policymakers and analysts. Driven by innovations in information technology, increasing specialization and pcoduct differentiation, as well as government policies such as deregulation, privatization and liberalization of trade and investment regimes, trade in services grew faster than trade in merchandise throughout the last decade. As shown in Table 1, global services trade (defined by the GATI Secretariat as non-factor services in the balance of payments mins goverment tramsactions plus labor income) stood at some US $1,000 billion in 1992, or 21.1 percent of global trade (goods and services). The average annual growth rate of services trade over the last decade was 9.5 percent, as compared to 7.1 percent for merchandise. Both industrialized and developing countries have seen the relative importance of trade in services increase, although services acunt for a larger share of the total trade of OECD countries. Technological and managerial innovations have been particularly important in changing the production and consumption of 'traditional' services such as telecommnications, tranportation and finance. Financial services and transportation industies have become much more intensive users of information and communications technology as the quality and capacity of telecommunications and computng servces increased, and average unit costs declined dramatically. Managerial and tedcnological innovations have also led to the growth of demand for - and supply of - externally provided producer services (such as design, legal services, accounting, or mainbenance), h-house provision of both support services such as personnel administration and intermediate service inputs such as information processing 3J See GATT (199(k), whch used the team eoomdistnce il the context of a discussion of eanic integation Dryaae and Gamaut (1992) employ tie tnn sesistance to uade, dng bewm objective and subjective resistalCeS. Ibe former incudes tanport and communncatrous costs ad officid barers to trade. The lte compise a range of socia, psychological and inutioal factos which cause pnces to vary aro geogphic space by larger mans than can be expained by the n_cemry cosoS of oveoung objective istanes. 4 Table 1 Global Trade Flows. 1932 and 1992 (US S billion) 1982 1992 Average _nual Total tmade in scrvces 405 1,000 9.5 OECD 290 760 Rest of world 115 240 Total merchandise trade 1,882 3,731 7.1 OECD 1,174 2,675 Rest of world 708 1,056 . Share of services in total 17.7 21.1 1.8 OECD 19.8 22.1 Rest of world 14.0 18.5 can increasingly be done more efficiently by independent, specialized suppliers. As technological developments have also expanded the tradbility of many services, such suppliers may be located anywhere on the globe. Advances in information technology may permit service firms, like their ma in counterparts, to split their production processes into parts and allocate certain operations to foreign affiliates - for instance, to take advantage of lower wages and other costs. Thus, the increased feasibility of exchanging data services across frontiers has stimulated foreign direct investment in labor- and information-intensive service activities. Examples are 'back office' type activities such as data entry, transactions processing (e.g., insurance claims), software development and maintenance, systems analysis, or database management. An increasing number of firms based in the United States and Europe are outsourcing such activities to locations in developing countries (Box 1). It is a popular misconception that the interests of developing counties in trade in services are confined to tourism. Trade statistics show that many developing counies have a revealed comparative advantage in services even if tourism is excluded (see Hoekman and Karsenty, 1992 and Section X below). 5 Box 1 Examples of developing country service exports Data nd information processing services are increainglY beiog provided by firms located in developing countries. These operations work as follows: documents are set from enterprises located in an OECD country to offshore processing facilities. Data are enered, processed, seot back to the orginabting firms, and stored in a data bawse. Alternatively, raw data may be read from databases located in the headquarts of a firm located in North America or Europe using a dedicated line, satellite or telephone mnodem and the processed information is sent back via the same links. Some 28 information processing firms located in Janmica in 1990 accounted for some 2,600 jobs. Examples of offshore back office activities can be found in insurance, air transport, computer and may other industries. Health insurance claims on New York Life, the US insurance company, are mailed to Kennedy Airport in New York, sent overnight to Shannon Airport in Ireland, and then tanmsoted by courier to a processing cater located an hour's drive from the airport. After processing, clims are retumed by dedicated tel ication lines to New York Life's data processing center in New Jersey, and a check or response is mailed to the clienL The motivation to move a part of the production process of insurnce paymeots was twofold: lower labor coas and difficulties in finding enough skilled personnel to process insurance claims at home. In addition to savings on labor costs, the company makes more use of its computers which we operated from eland in off-hours. Amencan Airlines sends accounting material and ticket coupons to Barbados for processing by its offshore subsidiary AMR Information Services/Caribbean Data Services. In Barbados, details of 800,000 American Airlines tickets are entered daily on a computer screen and the data are retuned by satellite to its data center in the United States. Data entry for telephone directories have been handled on a contract basis in Asia using labor inive double entry, with two or more workers entering data, and computerized comparison of files being used for quality control. India provides an example of foreign direct investment and trade in computer progrmming services. A sbstantial number of foreign computer firms have established both wholly-owned affiliates andjoint vtures with Indian firms in the souten city of Bangalore. Examples include Texas Instuments, Motorol Hewlett-Packad, Digital Equipment, Apple Computer, Sun Microsystems and Intel Corporatin. The attrtion of Bangalore derives from the availability of relatively low-cost, highly qualified, fluent Engish -speaking computer engines, wose sevices can be exported via satellite telecommunications orby travel to the location of individual clents. Bangaloe is a major research and engineering center in India. It hosts one of the country's leading technology universities, as well as one of India's top business schools. Over 12,000 engineers are estimat to work in the a Sources: UNCTAD andWorld Bank, Liberalingln ational7-asactionsain nervces.Aadbook,frtcming;- Mark WiLlson, 'The Office Farther Back: Busine Services, Productivity and the Offshore Back Office, Michigan State University, mimeo; 'India's High-Tech Capital Proves a Lure," Wall Street Jurnal Euroe. Janury 7, 1993. Space constraints prevent a fuller discussion of the impact of technological developments on intemational wade in services.' Rather, the main focus of this paper is on the regulatory obstacles 4/ See UNCTAD and World Bank (1994) for a more comprehsive teatm_zL 6 restricting access of foreign service providers to specific markets, whether on a cross-border basis or through foreign direct investment. In this connection it is important to note hat even though 'ntural' barriers to trade are diminishing, competing in a number of service markets will in many instances continue to require a local presence. Thus, regulatory impediments will remain important barriers to market access. Thus, foreign direct investment by service suppliers is likely to remain the primary avenue for exchanging services internationally. Moreover, because 'natural' transactions costs are often high in the services context - due for example to cultural and linguistic differences - a substantial reduction in regulatory impediments may not necessarily lead to significantly greater internationalization of services markets. The remainder of this section briefly reviews the major policy instruments that may be used to restrict international transactions in services. There is a wide variety of policy instruments that can be used to restrict access to markets. Annex 1 presents a listing of the main instruments that may be used. Five broad categories of policy instuments can be distinguished as impediments to trade in services: (i) measures that are quantiy-based (i.e. that explicitly restrict the volume or value of transactions); (ii) those that are price-based, involving the imposition of a monetary fee (tax) on foreign suppliers desiring to access a market, or price controls; (jii) those that require physical or corporate presence in a market; (iv) those relating to standards, certificadon requirements and industry-specific regulations; and (v) measures relating to govrment procurenent and subsidization, where discrimination tends to be the rule rather than the exception. Of the various measures described above, quantitative restrictions and standards are the most important market access restrictions in the services context. Quantitative restrictions may limit the quantity andlor value of imports of specific products for a given time period; restrict the number and/or market share of foreign service providers allowed to establish; or ration the amount of foreign exhge that may be used to import services. Such discriminatory quantitative restrictions are often complemented by non-discriminaory ones, i.e. measures that apply generally regardless of the nationality or orgin of service providers. These usually consist of limitations on the number of firms allowed to contest a market, or on the nature of their operations. Frequendy, this involves either a monopoly (e.g. basic telecommunications services) or oligopoaistic market structures (e.g. banking or self-regulating professional services). Although import tariffs rarely impede trade in services, prce controls are common. These involve either price-setting by government agencies and/or price monitoring and approval procedures. Price controls typically go hand in hand with capacity or quanttative restrictions, the intention usually being to ensure that prices are not set at either market-clearing levels or at the monopoly level in cases where providers of specific services have substantial market power. Examples of service sectors subject to price controls in many countries include air transportation, financial services and telecommunications. 7 Standards-related restrictions affecting international trade in services typically take two forms: (i) those that involve the non-recognition of imported goods in which services are often embodied (e.g. teecommunications or transportation equipment) or of services purchased or procured abroad (e.g. 'new' financial products); or (ii) those that involve the non-recognition of the certification or professional qualifications of foreign service providers. Alternatively, foreign service providers may be subjected to professional or goods-specific standards that are more onerous to meet than those pertaining to domestic goods or service providers. Market access barriers for service firms may therefore take the form of discriminatory and non- discriminatory measures, and may affect one or all of the modes of supply described earlier. Theoretically, unconstrained market access implies that domestic and foreign suppliers are accorded equal treatnent and that all service markets are contestable by suppliers of any origin through any mode of supply. In practice, of course, many service markets are only contestable by establishing a physical presence. Considerations relating to consumer protection, prudential supervision and regulatory oversight often induce governments to require establishment by foreign providers (e.g. financial or professional services). As well, certain service activities will be reserved for government-owned or controlled/regulated entities. A number of principles can be identified as useful benchmarks in determining the extent to which market access restrictions are reduced by an agreement. These include: (i) the uodali and instnunts ofiberaization - e.g. the application of national treatment, which guarantees that foreign suppliers are accorded treatment equivalent to that applying to domestic providers; most-fivored-nation treatment (MFN), which ensures non-discrimination between different foreign suppliers; freedom for foreign service providers to choose any mode of supply - including the right of non-establishment - as long as 'reasonable' prudential and other standards-related considerations are satisfied; and recognktion arrangements concerming standards, licenses, diplomas and related certifications; CQi) the sectorml covege of the agreement, in particular the number of service activities where contestabiliy remains prohibited or limited and the degree to which such restrictions are made transparent; (iii) disciplines on government policies such as subsidy practices and access to govenunent procurement contnads; (iv) &spute setLement and enforcement pmswions; (v) ruls of orin, which define the basis upon which the benefits of liberalization flow - or may be denied - to non-signatories; and, last but not least; (vi) safeguardprovsions allowing for temporary or longer term exceptions to treaty obligations. In the subsequent discussion, the focus will be on the extent to which such principles are embodied in the various international agreements governing trade in services and the resulting liberalization of services markets. 8 m. The European Conmnunity The European Community is unique among the agreements discussed in this paper in that it goes beyond inter-governmental co-operation. This is reflected, inter alia, in the fact that the EC has its own prerogatives and resources and that binding decisions on certain issues are taken on the basis of a majority vote. A major objective of the Treaty of Rome, which established the European Economic Community, was the realization of the 'four freedoms' of free internal movement of goods, services, labor and capital, including the right of establishment. In principle, the freedom to provide services applies to all services, with the exception of transportation services for which the primacy of national policies was recognized until a common EC-wide regime was established. As a result, there has been only limited intra-EC competition in transportation services, with governments frequendy setting tariffs (e.g. in rail), imposing and enforcing quotas (road transport), or agreeing to bilateral market sharing arrangements (air transport). Although EC Member States abolished border tariffs and quotas affecting intra-EC trade in goods on schedule, until recently very litde progress had been made in effectively liberalizmg intra-EC trade and investment in services. In the financial services sector, Article 61 of the Treaty of Rome stated that liberalization was to be effected in step with the progressive liberalization of capitad movements - on which little progress was made. Liberalization of the medical and pharmacetical professions was made contingent upon the harmonization of licensing and certification requirements. Rulings by the European Court of Justice in the mid-1970s reaffirmed that, as of the end of the transitional period (1970), all other services in principle were subject to the relevant provisions of the Treaty of Rome. The main liberalizing principles of the Treaty of Rome in this area are the freedom to provide services (i.e. the freedom to engage in cross-border trade) and the freedom of establishment. These principles proved to be insufficient to lead to a significant increase in the openness of many EC service markets because differences in national regulations - rather than policies that explicidy discriminated between domestic and other EC firms - constituted the major barriers to market access. Writing in the mid-1980s, FHimdley (1987, p. 471) noted dtat 'it is widely accepted that progress to (attain the) liberalization of services transactions is so slow as to raise serious doubts as to whether it will ever arrive at its destination'. Lack of progress appeared to be due to a lack of enthusiasm on the part of many EC members. Many Member States argued in the EC Council that a necessary pre-condition for liberalization was the adoption of common regulatory policies for specific services, and that in the absence of harmonizaion the principle of national treatment should continue to be applied. However, repeated efforts at agreemg to harmonized policies proved relatively unfruitfil. In part this failure reflected a disinterest on the part of service industries to expand beyond domestic markets and to form a unified internal EC market. To the extent that service industries desired to compete in other EC markets, establishing branches or subsidiaries appeared to be the preferred option. Foreign direct investment within the Comn-mity by EC 9 service companies has generally been allowed without significant restrictions. Once established, affiaes are, of course, subject to host country standards and regulations. As noted by Roth (1988), the EC Council's harmonization practice prior to the adoption of the Single European Act implied that freedom to establish and freedom to provide services were regarded as closely linked, if not equivalent. The liberalization that occurred during the 1970s and early 1980s was thus mostly the result of unilateral initiatives by certain countries to deregulate specific industries (Messerlin, 1990). This has changed with the adoption of the Single Market or EC-l992 programme, which can be duracterized as an attempt to achieve the original objectives of the Treaty of Rome, although by going beyond the original treaty by introducing the concept of the 'internal market'.5 Among other things, the Single European Act led to the adoption of qualified majority voting in the EC Council on most issues relating to the establishment and functioning of the internal market, agreement to open up public procurement markets - including services - to EC-wide competition, and the introduction of the concepts of mim standards, mutual recognition and 'home country control' for regulatory regimes. The principle of mutual recognition - which originated in decisions of the European Court of Justice - requires Member States to allow products lawfully introduced into the commerce of one EC country to be sold in all other Member States. While relatively straightforward when applied to goods, the intangibility of services often imnplies that mutual recognition procedures need to be complemented by common EC-wide minimum 'quality' standards. This requires the negotiation and adoption o' EC Directives or Regulations. Much of the EC-92 programme has thus consisted of Directives related to specific service industries. For example, the second Coordinating Banking Directive makes home countries responsible for prudential supervision (e.g. setting and enforcing liquidity and solvency standards), subject to the requirements of other EC Directives that establish minimum standards in this regard. It allows any credit institution authorized in one EC Member State to establish branches and provide banking services anywhere in the EC (the so-called single passport).6 In addition to banking, there are also directives on investment services (securities markets), mutual fimds, and insurance. These have proven to be more difficult to formulate than the banking directive, in large measure because of the greater diversity both of the activities covered and of existing regulatory structures in individual Member States. Other services where significant liberalizing directives have been passed include road and air transport, St See Pelkznans (1990) and Messerlin (1990) for summary descriptions of the Single Market progmnFme as it affects services. Roth (1988) provides a detailed aInaysis and discussion of EC law on sonvices. 61 However, foreign financial institutions remain subject to dth hos country's busine rules - mch as reporting requirements and restictions on permissible product and activities. This potentialy limits the extent to which there will be a genuie single maiket for financial servic. 10 telecommunications (broadcasting as well as value-added services), and professional services (accounting, legal and medical services).' The EC also imposes disciplines on state aids, public procurement and competition within industries. The adoption of the Single European Act led to more frequent targeting of service industries by the European Commission's competition authorities. Investigation of the value-added telecommunications service industry and the air transportation sector underlay to some extent the adoption of Directives aimed at progressive liberalization in both industries. The EC Commission has the right to monitor state aids and require Member States to oblige firms to repay such aids. It may even impose fines on those Member States that do not comply. As mentioned earlier, the European Court of Justice played a pivotal role in the adoption of the mutual recognition principle in the Single European Act. As befits a fully integrated economic region, the dispute setdement provisions of the EC are, as well, far-reaching. EC law has primacy over national law of Member States, and has direct effect. Thus, private parties may invoke EC law in national courts. In conjunction with the power of the Commission to initiate legal proceedings against a Member State which it perceives as not implementing EC directives or regulations, this ensures that violations of EC rules are frequently contested and thus made transparent. However, the Court does not have the power to enforce judgements, and in contrast to most other international trade agreements, there are no provisions for Member States to retaliate against each other. Under international law the nationality of a company is determined for most purposes by the country of incorporation. This is a simaple and unambiguous criterion, one that was reaffirmed by the Interational Court of Justice in the Barcelona Traction case in 1970 (Fatouros, 1987). However, the criterion of incorporation has been deemed to be inadequate for certain purposes. For example, it may accord nationality to corporations that are incorporated in a country for tax avoidance or related purposes, but do no business or have no assets in that country. This perceived inadequacy is reflected in many bilateral and plurilateral trade and investment agreements As far as the EC is concerned, Artide 58 7/ Directives have been adopted conceming the mutual recognition of diplomas relatd to pharmacy ad higher education related to 'regulated' professions. The data services market has been opeed to EC- wide competition, as has broadcasting. As of 1993, EC-based airlines will be free to fly on any rmut conecting two or more Member States, and will be much less constned regardng prce settg. However, purely domestic flights (cabotage) remain for the time being die prerogative of nationm airlines. For a recent review of the state of the Single Market, see WaU Sreet Journal, December 23, 1992. / Bilateal investmt reaties (BiTs) negotiated between certain OECD counties and develapmg countries may imclude ownersip or control as the prmary or as additional fictors for determiig the origin of a corporation. The BiTs of coumtries such as France, Germany and the United Kingdom rely 11 of the Treaty of Rome specifies that to be considered an EC company, not only must it be incorporated in a member state, but it should also have its headquarters/central administration or principal place of business within the EC. The Treaty of Rome contains a number of general safeguard provisions. Examples include the following: Article 36 allows restrictions on imports to safeguard public policy, security or health, or to protect national treasures or commercial property. Articles 108-109 deal with measures to safeguard the balance-of-payments. Article 115 allows the Commission to authorize Member States to take protective measures in cases where implementation of the common cormmercial policy leads to economic difficulties. Article 226 allows Members to apply for authorization to take protective measures if, during the transitional period after the Treaty entered into force, serious economic difficulties arise for a sector or area which are liable to persist. Finally, the common commercial policy provides for the application of the GATr provisions for contingent trade policies against third parties: antidumping, anti-subsidy, and GATT Article XIX-type emergency protection. With the exceptions of Articles 36 and 108-109, these provisions pertain to merchandise trade flows. The Treaty of Rome has only one service-specific safeguard procedure in Article 75, which pertains only to transport. It provides EC Member States with a veto power in instances where provisions of a common transport policy would seriously affect, inter aia, employment in certain areas or the operation of transport facilities. The EC-1992 programme clearly has far-reaching potential in terms of liberalizing intra-EC service markets. At the same time, the EC experience illustrates how difficult it can be for countries to liberalize access to service markets in a cooperative manner. It also reveals the limits of principles such as national treatment and MFN. Non-discrimination must be complemented by other measures, such as the application and enforcement of competition rules, the harmonization of sandards, the establishmt of recognition arrangements for the certification and licensing of professional-service providers, and the acceptance of a certain degree of competition in regulations. While the final result of the EC-1992 programme remains to be seen, it has already had a substantial impact on the services sector, as reflected in the great increase in merger and acquisition ac' .ity during the late 1980s and early 1990s. Firms will increasingly face common standards and be free to choose the economicaly optimal mode of supplying their services in other EC markets. primarily on the incorporation criterion, 'referring to control or substatial interes only in specific conts, such as the grant of national tetmen to invesbnmts by nationals of a party' (Fatour, 1987, p. 302). The US BrTs use a combination of incorpoaton 1md substantid interest, while odter countrie such as Switzerand focus only an oontrol. 12 IV. The Canada-United States Free Trade Agemet The FTA was negotiated in 1987 and entered into force at the beginning of 1989.' The discussion of this agreement will be brief, as the FTA has been superseded by the NAFTA. A summary review of the FTA's services provisions is nonetheless useful for comparison purposes. As will be seen subsequently, the differences between the FTrA and the NAFTA are substantial in the area of services. At the time of its signature, the FTA represented the first inter-governmental attenpt at crafting a set of comprehensive disciplines to govern trade in services.' The FTA contains four chapters related to trade in services: one on servicesper se, which includes annexes on telecommunications and computer services, tourism services, and on the mutual recognition of architects; one on financial services; one on temporary entry for business people; and one on investment. The investment chapter is generic in nature, covering both services and goods-related establishment. The main liberalizing principle that is applied to service providers is that of national treatmet. However, the immediate effect of this obligation was severely restricted because it applied only to measures adopted by either country after the Agreement's entry into force. That is, all existing non- conforming measures were 'grandfathered'. This was predicated mainly on the belief that both countries' 'covered' services markets were on the whole already fairly open to outside competition. The FTA, indeed, took a 'positive list' approach to sectoral coverage, its obligations only applying to those services activities - some sixty in all - that were explicitly listed in an annex to the Agreement. Important service activities such as transportation (all modes and related services), basic telecommunications, legal and medical services (doctors, dentists) were excluded. Services were similarly not subject to the FTA's procurement chapter, which applied only to goods and the Agreement contained no disciplines on services-related subsidies. The FTA does not feature service-specific dispute-settlement procedures. Rather, disputes are subject to a generic set of procedures applying to all mattrs covered by the Agreement (with the exception of financial services other than insurance, where bilateral consultations between both Parties' FinancelTreasury officials was preferred): a notification and consultation requirement, followed by referral to the Canada-United States Trade Commission if no agreement can be reached. The Commission may refer disputes to a binding arbitration panel. Failure to implement panel decisions allows retaliatory measures to be taken against the non-complying country. 21 See Schl and Smith (1988) for a concise review of the agreement's major services-related provisions. lo/ Of course, the EC predates the FIA by dree decads. But, as mentioned ealier, the EC goes beyond inter-govemmental co-operation, whras al of the other agements dissed in tis paper we restricted to intergovemental co-opeation. 13 The one service sector where some limited rollback of existing restrictions was achieved wu financial services, which saw American and Canadian financial institutions secure exemptions from certain existing regulations perceived as significantly impeding bilateral trade and investment in financal services. However, rather than providing a set of trade liberalizing principles and rules (including dispute settlement), the Agreement's separate chapter on financial services (other than insurance") is couched in terms of specific concessions.'2 Ironically, the financial services 'paclcage' of the FrA has come to be viewed in both countries' regulatory and industry circles as suffering from serious shortcomings.13 Given the grandfathering provision, the absence of general procedures for harmonization or mutual recognition of standards, and the absence of government procurement disciplines for services, the FTA could only achieve limited progress in increasing the contestability of service markets." The Agreenent did, nonetheless, break new ground in a number of important areas by developing trade disciplines and rules for value-added telecommunications services, licensing and certification of architects and the temporary entry of business people. Advances in all three areas, in addition to the adoption of I1/ lsurance is addressed under the geneal chapter on services. The reason for dtis dichotomy was largely bureaucratic in nature, owing to the fact that regulatory oversight for insrance activities in the United States falls with the Department of Commerce, rather than the Treasury. This partition meant tht anly insurance services benefitted from principles-based libealiation under the FTA, including the Agreement's binding dispute settlement provisions. 12/ In terms of specific commitments, the PTA saw Canada exempt US financial firms frm cain laws limiting the aggregate foreign ownership of federly-regulated financial insttutions to 25 per cant, and individual ownership to 10 per cent (the so-called 10/25 rule). However, the individual 10 per cent ownership iimitation continues to apply to both American and Canadian investors having equity in a Schedule I bank- Additionally, US bank subsidiaris opeantng in Canada were exempted frm the aggregate ceiling on the size of the foreigm banking sector; permitted to tranfer loas to their parent companes subject to certain prudential considertions; and exempted from the requirement to obtain approval of the Minister of Finance prior to opening additional branches wndin Caada. The United States, for its part, agreed to permit domestic and foreign banks and bak holding compnies to deal in, undewrite and purchase without limitation Canadian govenment-backd securities (including provincial government debt). The US also agreed to gradfather certain rights related to interstate banking and non-banking activities of Canadian banks under the Intnational Bank Act of 1978. Finally, the US committed to provide Canadian financial institutions with the same tment as tat accorded to US finns with respect to any amendment to the Glass-Steagall Act. 13/ Chief among these were the absence of general rules or principles enshrining the right to market acces and non-discriminatory treatment, the absence of disciplines on measures of b-national governme and self-regulatory organizations, the lack of any direct links to the FTA's inveslment disciplines, the absence of a binding dispute settlement mechanism and the ladc of a built-in dynamic for futue libermlization. See Sauvd and Gonzdlez-Hernmsillo (1993). 14/ See Whalley (1991) for a similar conclusion. 14 a national treatment-based regime for services trade liberalization, were instrumental in laying the foundations of what would later be achieved in the GATS and NAFTA contexts. The FTA aw Canada and the United States adopt a rule of origin for services based on ownership and control rather ta incorporation." Article 1402.7 states that the provisions of the chapter on cross-border trade in services apply to enterprises owned or controlled by a person of the other Party, notwithstanding the incorporation or other legal constitution of such enterprises within the Party's territory."' The FTA has no service-specific safeguard mechanisms, except for a general denial of benefits clause - which allows a Party not to apply the provisions of the agreement to entities deemed to originate in non-member countries - and a general provision allowing actions to be taken to safeguard the balance of payments. Articles 1101 and 1102 of the FTA, which are analogous to Article XIX of GATT and allow emergency protection action to be taken in certain circumstances, apply only to trade in goods. Similarly, while Canadian and US exporters continue to be able to invoke antidumping and countervailing duty procedures on intra-area trade flows, these laws relating to unfair trade apply to goods only. V. The North American Free Trade Agreement The North American Free Trade Agreement (NAFTA) was completed on August 12, 1992 and entered into force on January 1, 1994. Marking a significant departure in economic relations between developed and developing countries, the NAFTA extends to Mexico the rights and obligations of the 1989 Canada-United States Free Trade Agreement (FIA). It also expands on the FTA, both by broadening its coverage and by deepening the treatment applying to sectors and issues already covered under the bilateral pact. Services are a good example of an area whose treatment was both significantly broadened and JL/ The FTA's chapter on the temporary entry of business people (like the NAFrA) extends the chapter's benefits aoly to citins of a Party. This means for intnce that a European national being trsferrd from the Canadian to the US subsidiary of a firm (regardless of the firm's nationlity) would sti be subgect to labor certification requiements. Citizenship requments within the Europen Community similarly hamper the mobility of non-EC nationalslprofessionmls. Jl/ Control is defined in Article 1611 of die FTA's investnt chapter as ownersip of all or subst tiily all of the assets used in carrying on the business entuprse and includes with respect to an entity tat controls a business enterprise the ultmate diuect or indirect control of mich eni through the ownership of voting interests. A different definitio is employed in the chapter on finanl saerice Tihee a compnay is controlled by one or more peroW if the shaes of a company to whdich ae atched more than 50 per cent of the votes that may be cad to elect directors are beneficially owned by the person or persons; and the votes attaced to thos haes are sufficient to elect a majority of tho dirctors of the compny; or the Pe/ptso/s ha or have, diecily or indiecly, control in fact of the company (Arficle 1706). The latter provisions have been deemed to breach Canadsm uder the OECD Codes of Liberlization on Inrvisble Transons and Capital Movements. 15 deepened by the NAFTA. While drawing on the services and investment-related provisions of the FTA, the NAFTA is noteworthy for having provided the diree countries' services and investment negotiators with the first opportunity to apply the numerous lessons learned in developing the GATS. As discussed furffier in Section VIII below, the services-related provisions of the NAFrA differ from those of the FTA and GATS in a number of significant ways, making the NAFTA arguably the most comprehensive package of services trade liberalization achieved in an inter-governmental trade agreement to date. Negotiators in NAFTA opted to treat services in as generic and integrated a way as possible. NAFTA's services package is thus made up of -- and draws its consistency from - several parts of the overall Agreement, many of which relate to trade in the goods in which services are often embodied. These include: (i) an extensive set of investment disciplines, since much of services 'trade' takes place through an established presence;" (ii) more liberal rules on cross-border trade in services, including those pertaining to local presence, right of non-establishment and a more generic treatment of matters relating to licensing, accreditation and professional services; (iii) sector-specific trade liberalizing rules and/or timetables for financial services, telecommunications and transportation services;13 Civ) new protection for intellecual property-intensive goods and services (e.g. telecommunications, computer services); (v) disciplines on - and significant liberalization of- government procurement of services and construction (a first); (vi) recognition of the nexus between goods-related non-tariff barriers and savices trade liberalization through the establishment of work programmes on standards hanwnization for land tansportation (bus, truck and rail services) and teleconununications equipment; and (vii) border facilitation in respect of the temporary entry of business people and their 'tools of the trade'. L7/ The NAFTA introduces significant changes over the FrA as regards the treatment of investmet, resuting in what has been described as a considerable clarification of the rles goveniing tht treatment of sll foreign investment in North America (Gestrin and Rugman, 1993; Hufbsuer and Schott, 1993). Two key differences disinguish the FTA and the NAFTA investment chapters: (i) the coverage of the NAFTA chapter has been extended to a much larger group of investments, inluding various fomns of non-equity interests, and to a greater number of sectors, among which aU service sectors; and (ii) the security of investments has been enhanced through the development of extensive provsions regarding the settlement of disputes and designed to prot intemational investors and their investmets. The innovations contained in NAFTA's investment chapter seem destned to have nmultilel ripple effects, with some observers noting that 'idealy, the GATT negotiators should replace the TRDls (trade-rcated investment measures) accord with an investment code based on the NAFTA text -if not in the Uruguay Round then in subsequent talks' (Hufbauer and Schott, 1993, p. 84). The NAFTA's investment provisions may similarly be expected to influence discussions on the development of a Wider Investment ntlument in the OECD context. 18/ Abstracting from the EC, the coverage of - and liberalization commitments in - all t_nsport modes represents a first in an intemational trade agreemenL 16 A second major architectural change introduced by the NAFrA relates to its approach to coverage. Unlike the FTA, the NAFTA chapter on cross-border trade in services does not take a scheduling (or positive list) approach to coverage, but rather applies to all measures affectiog trade in non-financial services not falling within the ambit of the Agreement's investment chapter and not specifically excluded from coverage."' With the exception of niost air transport services (i.e. all services except aircraft repair and maintenance and specialty air services), the sectoral coverage of NAFTA's cross-border services chapter is universal in scope.' An important consequence of the negative list approach to coverage is that, unlike the FTA, there is no general grandf1thering of non-conforming measures under the NAFTA. Rather, the Agreement compels Parties to list all non-onforming measures at both the national and sub-national levels within prescribed time limits.' Failure to list non- conforming measures within these limits entails their full and automatic liberalization. The obligation of NAFTA Parties to provide detailed information on remaining regulatory impediments to trade and investment in services yields a much greater degree of transparency than is the case under the other regional agreements reviewed in this paper.? NAFTA's services-related rules and disciplines carry forward elements that are common to most regional or multilateral agreements, namely the core liberalizing principles of national treatment, MFN and non-discrimination, the latter being defined in NAFTA as the best of national treatment or MFN. The Agreement does, however, draw a distinction between discriminatory (i.e. national treatment or MFN- related measures) and non-discriminatory measures that restrict access to a service market. The latter are called 'quantitative restrictions' in the NAFTA. While Parties are unconstrained with respect to the latter measures, these must nonetheless be listed in an annex for transparency purposes and are subject to 19/ Whereas insurance services were covered by the services chapter of the FTA, they are covered in NAFrA under the financid services chapter. 20/ As discussed further below, although both the GATS and NAFrA have unversal coverage, the full range of the GATS disciplines applies only to services that are listed positively in Paties' national schedules. It is worth noting that all categories of air hnsportation senrices are subject to the disciplines of the NAFTA's investment chapter. 21/ Tle listing of non-conforming measures at the federal level was completed at the time the Agrement was signed by the three countries' heads of state in December 1992, whereas states ad provinces have been given a two-year grace period following the Agreement's entry into force to complete thdir lists. Non-conforming measures of local or municipal governments need not be scheduledid the NAFTA. 221 The GATS does go somewhat in this dirfecion by compelling Parties to documet, adbeit less comprehensively, market access and national trement restrictions applying in schduled sectors. Service providing firms and future trade negotatos stand to be the mai beneficire of NAFrA's greater trsparency, the former by obtaining prior 'warings' on all market impediment to be expectd nm a particular country/sector, the latter by having before them a road map of all tat remains to be achieved by way of liberalization. 17 periodic negotiations. Drawing from the FTA, the NAFTA provides for an explicit right of non- establishment by oudawing all future measures requiring the local presence of firms or service providers (i.e. residency requirements for professionals) as a pre-condition for the delivery of a service. Both national treatment and MFN are general obligations under the NAFTA.1 The NAFTA, moreover, incorporates a 'ratcheting' provision whereby a Party's commitments under the Agreement are automatically adjusted to reflect any liberalization of domestic measures. The negative list approach adopted under the NAFIA required the production of a set of annexes pertaining to reservations and exceptions to the investment and cross-border services disciplines. The NAFTA allows reservations to be lodged against a number of obligations common to - or found in either - the cross-border trade in services or investment chapters: national treatment, MFN treatment,2' local presence (cross-border trade in services) as well as obligations relating to performance requirements and to requirements on the nationality of senior management and boards of directors (mvestment). The Agreement contains seven annexes. Annex I lists reservations maintaining existing non- conforming measures. Annex I lists sectors, sub-sectors and/or activities in which NAFTA Parties may enact new non-conforming measures (i.e 'unbound' reservations). Annex m lists sectors reserved to the Mexican State. Annex IV lists exceptions to the MLFN principle in respect of existing or future international agreements. Annex V lists each Party's non-discriminatory quantitative restrictions. Annex VI lists miscellaneous liberalization commitments, while Annex VII lists reservations, specific cornnutments and other items specific to the financial services sector. The annexes to the NAFTA agreement are substntial. What is relevant, however, is not so much the number of such annexes but their content, i.e. what they reveal about the degree to which North American service markets have been rendered more open and the ext to which intra-regional liberalization exceeds what may be achieved at the multilateral level. A review of the annexes shows that, with a few notable exceptions (i.e. land transportation, specialty air services, professional services), the 23/ The NAFTA's cross-border trade in services and investment chapters adopt what has been callod a 'reverse MFN' stadard, meaning that if a NAFTA partner extends more favorable tramt to a non- NAFTA investor or service provider, it must also extend this treatment to NAFIA investors or service providers. 24/ Although the GATS discussions have revealed the difficulties involved in mking MFN a genend obligation in a multilateral setting, it is notworty dtt the NAFTA countrie could not agmee to liberalize intra-regional tade and invesment in service on an MFN bass. This, to a Ire extent, may be explained by the fac tat the sectors inl which MEN senstivities have proven most acute in the GATS setting - eg. basic telecommuic mt tr rtation - are also ein which littlo tangible progress could be achieved in a trilatemd setting or in gard to wbich the mainenace of future negoting 'coinage' may have been deemed usefid. 18 degree of liberalization agreed to in the NAFTA by Canada and the United States closely approximates - - albeit in a now fully transparent manner - what had been achieved under the FrA. The situation is quite different for Mexico which, while lodging the largest absolute number of reservations, also undertook significant liberalization commitments in the greatest number of service sectors under the NAFrA. 'Unbound' reservations were, moreover, lodged in those sectors - basic telecommunications, air and maritime transportation, government services - where the frontiers of liberalization have traditionally proven most difficult to nudge, regardless of the negotiating forum (including the EC). Still, the NAFTA is noteworthy for registering progress in a number of complex and/or highly regulated service sectors where liberalization has so far proven difficult to achieve in regional and/or multilateral settings. One such area is that of professional services. The NAFTA reaffirms and expands on FTA provisions relating to licensing and certification. Its provisions commit each NAFTA country to seek to ensure that licensing and certification requirements and procedures are based on objective and transparent criteria, such as competence; and are no more burdensome than necessary to ensure the quality of the service and are not in themselves a restriction on the provision of the service. In an agreed departure from the MFN obligation the NAFrA does not require a signatory country to recognize automatically the credentials of service providers of another country. The latter must, however, be affirded the opportunity to show that their licensing standards match those contained in any accreditation agreement involving other NAFTA Parties. Appended to the Agreement's cross-border services chapter, the Professional Services Annex, is the first generic blueprint aimed at encouraging and assisting all professions interested in reaching mutual recognition agreements to be contained in a trade agreement.2Y The Annex sets out procedures - in areas such as recognition of diplomas, examinations, experience, professional conduct and ethics, alternatives to residency requirements, and liability insurance - aimed at the development of mutually acceptable standards of professional practice, a pre-requisite to any meaningful liberalization of trade in 'accredited' professional services. Three elements complement the NAFTA package on professional services. First, an agreement to remove, within two years of the Agreement's entry into force, all citizenship ancL permanent residency requirements attached to the licensing and certification of professional service providers (i.e. the obligation to be a 'landed immigrant').' Second, the establishment of detailed work programmes aimed 251 The core provions of dhe NAFTA's annex on professional services found their ongin in the Cnada- United Sttes FTA nnex o mutual rwecogtion for architects. 26/ Iu part, te agreement to remove citzesip and pen_et residency requirements stems from tec recognition of the gowng body of jurispnWdence in all tbree comanies regarding the uncos ity of suc requirements. Rather than subjecting such meas_rs to the dispute settlement proviions of the 19 at liberalizing the licensing of foreign legal consultants and providing for the temporary licensing of engineers. Third, the development (m NAFTA's chapter on Temporary Entry of Business People) of governing principles and rules under which citizens of each NAFTA country may have access to the other NAFTA countries on a temporary basis to pursue business opportunities without meeting a labor market (or economic 'needs') test.' Transportation, telecommunications and financial services stand out as other key sectors in which significant new liberalization commitments were secured under the NAFTA. NAFTA marks the first time that all transportation modes - i.e. land, maritime and some air services - are addressed by an international trade agreement. While the NAFTA consolidates what had already been largely achieved between Canada and the United States in the area of land transportation, it marks a significant opening of Mexico's previously closed cross-border and investment regimes for international bus and trucking services. The land transportation package is accompanied by a six-year work programme on standards harmonization in areas such as vehicle size, driver certification, emission standards, road signs, carriage of dangerous goods, etc. Also noteworthy is the agreement in NAFTA to fully liberalize the cross-border provision of specialty air services within the three countries over a six-year period.' Bringing t-rnsportation services within the coverage of NAFTA's investment and cross-border services chapters provides a ready-made forwn for future negotiations and standards harmonization in the sector, a first step towards the fully integrated market for transportation services required to optimize trade and growth opportnities within the region. The treatment of telecommunications in NAFIA draws heavily on related FTA provisions and refines some of the language developed in the GATS annex on telecommunications services. As in the NAFTA, it was agreed that failure to eliminate such measurs within the agreed time limits would allow other NAFTA countries to maintain or reinstate equivalent mesures in the affected sector. V7/ NAFrA's temporazy entry chapter builds on and exteds the temporary entry provisions of the FTA to Mexico. Like the FTA, the NAFTA identifies four categories which are eligible for temporay entry: business visitors, ttaders and investors, mta-compmny transfezees and professionals. The latter comprse some 63 professional activities that are listed in the chapter. A number of new professionul categones have been added, such as satisicias, oceanogaphr and geographer, as well as seminar leaders conducting training semar Tlhe United States and Mexico have agreed under the NAFTA to set a quota on the number of Mexican professionals who may enter the United States on an annual basis (curntly set at 5 500). Canada has chosen not to set a quota on the temary entry of Mexican professionasl. The NAFTA, furtemore, extends duty-free privileges to the tools of the tade (e.g. compute, software, smples, promotionl matderil) imported an a tempoy basis by professionals covered under the Agreeet's chapter o Temporary Entry of Business Poople. 28/ Specialty air services are ar senrices wise mn pupose i6s not the carage of people or cargo. These iclude activities such as aeral photography, aeil surveyig, arial maipping, aerial fire figtng, aerial construction, heli4ogging and eial spraying. 20 FTA, the NAFTA chapter on telecommunications does not apply to the provision of basic services (e.g. local and long distance voice telephony services).' Rather, its purpose is dual in nature: to set out 'reasonable' and non-discriminatory terms under which firms can gain access to and use public networks and services, and to delineate conditions that may be attached to the provision of enhanced telecommunications services. Under the Agreement, 'reasonable' conditions of access and use means that companies will be allowed to operate private leased networks for intra-corporate communications, attach terminal or other equipment to public networks, interconnect private circuits to public networks, perform switching, signalling, and processing functions, and use operating protocols of the user's choice. The NAFIA goes beyond the GATS by requiring that private leased circuits be made available on a flat-rate pricing basis and that rates for public telecommunications services reflect economic costs. It also breaks new ground by circumscribing the range of conditions that may be attached to the provision of enhanced telecommunications. As in the case of land transportation, the NAFTA sets in motion a common approach towards standards for telecommunications equipment attached to public networks and sets up a telecommunications standards sub-committee to develop a work programme on standards harmonization within six months of the Agreement's entry into force. The Chapter also foresees the mutual recognition of conformity assessment procedures amongst the three countries within a year of NAFTA's entry into force. The NAFTA, finally, eliminates foreign investment restrictions and local presence requirements for enhanced teleconmunications service providers in Mexico.' Of all the sectors covered in both the FIA and the NAFTA, financial services stands out as perhaps the area where the NAFTA introduces the greatest changes. Unlike the FTA, or any other existing financial services agreement, the NAFTA establishes the first comprehensive principles-based approach to disciplining government measures regulating financial services.3' The NAFTA provisions on financial services - in both architectural and substantive terms - draw heavily on the insights gained in the first six years of GATS negotiations. For example, provisions such as those dealing with defacto 29/ All three NAFTA countnes have lodged 'unbound' reservations m the area of basic telecomnucations services, allowing them fidl fieedom of future regulatory behavior. The NAFTA does, however, contain language specifying that 'the Parties will consult with a view to determining the fnbility of further liberaiing trade i all telecommuncations services, including public telecommuncatiLons tnwport networks and services'. 30/ Mexico currently limits foreign ownersip i enhanced telecommucations services to 49 per ceut The removal of local presence requiements applies to al enhanced services other than videotext and enhanced packet switched dat services, which are to be eliminated by July 1995. 31/ The adoption of this approach marks an important new development in the area of financial semrvices. It stem from the recognition - largely absent within the inrnational mmuty of financia rgulators less thaLn a decade ago - that busiess globalizition ad trade- liberalizato require agreenmit amongt countries on a set of rules and disciplines to deal with mats of establishmt, effective maket access, standards of treatmt, transparency of regulations and dispute settlement 21 national treatment (i.e. the development of a non-discrimination standard aimed at securing an equality of competitive opportunities between domestic and foreign firms); commercial presence; the carve-out of measures taken for prudential considerations; the mutual recognition of supervisory practices; the right to purchase financial services on a cross-border basis; disciplines on payments and transfers and on the movement of information and specialized personnel; as well as the tailoring of dispute settlement provisions to meet the needs of the financial sector, were all developed in the GATS context prior to their adoption and further refinement in the NAFrA. In addition to providing a ready-made laboratory in which to test new financial rules of the game, the NAFTA saw Mexico agree to far-reaching liberalization of its financial markets, opening up its hitherto heavily protected financial markets to the rigors of international competition over a fairly short - - six-year - transition period. Under the Agreement, financial firms (including from non-NAFlA countries) organized under the laws of another NAFTA Party will be able to establish wholly-owned subsidiaries in Mexico, subject to certain market share limits - both aggregate and firm-specific - that will apply during a transition period ending by the year 2000.3 Canada and the United States, for their part, were unable to secure any new liberalization commitments from each other under the NAFTA. The Agreement, therefore, introduces no changes to the bilateral commitments exchanged in the FTA, other than to make such commitments subject to the principles and dispute settlement provisions of the NAFrA. The NAFTA includes no disciplines on services-related subsidies, owing to the three countries' position that such matters - particularly in light of the current paucity of analytical work on the subject (see GATI, 1990b) - are best addressed in a multilateral setting. The NAFTA does, however, break important new ground in the area of government procurement. Disciplines of openness, transparency and competitive bidding are to apply to the purchases by public entities of goods and services, including construction services. NAFTA's expanded coverage brings the total North American market covered by the Agreement's procurement disciplines to some US$78 billion (half of which is estimated to consist of services and construction contracts), up noticeably from approximately US$20 billion of goods-only procurement subject to FTA disciplines. Such expanded coverage is significant in that it typically represents the most direct and immediate means of liberalizing the provision of many services - such as computer services, consulting engineering, or construction - that are otherwise subject to few or no ross-border impediments. For such services, the trade-disciplining rules contained in the Agreement's cross-border services chapter may on the whole be less important from the point of view of securing effective access to other countries' markets. The NAFrA's procurement disciplines apply to federal IV Therfter, temporry safeguad provisons may be applicable m bmiing and securities, but not beyond January 2007, and only if prescribed foreign maket shaes reach their upper limits. For a debiled discussion of NAFTA's fiaci services provisions, see Smwd and GonzAlez-Herimosilio, op. cit. 22 government agencies and goverment-owned enterprises (e.g. Petroleos Mexicanos -PEMEX). The Agreement takes a positive list approach to entity coverage and a negative list approach for saevices coverage. Services that are excluded in whole or in part include transportation, storage, communications, finance, R&D, and legal, education and health services. While the detailed new rules and market opportunities afforded by the NAFTA's procurement chapter are significant, it should be bore in mind that the Agreement liberalizes access to slightly less than a tenth of North America's estimated US$800 billion civilian procurement market. Like the FTA, the NAFTA does not feature services-specific dispute settlement procedures but rather subjects potential disputes to a generic set of procedures applying to all matters, including all types of financial services,33 covered by the Agreement. The NAFTA's dispute settlement provisions largely parallel those of the FTA, with some improvements made to procedures for selecting panelists to judge disputes.3' The NAFTA establishes a trilateral Trade Commission responsible for the oversight of the entire Agreement. Cabinet-level officials from member countries, supported by their officials, are charged with oversight of implementation, further elaboration of the Agreement, and ultimately for the management of all disputes. The NAFTA innovates by making binding dispute settlement available to determine whether one country's retaliation in response to another country's failure to comply with a panel report is itself 'manifesdy excessive'. Another significant improvement borrows from procedures common to the bilateral investment agreements that the US and Canada have with other countries and establishes a regime of mixed - or investor-state - arbitration for the enforcement of obligations under the investment chapter of the Agreement.' The NAFTA's services and investment chapters adopt a more liberal rule of origin than the FTA, with coverage extended to investments made by any resident or incorporated entity in a NAFTA coutry, regardless of country of ownership or control. The focus in developing such rules was on ensuring that 33/ NAFTA's Finciad Services chapter contains provisions aimed at ensing that the prper panel expertise may be brought to bear to disputes in the sector. 34/ Instad of each govement selecting nomines to a panel from its own national list, the NAFTA calls for a prcess of reverse selection, by whch one comtry must select from among the country's natonals on a consens roster. Insted of separate national rosters, as was dte case under the FTA, the NAFTA calls for a consensm roster of persooo acwtble to al member counries. In the ssme vein, unlike the FTA, the NAFTA penmits thid-country and non-member coumtry nationals to serve as Chir of a pamel. 35/ Any NAFTA investor who alleges that a host govemment has breached an obligation of the investnut chapter may convoke an artitl trimual to hea the matter. Procoedures may be based on ICSID International Camter ibr the Settement of Investmet Disputes) or UNCITRAL (United Nations Commission on Internaional Trade Iaw) rules for such arbitration. 23 non-member entities did not circumvent the investment and services disciplines of the Agreement through recourse to shell companies. Whereas the investment chapter focuses on incorporation within the teritory of the Party under whose law a company is constituted, the cross-border trade in services chapter exes NAFTA privileges to any service-providing entity having substantial business activities in a NAFrA country. That is, a Party may deny the benefits of the cross-border trade in services chapter to a service provider incorporated in another Party if it establishes that the entity is owned or controlled by persons of a non-Party and that the enterprise has no substantial business activities in the territory of any Party (Article 1211.2, emphasis added). Rules of origin posed a modest problem in the financial sector, with Mexico and the United States opting for a country of incorporation test as opposed to Canada's more restrictive defacto control test.' A central concern of many financial institutions from non-NAFTA countries related to their ability to share equally in the benefits of the far-reaching opening of Mexico's financial markets under the NAFrA. Mexico's decision to allow outside firms to benefit from NAFTA treatment through expansion into Mexico from their Canadian or US operations has largely allayed fears over the creation of a Fort North America for financial services. However, given that the gradual opening of Mexico's financial markets will involve the maintenance of foreign market share limitations, the treatment afforded by Mexico to non-NAFTA firms in instances during the transition period when the aggregate ceilin are close to being met could prove controversial if precedence is given to Canadian or US financial institutions over non-NAFIA applicants.' Safeguard provisions in the NAFTA are similar to those of the ETA. There is a denial of benefits provision and a balance of payments article, but there are no service specific safeguard provisions along 361 Under an incopoadon test, a firm's nationality is detemined by the place in which it is icorportd, provided that it conducts sdbs_tai business operts in that place. Under Canada's control teut, financisl instiutions must be more than 50 per cent owned by sbar-holders tiat ae residents of a NAFTA country to enjoy NAFrA benefits in Canada Thrus, Where a wholly-owned Europea or Japnese financial firm inorported m the Umted States or Mexico would qualify for NAFrA teatment in both countries, they woultd be deemed by Caada as being European or Japanese, and would thus not enjoy NAFTA privileges in Canaha It is worth noting tha the financid ser rule of ongin adopted by the United States in the NAFTA entrches the right for outside fanciad instutions established in a NAFTA country to benefit (alongside Canadian and Mexican firms) from any future hlberaizaion of US regulatory practices. 37/ Languae coined i Mexico's financial services reservaions (Annex VII) suggests that, m adminiering license aplications, dte Mexican authorities will attempt to esesr, ;ser alia, dua benefits are not deied to enteprises controlled by US or Canadian naonals becase of expmn in Mexico of institutions controlled by non-NAFTA Parties. 24 the lines of GAIT's Article XX.' The latter types of measures remain restricted to merchandise trade. A final, albeit notewordty, feature of the NAFTA is its accession clause. Similar in design and intent to that conaned in the GAIT, its aim is to allow other countries or groups of countries, within or outside the Western Hemisphere, to join the NAFTA by accepting the same obligations as other member countries. Viewed by proponents of the trilateral pact as a clear commitment of signatory governments to a process of 'open regionalism', the accession clause would ensure that expansion of NAFTA membership would not entail that negotiations start from scratch. It would also provide a ready- made vehicle to lock in the Agreement's negotiating advances - in terms of both trade rules and disciplines and of liberalization commitments - made in the areas of services and investment. VI. The Australia-New Zealand Closer Economic Relations Trade Agreement Australia and New Zealand negotiated a trade agreement during the mid-1960s which entered into force on January 1966.3 The structure of this Agreement was similar to that of other trade agreements negotiated during this period: a commitment to abolish tariffs for 'scheduled' conmmodities over an eight- year period, accompanied by a number of safeguard clauses. Essentially a tariff agreernent, its coverage was carefltly designed to exclude sectors where reciprocal liberalization might have a significant impact. A positive list approach was taken to determine the coverage of the Agreement. The stated intention of the two governments was to gradually expand the Agreement's coverage over time. However, no time frame or binding procedures were established within which this expansion would be completed. As noted by a GAIT Working Party, the Agreement covered only about 50 per cent of trade between the two countries, some 90 per cent of which was already duty-free (GATT, 1966, p. 116). As the two governments proved unable to significantly increase the coverage of the Agreement - potentially affected import-competing industries were indeed quite successful in preventing their inclusion - its impact was quite limited. Trade-weighted average tariffs on intra-area trade flows actually rose over time (Chomas, 1976). II/ NAFTA Annex 1212 an land tasportation does, however, contan safeguard-type language by committing the Parties to conslt with each other during the fifth year after the date of entry into force of the Agreement, ad every two yeas thereafter to assess prognrss respectig liberalzaon of land transportaion services, including 'specific problems for, or unanticipated effects on, each Party's bus and truck tnortaton industres arisig from liberalization and modifications to the penod for libelization'. 39/ T`he agreement is often referred to by the acronym NAFTA, stnding for the New Zealnd-Austalia Froe Trade Agreemn. lu this paper NAFTA will be reserved for the more recent North America agreemeaL 25 Reflecting a change in trade policy thinking and consequent dissatisfaction with the provisions of the agreement, the bilateral pact was superseded by the Closer Economic Relations Trade Agreement (CER) in 1983. In contrast to the earlier agreement, the initiating objective of the CER was substantial trade liberalization. It took a negative list approach to coverage - all products being included except those explicitly mentioned for exclusion - and imposed much greater disciplines on quantitative restrictions. Time limits were set for the abolition of tariffs, quotas and export subsidies. Export subsidies were to be eliminated by 1987, tariffs as of the beginning of 1988, and quantitative restrictions by July 1995. Free trade in commodities (goods) was achieved on July 1, 1990 - five years ahead of schedule - by which time all three of these instruments no longer applied to trade within the region (intra-Tasman trade) (Uoyd, 1991, p. 12). The 1983 agreement included a first atempt to liberalize gorvernment procurement of goods and harmonize product standards and related regulations. However, the magnitude of liberalization of government procurement was rather limited as Australian states were excluded from coverage and were allowed to continue to maintain preferential practices. The CER agreement was re-negotiated in 1988, at which time it was agreed to include a Protocol on services, eliminate anti-dumping provisions for intra-Tasman trade as well as industry-specific subsidies that affected intra-Tasman competition,' extend the coverage of non-discriminaion in government procurement of goods to preferences of Australian states, and harmonize a number of regulatory policies, including product standards and competition laws affecting trade in goods.'1 The goal of the Protocol on services was to establish a framework of transparent rules, liberaize barriers to trade in services and facilitate competition in the provision of services. As noted by Thomson (1989), the Protocol contains no references to concepts such as progressive or gradual liberalization, reciprocity, or fair trade. As in the NAFIA, a negative list approach was followed to determine the coverage of the Agreement (i.e. all service sectors are covered unless specifically exempted). As in virtuay all services-related agreements, whether at the regional or multilateral level, excluded sectors include a fairly predictable list of 'sensitive' areas: basic telecommunications, broadcasting, air trport, maritime cabotage and postal services. Moreover, Australia reserved restrictions on the establishment of foreign-owned banking branches, subsidianes or representative offices, as well as legislative limits on shareholdings in Australian banks. Also excluded were Federal government procurement preferences for 40/ ITe 1988 Protocol stated that 'the maintenance of ani-dumping provisions in respect of goods ongiat in odter Member States ceases to be a priate as the Member States move towrds the achievemet of full free trade.' (cited in Ahdar, 1991, p. 320). Similady, it held that 'bounties ald subsidies providing long term competition can no longer be regmrded as viable intuments of idustry policy' in a fiee trade agreement (lloyd, 1991, p. 24). 41/ For more iformation an the CER, see Bollad (1986), Thomson (1989), and Lloyd (1991). 26 construction, engineering and general consultancy, and preferences in Australian states for basic health and third-party insurance. In a notable achievement, however, and in contrast to other regional agreements, these sectoral exclusions are not of indefinite duration. The Agreement contains provisions aimed at bringing these sectors within the scope of the Protocol in the future.2 Thus, in the 1992 review of the Agreement, Australia removed its reservations relating to banking and government preferences for Australian companies in construction, engineering and general consultancy. New Zealand removed its reservations for radio and television broadcasting, shortwave and satellite broadcasting, stevedoring and part of the reservation relating to airways services. Both countries amended their inscriptions on telecommunications and postal services. In addition to removing sectrs from reservations lists, the two governments also agreed to work towards the full integration of their aviation markets. A Memorandum of Understanding was signed in August 1992 which provides for the phased introduction of additional airlines to trans- Tasman routes and allowing airlines from both countries to fly to more destinations beyond each oountry. As of November 1, 1994 airlines originating in either country will be able to operate on all routes between the countries as well as domestically within each country (i.e. cabotage). Parties are required to provide national treatment, MFN treatment for excluded sectors, and market access for covered services. Market access is defined as granting persons and services of the partner country access rights no less favorable than those allowed to domestic providers. National treatment is defined conventionally, except that allowance is made (as in the other agreements)' for differences in treatment that nonetheless result in effectively equal treatment between foreign and domestic servce providers, and for differences thar are motivated by prudential, health or safety considerations. While there is no mention of non-discrminatory regulations (quantitative restrictions) as impediments to market access, the market access article implicitly allows such restrictions to be maintained. The principles and rules of the Agreement apply to any measure - existing and future - that relates to or affects the provision of a covered service by or on behalf of a person of one Party within or into the territory of the other Party (Article 2). Both measures taken at the Federal and the State level in Australia are covered by the Protocol, although sub-national (i.e. statelevel) measures were excluded in an annex. There is therefore no grandfatheing as in the Canada-United States FTA, except indirectly in respect of the excluded sectors mentioned above. Also excluded from the national treatment obligation 42/ Wbat folows draws on Govenment of Ausalia (1992). 43/ Altough naional _trm t is not a gesnl obligat under the draft GATS. See Section VIIL x 27 are taxation measures, subsidies and government procurement. As far as the latter two policies are concerned, disciplines for goods greatly exceed those for services. Service providers originating in a member state are free to choose their preferred mode of supply, including establishment. Ihe CER does not deal with investment, an issue that was left for future negotiations. Although the agreernent does include a right of establishment - this being recognized as a critical element of the provision of many services - such estabNishment is subject to the foreign investment policies maintained by each country. As in the Canada-United States FTA and the NAFTA, the agreement incorporates the principle of non-establishment. Measures requiring establishment are forbidden if the measure constitutes a means of arbitrary or unjustifiable discrimination or a disguised restriction on trade between the member states in services. Unlike the FTA and the NAFTA, but as in the case of the EC, Australia and New Zealand form a common labor market.' Nationals from one country are free to seek employment in the other. As with the EC, the establishment of a common labor market obviates the need for FTA- or NAFrA-type provisions on tenporary entry as well as on the removal of citizenship and/or permanent residency requirements associated with the licensing of service providers. While the two countries agreed to adopt similar competition laws and to abolish the application of antidumping laws to intra-bloc trade flows in the 1988 renegotiation of the Agreement, these provisions apply to merchandise trade flows only.' The Protocol on services imposed a standstill on export subsidies and other direct assistance affecting trade in covered services, and required member states to work towards the elimination of all such measures by July 1990. To date, CER is the only trade agreement to contain disciplines on trade-related subsidies for services, other than the GATS' ban on MFN-inconsistent subsidy practices. The agreement also contained 'best efforts' language regarding licensing and certification requirements. A 'best efforts' commitment was all that was feasible given the authority of Australian states with respect to numerous licensing and certification matters." Parties agreed to endeavor to ensure that such measures do not act to discriminate against persons of another party when these seek access to licensing or certification. Parties are also encouraged - but not required 44/ This arangement - the Trans-Tasman Travel Arrangement - predate die Protocol. 45/ Parties agreed, for example, that a dominat position would henceorth be defined as dominmce in either market or the combined madet See Ahdar (1991) for a discussion of the competition policy aspects of CER. 46/ In the case of product standards for goods, the CER goes somewhat fuither. It requires Member States to examine the swope for takng action to harmonize such measures, reflecting a negotated understanng to increase co-operatio to elimine techical bariers to trade. Agreements were reached to begin harmoning standards for food and consumer products (Thomson, 1989; Lloyd, 1991). 28 - to recognize quaifications obtained in the other member state, though the Agreement contained no specific procedures aimed at facilitating such recognition.47 The lack of binding EC-type mutual recognition disciplines may be viewed as inhibiting the ability of both countries' professional communities to reap the full benefits of a common labor market. Echoing language found in FTA and GATS annexes dealing with value-added telecommunications services, the CER states that monopolies that are excluded from the coverage of the Protocol - i.e. are featured in the annexes listing excluded sectors and activities - are still required to provide services to consumers of another Party on a non-discriminatory and transparent basie. Unlike the FTA and the NAFTA, which prohibit such practices, the two countries have agreed to endeavor to prevent such monopoly providers from cross-subsidizing services that are sold in competition with private companies originating in either country. Enforcement procedures are informal and non-binding. There is a requirement to enter into consultations if one Party considers that an obligation is not being fulfilled by the other Party, or the achievement of an objective is being or may be frustrated. No panel proceedings or binding arbitration - let alone an EC-type supra-national court - are foreseen. The lack of binding dispute settlement procedures sets the CER apart from the other agreements reviewed in this paper and may generally be seen as weakening the effects of an otherwise innovative and fairly liberalizing instrument. The rules of origin in the CER are based on nationality/residency for natural persons and incorporation for legal persons. Insofar as an entity is not a natural person or a corporate body, the origin of the entity depends on the nationality or territory of incorporation of the persons controlling the entity. Control is not defined in the Protocol, however. According to Thomson (1989), the origin rules were deliberately designed to be liberal, as neither government desired to have an unnecessarily inward looking Agreement. There are no service-specific safeguard clauses in the Protocol. Indeed, there is not even a GATI Article XX analogue for goods. The equivalent of such an Article only applied during the transition period, which has now passed. Finally, note should be made of the fact that, as with the NAFrA, the CER has an accession clause providing for the future association of other countries on terms to be negotiated jointly between the potential entrant and existing members. 471 Howeer, there is a co-operaton agreement between New Zealand and Australa relating to tr g and education. The objective of this agreemet is the rwecoguition of qualifictions of professional_ tained in te oter country. This agreement pdates the 1988 Protocl and underlies the inclusion of the ropition principle in the Protocol (loyd, 1991). In the 1992 review of the CER New Zealnd and Austalia oonminted themselves to exploring te potential benefits of concluding b trans-Tasman ageement applying mutual recoition principles to AustaHli and New Zeiland rgulatory standards for goods and occuaon (Government of Ausaia 1992). 29 Vll. The General Agremt on Trade In Seices The GATS consists of four main elements: (i) a set of general concepts, principles and rles that apply across the board to measures affecting trade in services; (ii) specific commiunents on national treatment and market access that apply to those service sectors and sub-sectors that are listed in a positive manner in a Member's schedule, subject to sector-specific or cross-sectoral qualifications or conditions (if any); (iii) an understanding that Members to the GATS shall undertake periodic negotiations with the goal of achieving a progressively higher level of liberalization; and (iv) a set of attachments that include annexes that take into account sectoral specificities and ministerial decisions that relate to the implementation of the GATS. 1. lhe Framework Article I on 'Scope and Definition' specifies that the GATS applies to measures imposed by a Member to the Agreement that affect the consumption of services originating in other Members. Reflecting the fact that the sale of a service frequently requires proximity between suppliers and consumers, Article 1 distinguishes four 'nwdes of supply' to which the Agreement applies. These are the cross-border supply of a service (that is, not requinng the physical movement of supplier or consumer); provision involving movement of the consumer to the country of the supplier; services sold in the territory of a Member by (legal) entities that have established a commercial presence there but originate in the territory of another Member; and provision of services reqLiring the temporary movement of natural persons (service suppliers or persons employed by a service supplier who are nationals of a country that is a Member to the Agreement). These modes are covered in principle only. As discussed further below, the extent to which specific modes can be used by foreign suppliers to provide individual services is determined by the commitments entered into a Member's schedule, that is, those sectors or sub-sectors in regard to which the Agrwement's natonal treatment and market access obligations are undertaken. A fundamental general obligation of the GATS is unconditional MFN treatment (Article II). Other general obligations deal inter alia with matters of transparency, recognition of licenses and certification, domestic regulation and the behavior of public monopolies. Article m of the GATS on transparency requires all Members to establish enquiry points to provide specific information concerning any laws, regulations, and administrative practices respecting services covered by the Agreement. Echoing 'best efforts' language found in the FrA, the NAFTA and the CER, GATS Article VI (domestic regulation) requires that Members establish disciplines to ensure 30 that qualification requirements, technical standards and licensing procedures are based on objective and transparent criteria, are no more burdensome than necessary to ensure the quality of the services concerned, and do not constitute a restriction on supply in themselves. Moreover, such measures are not to nullify or impair any specific commitments made by a Member. Artide VII (recognition) allows for the establishment of procedures for (mutual) recognition of licenses, education, and/or experience granted by a particular Member. However, the GATS shies away from devdoping a NAFTA-type generic blueprint for use by (professional) service providers seeking to engage in recognition agreements, nor does it contain language specific to any particular profession. Dispute setdement procedures under the GATS are identical to those of the GArt, as to be amended by the Uruguay Round. The Uruguay Round agreement on dispute settlement significandy strengthens the current system. A Dispute Settlement Body (DSB) is to be established that will exercise the authority of the General Council of the World Trade Organization (WTO) and the Councils and Conmittees of the covered agreements (including the Services Council of the GATS). Time limits are imposed for entering into consultations and requesting the establishment of a panel, as well as rendering and implementing panel decisions; new mechanisms are introduced to ensure prompt implementation of panel findings; and adoption of the reports and recommendations of the panels of experts addressing specific disputes can no longer be blocked by either of the parties involved.' It is noteworthy in this regard that retaliation from goods to services and vice- versa is possible. There are two main articles in Part m of the GATS on Specific Commitments, entitled Market Access and National Treatment (Articles XVI and XVII, respectively). These obligations apply only to services that are included in the schedules of Members, subject to whatever qualifications or conditions are listed. Article XVI states that: 'with respect to market access through modes of supply identified in Article I (on scope and definition, see above) each Member shall accord all foreign providers treatment no less favorable than that provided for under the terms, limitations, and conditions agreed and specified in its schedule'. Market access commitments are therefore sector- and mode-of-suMply-specific, unconstrained market access implying freedom to choose any of the four modes of supply (i.e. no restrictions, whether discriminatory or non-discrimina'ory, on any of the possible modes of supply). 48/ Stadard tems of refece for paels and hir comj .it,an have been esublisded. Panes are to report witin 6 monts or in cases of urgency within: monhis. Reports ae to be adopted wiin 60 days of their issuac, unles the DSB decides by coasehs not to adopt or one of the pauties to the dispute notifies the DSB th it will appeal. A new feature is the ceaion of an Appeate Body to address issues of kw and legl interpetaos developed by the p-m. Once a pand report or appellat body report is adopted, the losing paty must inform the DSB within 30 days of it itentons with respect to implemetion Such implion will be monitored by the DSB. In the cae of an- implementation, mutually accptble compensation is to be negoiated. Where this cannot be geeod wihin a reasonable period of time, the DSB may be asked to authorin retalatoy meaues. Such autborizaion is normally to be ginted within 30 days of the requesL See GAIT (1993) for th coplet Agreemen_ 31 Negotiators discussed at some length whether specific policies that wee generally considered to limit market access should be prohibited, and if so which ones. Although market access is not defined in Article XVI, agreement was reached on a closed list of market access restrictions that in principle wre prohibited. These consist of limitations on: (i) the number of service suppliers allowed, (ii) the value of transactions or assets, (iii) the total quantity of service output, (iv) the number of natural persons that may be employed, (v) the type of legal entity through which a service supplier is permitted to supply a service (e.g., branches vs. subsidiaries for banking), and (vi) participation of foreign capital in terms of a maximum percentage limit of foreign shareholding or the absolute value of foreign investment. National treatment is defined as treatment no less favorable than that accorded to like domestic services and service providers. However, such treatmnent 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). Largely developed in the financial services working group, the GATS' de facto stanrd of national treatment aims at securing an equality of competitive opportunities between domestic and foreign firms.' As national treatment is not a general obligation, the national treatment commitments of a Member specify the conditions under which a foreign service provider can compete in the domestic market for each of the modes through which market access has been granted. The market access article closely resembles that on national treatnent, which simply requires equal treatment of foreign and domestic sources of supply for each of the possible modes of delivery. Similarly, the market access article requires that policies do not discriminate between foreign suppliers insofar as conditions on entry to markets (modes) are concerned. While it may at first glance appear that the two articles could be combined into one, with schedules simply listing the restrictions, conditions and limitations on national treatment that Members wish to retain on a sector-by-sector/mode of supply basis, this is not the case. This is so because the market access obligation also pertains to quantiative limitations that are applied on a non-discriminatory basis. Such measures are in principle prohibited under Article XVI. Any such measures that countries desire to maintain for services that are included in their schedules must be listed. Thus, while the use of separate market access and national treatment provisions pardy reflects a desire to maintain the GATT distinction between measures that are applied at the border (market access restrictions) and measures that are applied within borders (national treatment), it also reflects one of the distinguishing charactristics of service markets: the fact that the contestability of such 49/ Unlike the tmditional, GAITlke, dejure stadard of national tetment, defaco national t_tmnt s into accout the potenta inequaty in effects of regulatory requiremnt even if aplied equaly to domestic and foreign entities. Dcfacto national tratment may allow laws and regulations applied to foreign sermice proiders to differ from those applying to domestic firms, so log a their effect is aqivalent nd does not place the former at competitive disadvantage in the hot country muart. 32 markets is frqentdy restricted by non-discriminatory measures. The market access article explicitly covers one such type of measure - quantitative restrictions - that was felt to be of particular importance. While govremments may continue to maintain such restrictions, they are required to schedule them and they are subject to future negotiations. Moreover, in an improvement over the NAPTA, which merely imposes a transparency obligation, the GATS would prohibit the introduction of new quantitative restrictions in scheduled sectors. The inclusion of separate Articles on both Market Access and National Treatment may turn out to be somewhat problematical. Contrived as an instrument to extract aconcessions," i.e., to ensure that positive market access commitments would be taken, Article XVI encompasses both discriminatory and non-discriminatory measures. It therefore overlaps with Article XVI (National Treatment), whose aim is to capture and discipline discriminatory practices. The overlap creates potential for confusion and disputes. Under GATr procedures, Contracting Parties present a schedule of bound tariff concessions. The counterpart to this in the GATS is that schedules of market access concessions (commitments) pertain to four modes of supply, not just one. However, the structure is similar. This is not the case with national treatment which, unlike the GAIT, is not a general obligation under the GATS. Consequently, in the GATS context the schedules of commitments of Members are much more important than is the case in the GATr in determining the extent of the market access opportunities resulting from the Agreement. lf most countries list most of their service sectors in their schedules, and do not impose restrictive conditions or limitations on altemative modes of supply, the effective market access opporunities resulting from the Agreement may prove to be substantial. Conversely, if many sectors are excluded Ci.e. not lised in county schedules), or if many restrictions are imposed with respect to modes of supply and the application of national treatment and market access in scheduled sectors, the Agreement will have litde immediate impact in terms of effective liberalization. The contents of the schedules are currently (early 1994) not yet available for analysis. The preliminary offers that were on the table as of mid-1993 revealed that developing country offers covered around one-fifth of their service sector, whereas industrialized countries offers covered over two-thirds of their market services (Hoekman, 1993). As final offers are unlikely to have improved dramatically in the final stage of negotiations, it is clear that not all services will be subject to market access and national treatment commitments. It is important to recognize that the 'effective' coverage of country offers will be substantially less than is suggested by simple sectoral coverage. Account must be taken of the restrictions on national treatment and market access that continue to be mainained, and the so- called headnotes found in many schedules that maintain (restictive) regulations that apply across a number of sub-sectors or modes of supply. In all cases, national laws and regulations remain applicable, and the economic impact of regulatory regimes will differ across countries. Indeed, in some cases it may 33 be difficult to determine whether a schedule even goes so far as to imply a standstill. Clearly, more than enough work has been left for future talks. While undoubtedly important, it can be argued that from a longer-run perspective the inkial coverage of the country schedules is not crucial. Progressive liberalization remains, after all, a central objective of the Uruguay Round's services negotiations. The aim has been and remains to expand gradually the coverage of the Agreement and the extent of liberalization through recurring negotiations. More fundamental is the structure of the Agreement - the architecture of its rules and disciplines, the ease with which it lends itself to services trade liberalization and the degree to which sectors are excluded from the Agreement's reach indefinitely, which will importandy affect the prospects for this future liberalization. The decision of participants in the Group of Negotiatiow an Services to schedule specific commitments by modes of supply may prove to be a potential problem in this regard. As noted earlier, and as is illustrated in Table 2, signatories to the GA7'S must list each sector or sub-sector where a specific commitment will be granted, but may exclude individual modes of supply, o: continue to apply certain oDnditions for a mode of supply. Several problems can be identified widi respect to the design of the scheduling of specific commitments under the GATS, all of which may prove detrimental to the fnctioning of the agreement, and could affect the prospects for future multilateral liberalization by increasing the incentive to pursue regional options. Table 2 Format for Countr Schedules of Specific Commitments Secor or sub-sector Mode of supply: Conditions and Conditions ad Additional limitations on markct qualfications on conmitments acces national treatment Cron-border _ l Commnceial prcsewce Movement of consumer Movnemnt of First, the hybrid aproach to schedling (i.e. a positive list of commitments requiring the negative listing of non-conforming measures to be maintained) yields a mostly unsatisfactory outcome from a tansparency point of view. The GATS generates no information on sectors, sub-sectors and activities in which no commitments are scheduled -most often the sensitive ones where restrictions and 34 discriminatory practices abound. This is a serious shortcoming when one considers the nature and orgin nf impediments to trade in the services area (i.e. regulatory barriers at both the national and sub-nationa levels). A CER/NAFTA-like, top-down 'list it or lose it' approach would have significantly enhanced transparency (even at the cost of producing 'phone books' of non-onforming measures). Second, the a la carte approach to liberalization foreseen under the GATS' hybrid approach to scheduling allows countries to schedule commitments whilst maintaining significant degrees of regulatory discretion (i.e. as potential departures from otherwise bound non-discriminatory undertakings). Thus, commitments relating to conmmercial presence may be subject to the right to maintain or impose authorization and/or screening procedures, and the criteria or specific measures that underpin such procedures may not necessarily be clearly defined or specified in the scheduie. Tnird, iuc suri:""ing uv L-ummumenrls according to modes of supply imparts a somewhat perverse logic to the negotiations, creating incentives for offering far fewer commitments on the cross-border movement of services and service providers (i.e. labor) than most observers might have expected or hoped for at the outset -or during the course- of the negotiations. Somewhat ironically, given the early resistance to discussing investment-related matters in the GNS, the bulk of commitnents lodged under the GATS, especially by developing countries, relate to the commercial presence mode of supply. While this is far from surprising given that most service providers will require proximity/establishment in order to contest a market, the somewhat arbitrary recourse to scheduling by modes of supply has meant in practice that commitments on commercial presence amount to disguised trade-related investment measures (TIMs) for services. TMat is, foreign service providers will be compelled to establish a presence as a pre-requisite for market access. It is important to note that nothing in the GATS compels Members to schedule commitments by mode of supply. What is useful from a definitional point of view may not be a good idea from the point of view of operationalizing the link between the negotiated rules and obligations) and negotiated specific commitments. This conclusion was in fact drawn in the NAFTA context, where the concept of modes of supply was only used to define trade in services. The fact that the GATS itself does not mandate any particular scheduling methodology suggests that the arbitrary divide described above could in principle give way to a more rational approach in future negotiations, one in which the needs of service providers may be factored into specific commitments in any given sector (e.g. access to capital, information, telecoms netw rks (public and private), or accompanying labor mobility). Much will depend in this connection on the experience that is obtained with the GATS in the coming years, and on the 'case law' that will be developed through the functioning of the dispute settlement process. In comparison to the GATT, general rules and principles are much less important (binding). As discussed further below, this can be expected to have consequences for the operation of the agreement, in particular dispute settlement. As noted earlier, market access is not defined in the GATS, there being instad a closed list of in principle prohibited measures. The measures that are prohibited will frequendy reflect a coutry's 35 regulatory regime. For example, governments may impose limitations on the number of firms in the context of 'natural monopolies' orpublicutilities. What matters then is not the limitation perse, but how contestable markets are. If a government periodically auctions licenses, are the limitations on the number of firms (icenses) a market access barrier? As it is worded the market access article gives a foreign firm the opportunity to use Article XVI as the justification for a complaint to the WTO independent of the degree of contestability of a regulated market. This is because the article focuses on the Jorm of measures, not on their effect." The scope for disputes (i.e., need for interpretation by panels) appears great in this connection. The same applies with respect to allegations that national treatment commitments have been violated. Many sectors will continue to be subject to scheduled measures that violate national treatment but that may be worded somewhat ambiguously, again complicating dispute settlement. More generally, in the services context it is not possible to point to a bound tariff level, and argue that a policy nullifies or impairs an earlier concession. In comparison to the GATT, therefore, dispute settlement in the GATS will rely less on fundamental principles/concepts. Instead, interpretation of country schedules can be expected to form the main part of the panel process. This in itself will increase the nmnber of cases as it reduces the scope for one panel finding to have a general impact in terms of interpreting the rules. Finally, the history of GATT dispute settlement cases relating to disciplines that were less thar. clearcut (e.g., subsidies) suggests that there is the potential for some controversy. The GATS includes a number of articles allowing safeguard actions to be taken by Members in specific circumstances. Such actions involve measures that violate either general obligations (such as MFN) and/or specific liberalization commitments (relating to national treatment and market access). There are three articles of a safeguard nature: Article X (Emergency Safeguard Measures), Article XII (Restrictions to Safeguard the Balance of Payments), and Article XXI (Modification of Schedules). The GATS contains no article dealing with dumping and anti-dumping. Given that anti-dumping has become a widely used instrument of contingent protection in the merchandise trade context - indeed, it is often regarded as a substitute for non-discriminatory emergency protection - the absence of antidumping provisions in the GATS is noteworthy (and welcome). The provision on modification of schedules is analogous to that of the GATT, allowing concessions to be withdrawn subject to negotiation and compensation. Moreover, as a prior stage to authorizing retaliation in the event that bilateral negotiations result in perceived inadequate offers of compensation for affected Members, the GATS foresees arbitration. Retaliation will, however, only be authorized in instances where the Member withdrawing a concession does not comply with the suggestions of the arbitrator. 50/ The article pMbibits specific measr only. It would have been strengthened, and dispute sttlement facilitated, if the words 'or measures with equivalent effect" had been added. EU expenence has demstat the importance of this in enforcing the Treaty of Rome. 36 Of the two other articles mentioned above that allow for temporary safeguard actions, Article XH is the more detailed, specifying the conditions under which measures to safeguard the balance of payments can be taken. The article only applies to those services for which specific commitments have been undertaken. It requires that such measures be non-discriminatory, temporary, and phased out progressively as the invoking Member's balance of payments situation improves. Moreover, they should not exceed whatever is necessary to deal with the imbalance and are subject to multilateral consultations (surveillance). There is a recognition of the particular pressures that may occur on the balance of payments of Members in the process of economic development, and that this may necessitate the use of restrictions to ensure the maintenance of an adequate level of foreign exchange reserves.1l As under Article XVII:B of GATT, Members taking such action are permitted to give priority to certain sectors that are deemed essential to their economic or development programmes. However, restrictions may not be used to protect a particular service sector. The final article allowing for the possibility of temporary exceptions (Article X) requires furdter attention pursuant to the entry into force of the GATS. It states that within three years from the entry into force of the agreement, multilateral negotiations are to be completed 'on the question of emergency safeguard measures.'" Until the negotiations on safeguards are completed, the 'interim' safeguard procedure available to Contracting Parties after the GATS' entry into force would be to invoke Article XXI (Modification of Schedules). As far as rules of origin are concerned, the GATS defines juridical persons as entities constituted under the law of a signatory and engaged in substantive business operations in the territory of that signatory or any other Member; or is owned or controlled by natural persons who are nationals under the [aw of a Member. Ownership requires a person of a Member to have at least 50 per cent of total equity; control is defined as a person of a Member having the power to name a majority of directors, or to otherwise legally direct the actions of the entity. 2. The Annexes The GATS contains a number of sectoral annexes dealing with air transport, financial services, and telecornmmunications, an annex allowing for the possibility of invoking exemptions to the MFN requirement, and an annex on the movement of natural persons. The annex on air transportation primarily specifies that the existing system of bilaterally negotiated traffic rights will not be affected by 51/ As in the GATr context, no recognition is expressed that import restrictions are second-best instrwnat to deal with balnce of paymens difficules. 52/ While this appes to leave open the possbility tt no such procedures will be incorporated, it is also stated that recourse to such measur is to be based an the principle of non-discrimination. This is the only substantive or procedual issue that is specified 37 the provisions of the GATS, while introducing an element of multilateralism to trade-facilitating matters such as the marketing of air services and computer reservation services. The financial services annex defines the universe of covered services and specifies inter alia that Members will not be prevented by any provision of the Agreement from taking measures for prudential reasons, and that dispute settement panels relating to financial matters have the necessary expertise relevant to the matter under dispute. Much of the annex may be viewed as reflecting the concerns of industry regulators, rather than the trade liberalizing needs of the financial services industry. The pressure exerted by the industry to secure enhanced access in foreign markets is more clearly reflected in the Understanding on Commiments on Financial Services that is appended to the GATS. This contains a number of more liberalizing provisions (in areas such as conmnercial presence/right to establish, cross-border trade, 'new' financial services) which GATS signatories may accede to on a voluntary basis.' Financial services proved to be one of the sectors where disagreements concerning the value of initial offers were such to threaten the unraveling of negotiations. As a result, in the last days of the round it was agreed to include a second annex on financial services that allowed negotiations on this specific sector to continue (see below). The annex on telecommunications provides for transparent. reasonable and non-discrminatory conditions of access to, and use of, public telecommunications networks and services. The annex proscribes the imposition by signatories of conditions on access and use other than those necessary to ensure the availability of services to the general public or to protect the technical integrity of the network. It requires that Members undertake to price public telecom services on a cost-oriented basis and allow interconnection and cross-border movement of information. However, the GATS does not discipline measures applying to the provision of public telecomnunications transport networks and services, and Article VI of the GATS explicitly provides for the monopoly provision of services.' As was the case for financial services, there were great discrepancies between what some participants sought in terms of liberalization of basic telecommunications services and other countries were prepared to offer. Basic te'acommunications became a second sector where it was agreed to disagree, and to continue negotiations (again, see below). Before the end game stage of negotiations, the concerns of US financial rervices and telecommunications services firms regarding the application of unconditional MFN had already been 531 Other provisions containd in the Understdig include an enumerabion of exsting monopoly ightB - which would need to be listed in any event under trticle XVI (Markt Access) - and a undertkng to endeavor to dimina them or reduce their scope; the aplication of MFN teatment to publicly- procured financial services; and the inclusion of certain types of insurance trnsacions. 54/ Tlhe creation of a new monopoly wold, however, entail the modification of a Party's schedule with a view to conpnsting odher Parties. 38 important in leading to the inclusion of an annex under which countries could exempt certain measres from this otherwise general obligation.- The Annex on Article 11 exemptions specifies the procedures under which such exemptions may be sought. MFN exemptions may only be made at the time of joining the GATS. Once a Member, a country may not seek to obtain an exemption. MFN exemptions should in principle be time-bound (asting no longer than ten years) and are subject to periodic review. If sought for longer than ten years, such exceptions would be subject to negotiation in subsequent trade liberalizing rounds. As the sectoral coverage of the lists of exemptions is still to be determined at the time of writing, the extent to which the GATS will be undermined by exemptions affecting a significant share of commercially traded services remains unclear. In this connection, it is important to bear in mind that MFN does not, ex ante, imply liberal or restrictive conditions of market access; it simply requires non- discrimination between foreign suppliers regardless of the openness of particular markets. The need for an annex on MFN exceptions resulted from a variety of reasons. To the extent that the level of market openness varies among countries, a binding requirement to apply unconditional MFN has been criticized as providing incentives to countries with restrictive policies to maintain the status quo while enjoying a 'free ride' in the markets of more open (or less restrictive) countries. This concern was expressed most vividly - particularly by industrialized countries - in GATS discussions on financial services (all G-7 countries) and telecommunications (mainly the United States), prompting industry representatives in relatively 'open' countries to lobby for MFN exemptions as a way to force sectoral reciprocity. Although in principle this may be beneficial by maintaining pressure on certain countries to liberalize their more restrictive regimes in the sectors concerned, MFN exemptions would clearly reduce the value of the GATS as a whole to the extent that they are invoked. A fSrther concern with the application of unconditional MFN relates to the fact that some service suppliers would suffer from the immediate removal of existing preferences. For example, shipping fleets have been built up in line with long-term cargo sharing arrangements. The possible adjustment costs associated with immediate application of MFN in this sector are likely to be high for certain countries. In the final days of the Uruguay Round it became clear that a number of participants were ready to invoke the Annex on Article II exceptions for financial services, basic telecommunications, maritime transport, and/or audio-visual services. Rather than allow a situation to develop where countries would withdraw conditional offers in these areas and exempt them from the MFN obligation, a compromise solution was reached under which negotiations on a number of these sectors could continue without endangering the establishment of the GATS. A second Annex on financial services was included in the GATS. This provides for negotiations on financial services to be concluded within six months of the 55/ WAeter it wil be invoked for ths sector rmais to be sew as this is a function of the ongoing bilatead lnegodations on initial commitments. 39 entry into force of the agreement establishing the WTO. If negotiations are not successful - i.e., tde market access offers made by a certain countries are not satisfactory to other, demandeur, countries - Members are free to withdraw conditional offers in this area (invoke an MFN exemption). During tie six month period those countries that have listed exemptions conditional upon the level of commitments taken by other Members will not apply them. A Ministerial Decision was also taken to allow negotiations on basic telecommunications to start in early 1994. These are to be concluded by end-April 1996. Until that date, both the MFN requirement and the possibility of invoking an exemption shall not enter into force for these services, except to the extent that a Member has made a specific commitment for this sector. Maritime and audio-visual services were taken off the agenda altogether, with the agreement to initiate negotiations on these sectors within three years of the entry into force of the agreement establishing the WTO. A final GATS annex deals with the movement of natural persons. It specifies that natural persons who are either service suppliers themselves, or employed by a service supplier originating in a country that is a party to the GATS, shall be allowed to provide services in accordance with the terms of specific commitments relating to entry and temporary stay of such persons. As with national treatmentlmarket access, the extent to which Labor movement is allowed is completely dependent on what is specified in national schedules. Specific restrictions on labor movement may be horizontal in nature (e.g. a domestic means test for all incoming labor) or sector-specific. The annex states that the GATS does not apply to measures affecting natural persons seeking access to the employment market of a country, nor does it apply to measures regarding citizenship, residence, or employment on a permanent basis. While the contents of individual country schedules are still under negotiation, very few countries have so far shown a willingness to make commitments relating to the movement of people, significantly curtiling in the process the scope for cross-border (i.e. non-establishment related) trade in services. Similarly, a lack of disciplines on discriminatory licensing practices involving citizenship or permanent residency requirements can be expected to weaken the GATS' impact on trade in professional services. Perhaps in partial recognition of this, a Ministerial Decision on the movement of natural persons was agreed to at the end of the Umguay Round, which establishes a negotiating group on movement of natural persons to undertake negotiations on further liberalization of such movement for the purpose of supplying services. This group is to start talks in early 1994 and conclude negotiations within six months of the entry into force of the agreement establishing the WTO. 3. Undertand the Scope of the GA73 The structure of the GATS is quite complicated. Each Member's commitments and obligations will often not be easy to determine ulnabiguously. Ihe decision to distinguish general from specific commiments; the choice that was made to schedule specific commitments - and exceptions to those 40 commiments - by modes of supply; and the agreement to allow for MFN exemptions ensurn dna it in difficult to determine the scope of coverage of the GATS. As illustrated by Figure 1, the GATS wiU not apply to services that are supplied in the exercise of governmental authority. Different obligatks apply to Members for their scheduled and non-scheduled services. Some sectors may be exempted from the MFN requirement. Gover=nents that have in principle subjected specific sectors to specific commimen (i.e., national treatment and market access) may nonetheless treat foreign service suppliers less well thun domestic providers for one or more modes of supply, if they choose to do so by including a reservation to that effect in their schedule. FIGURE 1: The Scope of the GATS ... .... Non-scheduled rosCroerGi ..-....... - supply o88 onsumor . . _ X .. . ;: ,% subject to Sectors subJect to specific ] zu :- :-:-> M.F.N. \c mmftments on market acs -0ffi E: -. ::: exemptions and natlonal treatment (2) (Z) eubJmctpttri Imitatons, condWons and quuitlons as Inscrlbod InM'b.rs' schoduI.s 41 Why did this structure emerge? An admittedly greatly oversimplified synopsis of initidal negotiang stances is helpful in understanding the structure of the GATS.' Before and during the 1986 Ministerial meeting at Punta de] Este establishing the agenda of the Uruguay round, many developing countries defended the view that GA1T negotiations should not address services.5' While these countries did not manage to block the inclusion of services on the round's agenda, they did succeed in putting services on a separate track in an attempt to establish the principle that linkages be possible between traditional GATT issues and services. Moreover, at their insistence economic development and growth were agreed to be an objective of any agreement on services. Many developing countries also argued that the lack of comprehensive statistical information was a justification for excluding service transactions involving establishment by foreign providers from the coverage of an agreement.' Great emphasis was put on the need for goverrnents to be able to address restrictive business practices, impose conditions of inward FDI, and support infant industries. A consequence of this was that a generally applicable national treatment obligation was considered to be unacceptable. The EU's (then EC) initial negotiating position was that trade should be defined so as to include all types of transactions necessary in a sector in order to achieve 'effective' market access. A "regulations committee' was proposed that would determine the 'appropriateness' of regulations, with criteria to determine appropriateness to be negotiated among members. Inappropriate measures were to be subject to liberalization over time, the goal being to achieve "comparable' market access on a sector- by-sector basis for all participating countries. Any framework agreement was to involve only limited obligations of a generally binding nature. In particular, national treatment was to be only an objecflve. The implication of this was that any binding conmitments were to apply on a sector-specific level. The United Staes' initial proposal was by far the most liberal: MFN was to apply to all signatories and national treatment was to be a binding, general obligation. While the existence of national monopolies was accepted, the U.S. proposed that services sold by such entities be provided to foreign-based users on a non-discriminatory basis. Trade was to be defined broadly, and to include FDI (i.e., establishment 5/ What follows drws on Hoekman (1993). 21/ This position was defended by the so-called G- 10, which included most of the large and more influential developing counhies, including Argentina, Braz[, Egypt, India, Nigeria, and Yugoslavia. S8/ This was suppOred by UNCrAD, which proposed that tra in services be defined to occur only when the majority of value added is produced by nonresidents (UNCrAD, 1985). This would exclude most sales thrugh FDI, as foreign factors of production that relocate are generally considered to become residezts of the host country for sttistical purposes. One of the paradoxical outcomes of the negotiations is that the mode of supply aginst which the greatest number of specific commintments were scheduled, including by developing counti, is that relating to commercial presece. One reason for this is probably a peMeption that this mode genrtes the greatet local conetle/mploymen. See Hoekman (1994) for more on the political economy of negodations that include FDI. 42 or commercial presence). All measures limiting market access for foreign service providers were to be put on the table. Thus, both the EU and major developing countries expressed an early preference for an agreement with "soft" obligations - the EU arguing that national treatment should only apply to specific sectors, major developing countries opposing even that. Only the U.S. and certain small open economies - both OECD members and newly industrialized countries like Singapore -- were in favor of a 'hard agreement along GATT lines from the start, with generally binding obligations and universal sectoral coverage. At the end of the day the original EUldeveloping country preference for a "soft" framework agreement prevailed. In return for acceptance that trade in services be defined to include the four possible 'modes of supply', and agreement that certain non-discriminatory measures restricting market access were in principle negotiable, national treatment became a specific commitrnent (i.e., not a general obligation), and it was agreed that the scheduling of specific commitments would proceed on a sector-by- sector and modes-of-supply basis." The positive list approach to determining the sectoral coverage of specific commitments emerged in part because many developing countries apparently felt they did not have the administrative resources required to determine all the measures that currently applied to each sector and decide which they would want to exempt. An important constraint in this connection was the fact that little time was left for the compilation of the required 'telephone directories' of exempted sectors and measures. At the time the issue of coverage was being discussed seriously (summer of 1990), negotiations were scheduled to be concluded within a few months (December 1990). As many developing countries did not have the intention of making very substantial commitments to liberalize access to their serice markets, they had a marked preference for a positive list approach. This then shifted the administrative burden on those counties that did intend to schedule a significant proportion of their market services. VIIL Comparing the Agreements While the generic approach to investment and services trade liberalization pursued under the NAFI'A represeats a welcome development in many regards, the creation of a single market for goods, services, labor and capital in Europe stands out as clearly unique among the various agreements discussed above. lndeed, the provisions of the Treaty of Rome and the Single European Act aim at a degree of liberalization of service marke that goes far beyond what has resulted from the other regional 02 Mhe 'softness' of the gameral disciplines may also have been a factor underlying the pressure for MFN xe _peia.s. The case for ouch exemptions would be much weaker if naonal et access wold hve bein - obligatiol. 43 agroments, lot alone what may emerge in the GATS-context in the longer run. The main rdovance of the EC experiment for this paper is that it provides a benchmark for purposes of comparing the other regional agreements with each other and with the GATS. The discussion that follows centers mostly on the non-EC agreements. Six possible criteria for comparing agreements were suggested earlier: (i) the modalities and instruments that are used to liberalize access to service markets - including exceptions to liberalizing principles; (ii) sectoral coverage; (iii) disciplines regarding government practices in areas such a subsidization and public procurement; (iv) enforcement/dispute settlement procedures; (v) rules of origin; and (vi) safeguard provisions. These will largely determine the magnitude of intra-area liberalization, and thus the impact on both member countries and non-members. The degree of implicit discrimination against non-members arising from a regional trade liberalization agreement is likely to be an important factor leading the latter countries to seek and support the multilateralization of regional preferences. This section summarizes the foregoing discussion of the various Agreements, using these six criteria as a framework for comparison. For ease of reference, Table 3 provides a brief summary comparison of the agreements with regard to the six criteria listed above. I. Modalties and Instruments of Liberuization The Agreements reviewed in this paper are all broadly similar insofar as the basic instruments of liberalization are concerned. Key principles hat are found in most or all agreements include national treatment, MFN, freedom in principle for providers of services to use any mode of supply, and the reductior. of non-discriminatory measures that restrict the contestability of specific service markets. However, there are significant differences in the extent to which the reach of such principles is restricted for individual sectors or measures. NAFTA and the GATS allow for MFN derogations, the EC and CER do not. In both cases the need for a derogation arose mainly because of concerns of the telecommunications industry regarding potentially unbalanced market access opportunities in other countries.' Although the GATS discussions revealed the difficulties involved in making MFN a general obligation with regard to services in a multilateral setting, it is noteworthy that the NAFTA countries could not agree to liberalize intra-regional trade and investment in services on a full - i.e. reservation- free-MFN basis. This, to a large extent, may be explained by the fact that the setors in which MFN sensitivities have proved most acute in the GATS setting - e.g. basic telecommunications, maritime tranportation - are also those in which little tangible progress could be achieved in a trilateral setting or in regard to which the maintenance of future negotiating 'coinage' may have been deemed useful. 6Q0 1n the GATS context, financial sevices providers voiced simila concerns. See the discussion above. 44 TABLE 3. A BRIEF COMPARISON OF REGIONAL AGREEMENT'S AND THE GA1S ..,. CRIRIA EC.:2 PrA NA.TA CER ATS lie daN lies h Four freedoms: goods, National treatment for all National treatment, National treatment and All aode of supply Mgbwme t services, capital, labor. modes of supply. Right *reverse' MFN, freedom market access. covertd in pnckiple. iber4Ibadon Nondiscrimination: aU of non-cstablishment. of mode of supply, incl. Freodom of modc of Transparency, MFN, and modes of supply Grandfathering of all right of non- supply, but right of disputc settment as libamlized. Mutual existing non-conforming establishment (no local establishment remains basic general obligations. rocognition of diplomas measures. No general presence). No subject to national No geneml right of non- and certification of procedures for grandfathering. Allows investment laws. Right establishment. professional service harrnonization of for exemptions to of non-etablishment. Encouragement of providers regulations or mutual national treatment, MFN No residency recognition agreemcnts HarTnonization of recognition. No and local presence. No requirements for for licensing and prudential and safety disciplines on non- disciplines on non- professionals. Common certiliation regulations. Implicit discriminatory QRs. discriminatory QRs, but labor market. MFN for requiremnts. No general right of non- all such measures to be excluded etors, disciplines on non- establishment, listed. Ratcheting Encouragement of discriminatory QRs. but No exemptions to provision for unilateral recognion agreements thesc prohibited under Ln general liberalization. Abolition for licensing and the markn t access artick nondiscrimination of residency cenification unless explicily requirements. Common requirements for requirements. reserved. labor market. Accession professions. Generic Accession clause. negotiations, blueprint for use by ervice providers seeking recognition agreements. Work programmes on foreign legal conuulants and temporary licensing of enginee. Work progrmmmes on standards harmonization (land transport and telecoms). Accession clause. ... XaftBBMBNrs - - ...... : . :. - . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. ..... |. CRtARlA :::EC-92 PTA NAFFA CER GATS i S efts coVuWg. All services covered. Positive list approach to Negative list approach to Negative list approach Positive list of scheduled Sector-specific coverage. Some sixtv coverage. Univerul to coverage. Annexes sectors. Most air Dirctives and service activities coverage, except for air for exceptions to transport services Regulations. Common covered. services subject to national treatment and excluded via an annex EC policy for transport. Sectoral annexes on bilateral air market access (indefinite). Other value-added agreements.Annexes on: obligations. No annexes deal with telecommunication and reservations of cxisting indefrmite exclusions. A telecommunications computer services; non-conforming number of rescrved (access to and use of tourism services; and investment and cross- services were removed public networks and mutual recognition for border services measures from reservation lists in services); financial architects. Separate at federal and 1992 review of the services (complemented chapters on financial state/provincial levcls; Agreement. by an Understanding of services and temporary 'unbound ' reservations commitments on financial entry of business people, in sensitive sectors; services); movement of activities reserved for the natural persons. state; exceptions to MPN; and existing non- discriniinatory QRs. Separate chapters on telecommunications (access to and use of public networks and services); financial services; temporary entry of business people. Timetables for the liberalization of land transport and specialty air ervi CRITERIA BC-92 PTA NAFTA CER GATS D,wIphas an reAed State aid subject to No disciplines for Govemment procurement Export subsidies for No disciplines for governmenipociks restrictions and procurement of services of services and services prohibited. government procurement monitoring. Government - except for services construction covered. Government or subsidies. MFN procurement of services, incidental to sale of a Positive list for entity procurement of services obligation for subsidies. including construction, covered good. No rules coverage; negative list and other subsidies Subsidy disciplines to be covered. for subsidies to service approach for services exempted from national negotiated in future. industries. covcrage. No disciplines treatment obligation. Services and construction on subsidies for services. procurement under discussion in context of GATT code on .____________________ .____________________ _____________________ ____________________ governm ent procurem ent. Eaemen ad EBC law has direct effect: Generic procedures for Generic procedures Infoimal and non- Generl procedures under spbudc seNkmeW supersedes national law. all matters covered by apply to all covered binding procedures. the W%O. Consultations Enforcement by private the Agreement, except areas under the Only consultations followed by a panel. parties and the EC for specific consultation Agreement. Binding required. Strict time limits imposed Commiusion. procedures for financial dispute settlement for the various stages of Supranational court Oa services. Disputes may available to determine the dispute settlernent justice. No service be referred to binding whether retaliation in process. Non- specific procedures. arbitration. Retaliation, response to non- implenentation of panel including between goods implementation of a findings may result in and non-financial panel finding is authorization of services, allowed for 'manifestly excessive'. retaliatory measures. non-compliance. Regime for inveator-state arbitration for enforcement of obligations under the investment chapter. Retaliation allowed for non-compliance. Crmss- irealiation between goods ond services allowed, with the exception of financial services. :C,iUT A EC-92 PTA NAFTA CER GAI3 Incorporation in an eC Ownership or control by Nationality or Nationality or residency Nationality or residency Mernber State and FTA nationals. incorporation for for natural persons; for natural persons; headquarters or principal inveatnent; substantial incorporation for legal incorporation under law place of business in the business activity within persons. of a Member state and eC. any NAFrA country for substantive business cross-border trade in operations in a Member, SC vices, or control - ownership by nationals of a Menber. Ownership requires mr than 50% of assets; control requires the power to direct the actions of the enterpnse. 0 Safeuoni Only one service specific No service-specific No service-specific Currently no safeguard Pmvidcs for service- provision relating to the instruments. Emergency safeguards, other than measures for goods or specific measures to common transport protection for goods periodic review of bus services. A GAIT-type safeguard the balance of policy. General balance only. General balance and truck liberalization Article XIX safeguard payments and to protect of payments and public of payments and public with scope for provision applied during srvice industries injured health and safety health and safety modification of phase-in the transitional period, by import competiion. provisions. provisions. schedule. Emergency which has now expired. However, specific rules protection for goods on the ltaer to be .... .. .... . . . only. General balance negotiated. Also of payments and public provides for modification health and safety of commitments, subject provisions, to oompensation of affectod Member. As far as national treatment is concerned, the major difference between the FTA, the NAFTA and the CER on the one hand and the GATS on the other is that national treatment is a general obligation in the former agreements but may be applied selectively under the GATS. All four agreements define national treatment as treatment equivalent in effect, not as identical treatment. This reflects the possibility that identical treatment for certain services could have a discrimination effect. With respect to freedom for foreign providers to contest markets through any mode of supply, the GATS is the only agreement to allow restrictions to be maintained on specific modes on a sector-by-sestor basis. The FTA and the NAFTA make no distinction between modes of supply. Instead, both simply distinguish investment - in whatever sector, be it goods or services -- from cross-border trade in services. The CER applies to the 'provision of services' which covers production, distribution, marketing, sale and delivery of services through whatever form of commercial presence preferred by a provider. Again, no distinction is made between different modes of supply. The only general restriction that is maintained is that establishment remains subject to each members country's foreign direct investment regime. The FTA, the NAFI A and the CER explicitly provide for the right of non-establishment, whereas the GATS does not. By not affirming a right to non-establishment, which is the most direct means of promoting the cross-border delivery of services, the GATS may be viewed as having less of an in-built liberalization dynamic than the FTA, the NAFTA or the CER. Non-establishment is addressed indirectly under the GATS as one of the allowed modes of delivery (i.e. cross-border trade in services) to which restrictions may apply. Indeed, as noted earlier, the decision to schedule specific commitents by mode of supply in the GATS allows countries to require establishment by not making any commitments under cross border trade. Another area where fairly significant architectural differences can be noted amongst the various agreements relates to the interplay between disciplines on services and investment. As noted earlier, while providing for the right of establishment, the CER fails to develop a set of common investment rules which, pending future negotiations, remain subject to the domestic regimes of the two countries. Whereas the GATS may in some regards be viewed as an investment agreement for services, insofar as it treats investment as a mode of delivery (establishment) to which the obligations of transparency, dispute settlement, MFN, and (in the case of scheduled services) national treatment apply, the Agreement does not develop a comprehensive body of disciplines aimed at protecting investors and their investments. Building on the generic treatment of investment contained in the F:TA, the NAFTA develops what is arguably the most far-reaching set of investment disciplines contained in a trade agreement to date. With the exception of ihe EC, none of the agreements reviewed in dtis paper mandate the harmonization or mutual recognition of regulatory regimes peraining to licensing and certification of providers of professional services. NAFrA goes furthest in this respect, as there is an obligation to 49 abolish nationality or permanent residency requirements prerequisite to the licensing of providers of professional services. Furthermore, the NAFTA contains a generic blueprint aimed at assisting all professions to achieve mutual recognition of licenses and certifications, and incorporates separate work programmes aimed at liberalizing the provision of foreign legal consulting and engineering services. The GATS shies away from developing a NAFTA-type generic blueprint for recognition agreements. However, a Working Party was established to examine and make recommnendations on the disciplines necessary to ensure that qualification, certification and licensing requirements relating to professional services are not unnecessary barriers to trade. The Working Party was given the task to give priority to accountancy services. As in the FTA and GATS, there is no obligation under the NAFTA to recognize credentials of providers of professional services from another member country. While both the CER and the GATS encourage the negotiation of recognition arrangements, neither agreement requires it nor provides specific guidelines on how to achieve this objective. The CER is similar to the NAFTA in that nationality/residency requirements for natural service providers are eliminated. Indeed, Australia and New Zealand are similar to the EC in that they form a common labor market. Provisions on licensing and professional services contained in the FTA and the NAFTA tie in closely with rules designed to facilitate the temporary entry of business people. The GATS is not likely to generate much increased trade in accredited professional services because of its failure to deal with matters relating to labor mobility, combined with the maintenance of discriminatory immigration and permanent residency requirements. Finally, it can be noted that NAFTA is similar to the EC in that it addresses the possible interfaces between product standards harmonization and services trade liberalization in areas such as land transport and telecommunications. Both the NAFTA and the GATS recognize the potential for non-discriminatory regulations to restrict the contestability of service markets. The conceptual approach taken towards such measures is similar under both agreements, although the GATS outlaws the introduction of new nondiscrminatory restrictions in scheduled sectors whereas the NAFrA's negative list approach merely submits such practices to the discipline of transparency without constraining the ability of govermments to introduce new quantitative restrictions. However, both agreements consider such regulations as subject to future liberalization negotiations. The CER does not address this issue expliciLy. However, the sectoral exclusions listed in annexes to the Agreement largely comprise sectors where non-discrminatory quantitative restrictions are maintained. As the exemption of these sectors is negotiable, non- discriminatory measures are implicitly dealt with. The broad similarity in rules and disciplines found in the various trade agreements reviewed in this paper suggest that regional agreements are generally quite complementary to the multilateral process, particularly as they have provided an opportunity to experiment with different architectures in a number of related areas where multilateral rules are non-existent and/or still in the process of being developed. 50 A striking feature of the agreements reviewed here is the increasing sophistication in approach. Rules developed in the financial services area provide a good example. The financial services chapter of the FTA involved a static exchange of specific concessions by each side. Drawing on the insights gained in more than six years of GATS discussions, the NAFTA completely recast the FTA provisions and translated them into a set of generic rules to which specific reservations and a liberalization timetable are appended. While not as far-reaching as the EC-92 programme, the result iL a leading-edge instrument which in many regards goes beyond the financial services provisions of the GATS (assuming negotiations on specific commitments are concluded successfully). Similarly, the treatment of investment-related matters and of services-related standards harmonizaton under the NAFTA may be expected to generate positive multilateral externalities, laying the basis for future work in the OECD and/or WTO contexts. 2. Sectord Coverage The CER and NAFTA take a negative list approach to coverage; the FTA a positive list approach; and the GATS combines the two by compelling signatories to list national treatment and market access impediments in scheduled sectors. While either approach can lead to the same liberalization outcome, a negative list is significantly more transparent because it forces Parties to reveal all non-conforming measures and excluded sectors. Of all the agreements reviewed in this paper, the FTA scores lowest - and the NAFTA highest - on transparency grounds, whereas the GATS' hybrid approach yields a median result. The freedom of GATS Members not to list particular service sectors allows them to exclude such sectors from the Agreement's coverage without shedding light on the discriminatory practices they maintain in such sectors. Aside from this substantive architecural difference, the four trade agreements may, with a few exceptions, turn out to be fairly similar as regards the effective liberalization of investment and cross- border trade in services6'. Indeed, the agreements show an unsurprising tendency to exclude or maintain significant restrictions on the same broad range of sectors: iner alia basic telecommunications, broadcasting, air and naritime transport, government services, and, with the partial exception of the NAFTA, services subject to government procurement disciplines. These are sectors where the EC has _1/ An important difference between the CER and the NAFrA, on the one hand, and dhe FTA and the GATS, on the other, is that the formr agreements cast a much wider net of non-discrimination than do the other two agreemen, as both prohibit the introduction of any disriminatory praces in al but the relaively few sectors subject to 'unbound' reservationexcluded sectors. Under both the FrA and the GATS, non-discriminatory tatmt is secured only for sectors appearing on both agreements' positive lists of covered/scheduled services. 51 also encountered difficulties in liberalizing market access.< At the time of writing, negotiations concening the sectoral coverage of the GATS were continuing, preventing a full and informed comparison with regional agreements. The fact that, with few exceptions, broadly the same sectors seem to remain immune from the forces of liberalization regardless of the negodating seting would appear to suggest that regional agreements are not generally viewed by member countries as a substitute path to faster or significantly more comprehensive services trade liberalization. 3. Disciplines on Related Government Policks With the exception of the EC, none of the agreements impose significant general disciplines on subsidization practices targeted towards service industries. Article XV of the GATS on subsidies states that Members to the Agreement recognize that in certain circumstances subsidies mnay have distortive effects on trade in services, and that they shall enter into negotiations with a view to developing the necessary multilateral disciplines to avoid such effects. Pending the conclusions of such negotiations, the general obligation of MFN treatment is to be extended to subsidies applying to scheduled services. These negotiations are also to address the appropriateness of countervailing procedures. While incomplete, the emphasis on the need for multilateral disciplines and an investigation of the appropriateness of countervailing actions along GATT lines by individual affected countries appears to indicate a recognition that countervailing actions are rarely the optimal response to subsidization.C The Protocol on services of the CER prohibits new export subsidies or measures with a direct distorting effect on trade, but does not address more general subsidy practices insofar as they affect service industries. The FTA and the NAFrA impose no disciplines at all on services-related subsidies.' Government procurement also tends to be excluded from the scope of most of the agreements. The procurement disciplines of the FTA applied only to goods. Similarly, the GATS and CER do not cover government procurement of services, although negotiations conducted in parallel to the Uruguay 62/ In this respect, services agreements are therefore comparable to those pertining to merchadise bade. The *holes and loopholes' embodied in regional trade aeements applying to merchandise trde flown are very smilar to those incorporated in the GAIT. See Hoekman and Leidy (1993) for a mre detailed discussion of this issue. C3/ It should be noted, however, that while there is no obligation in Article XV to schedule subsidies per se, thes would need to be scheduled should they not be in conformity with national treatment (Article XVII). 64/ Article 1201:3 of the NAFA stte that no obligations are imposed or rights conferred on a Party with respet to subsidies and grants, including govemment-upported loans, guarantees, and insurance provided by a Party or a state enterprise. 52 Round may yet result in services and construction being covered by the GA1T Code on Gov ernt Procurement. The latter does, however, operate on a conditional MFN basis and currenty comprises only 12 signatories (counting the EC as one).' Marking a first in international trade agreements, services and construction are subject to NAFTA's disciplines on government procurement, which requires all federal agencies and a number of federal state enterprises to open public contracts to North America- wide tendering. Adopting a negative list approach to entity coverage and a positive list approach to services coverage, the NAFTA nearly quadruples the size of procurement markets liberalized under the FTA, with services and construction accounting for up to half of the recorded increase. Such expanded coverage is notable for providing the most direct means of effectively liberalizing a number of service- producing activities (e.g. computer and software services, consulting engineering).' 4. Enforcement and Dispute Settdement It may be easier to monitor the implementation of a regional as opposed to a multilateral agreement as there are fewer countries involved. The similarity (and often geographical proximity) of member countries makes its likely that industries are better informed regarding actions by rivals ot foreign governments that are deemed to breach or nullify negotiated commitments. Moreover, a regional agreement may allow for greater supranational enforcement mechanisms, as well as speedier and more certain implementation. The European Court of Justice and the bi-national panel process in the FTA and NAFTA illustrate that enforcement provisions under regional agreements can typically go beyond what is possible at the multilateral level. Dispute settlement procedures foreseen under the GATS are identical to those of the GAIT, as amended by the Uruguay Round. The Uruguay Round's Final Act (GATT, 1993) contains a text on dispute settlement that will significantly strengthen the current system. Time limits are imposed; new 65/ Membership of the World Trade Organization (WTO) implies acceptance of all Uruguay Round agreements and existing Tokyo Round codes on technical barriers to tbade, subsidies, customs valuation, and so forth. However, the disciplines of the Government Procurement code, the civil aircraft code, and the dairy and bovine meat arangements will continue to apply to signatories only. 66/ An important difference between regional and mnullateral agreements in the area of govemment procuement relates to the lower duesholds that typically apply im the former. Hence, the FTA threshold for goods contracts was set at USS25 000, significantly lower hn the SDR 130 000 (approximately US$180 000) applying under the GATT Procurement Code. Under the NAFTA, thresholds for procurement by federal agencies were set at US$50 000 for goods and services contacts and at US$6 million for construction contracts; wherns for state enterprises, these were set at US$250 000 for goods and services contracts ana US$8.5 million for constrution contracts. While the thresholds for services and construction that may emerge from the current GATT procurement negotiations are still under negotiation, most offers on the table involve significantly higher thresholds than those obtaining in the NAFTA. 53 mechanisms are introduced to ensure prompt implementation of panel findings; and adopdon of the reports and recommendations of the panels of experts addressing specific disputes can no longer be blocked by either of the Parties involved. The quid pro quo for this last change is that Parties are given a chance to object to a panel's conclusions prior to the issuance of its report, and have the option of appealing to a new appellate body. The significant strengthening of dispute settlement mechanisms that should offer a credible alternative to regional arbitration mechanisms.'7 Moreover, as in the case of evolving se-vices and investment architectures, some of the dispute settlement innovations made at the regional level - for example, investor-state arbitration under the NAFTA's investment chapter - may be expected to have positive spillover effects on future multilateral negotiations. They may also help avoid unnecessary and time consuming dispute settlement 'forum shopping.' 5. Rules of Origin Thc nature of rules of origin may be an important determinant of the degree to which regional trading arrangements discriminate against non-member countries. The more restrictive such rules become Ci.e. the greater the difficulties for producers in non-member countries to share in the benefits of regional liberalization), the more regional arrangements may be deerned to yield results that are inimical to multilateralism. The rules of origin for investment and services adopted in the agreements reviewed in this paper are much more transparent and uniform than those applying to goods. They tend on the whole to be more liberal as well. With the exception of the soon-to-be superseded Canada-US FTA, all of the regional agreements extend benefits to all investors and service providers that are nationals or permanent residents of a member country, or are incorporated under the laws of a Party. Ownership or control is not the primary criterion. In addition to incorporation, the EC and the GATS also require that entities conduct substantial business operations within mernber countries. The NAFTA contains the most liberal rule, merely requiring that service providers, regardless of nationality, either carry out substantial business operations (cross-border trade in services) or be incorporated in a member country (investment) in order to receive NAFTA treatment. Despite the recent trans-Atlantic rift over the EC's Utilities 67/ Indeed, it is noteworthy that with the exception of the EC, members of regional agreements can continue to invoke GA1T-WTO dispute settlement procedures insofar as regional disciplines do noL go beyond those negotiated in the multilaterl context As argued by Roessler (1993), in general participants in regional trade agreements should ensure that they maintain 'acquired righs' under the multlatel trading system. Access to the WTO's dispute settlement procedures of the WITO could be important for parties to regional agreements that have weaker enforcement mechsnisms but similar substantive disciplines (e.g. CER). 54 Directive,' the 'single passport' approach adopted by numerous services-related EC Directives generally affords foreign-established entities non-dcriminatory terms of access to Community markets.0 Similarly, the denial of benefits approach retained for investment and cross-border trade in services in both the FTA and the NAFTA adopts a country of residence approach, allowing established entities from non-member countries to enjoy the same rights as those conferred under both agreements to domestic entities. The sarne rule applies to services procurement under the NAFTA.' In general, rules of origin for producers of services are less restrictive than rules of origin for products (goods). As noted earlier, the former tend to be more transparent and uniform across sectors of activity. In contrast to the goods area, there are indeed few cases of industry-specific rules of origin for producers of services7". In most instances a legal or natural person will be able to demonstrate origin relatively easily. This simplicity contrasts markedly with rules of origin for goods. The NAFIA has 168 pages establishing very detailed rules of origin for goods. No such detail exists in any of the agreements to establish the origin of producers of services. While this difference can be explained in part by the fact that contesting service markets will usually involve establishment and thus inherently lead to 68? Govemnmen procurement, particularly of goods, remains one area where regional trade agreements' rues of origin may tilt competitive conditions against non-member countries. One example is pvided by the EC's Utilities Directive, which allows EC companies to deny a bid that does not contain at lesst 50 per cent European content, and requires them to offer a 3 per cent price preference to EC supplier bids. Proposed amendments to Community procurement Directives currently before the EC Parliament would open up Community service contracts in previously excluded sectors (trnsport, energy, wate and telecommnications) to third countries. Such amendmets are accompanied by a provision stipulating that the EC Council, acting by a qualified majority, take safeguard measures in relatioo dhird markets which do not grant Commity undertakings effective access to their markets. 69/ While the principle of mutul recognition of home-country licensing and certification does provide EC profesionals with greater Community-wide mobility, the creation of a truly integrated market for professional services still fices a number of regulatory impedinmnts. This is reflected in the recent proposal of EC Commisioner Martin Bangemann for an EC 'entity' for the joint cross-border practice by liberal professions. Seeking to fill a gap in EC law, such legal entity could be formed by naual pesons and firms, and the entity itself could carry out the professional activity. It would be for use only by certain defined professions. The EC maitams discrinatory rules of origin for profossinal practice by limiting the benefits of mutual recogition described above to EC nationals. The same applies to the temporary entry privileges obtaining for business people under the FTA and the NAPTA, which are reserved to member countries' citizens. 70/ The financial services chapter of the NAFTA offes one exception to the above rule, with Canada adoptiDg a control test to determine a financial institution's eligibility for NAFrA benefits. As well, the maintenance of foreign maket share limitations during the transition towards libealized Mexican financial makets could prove problematic depending on the size and speed with which firms from non- NAFTA cotries secure access into Mexico's market. 71/ Financial services under the NAFTA provides one example of a semrice sector-specific rle of origin 55 the employment of local factors of production, it is still noteworthy that no recourse is made to explicit local content criteria. 6. Safeguards Abstracting from national security and public health/safety-type exceptions - which are contained in all the agreements - the CER is the only regional agreement that does not contain safeguard provisions. The EC has one service-specific safeguard instrument that is not related to liberalizationper se, but rather to the implementation of the common transport policy. Apart from the commitment to review periodically liberalization commitmenits for bus and truck services, the NAFTA has no service- specific safeguards, containing only general provisions applying to goods and services (e.g. a balance of payments provision) or to goods only (e.g. emergency protection of industries injured by imports). In contrast, the GATS includes a number of articles of a safeguard nature. These largely duplicate those contained in the GAIT, with the notable and welcome omission of antidumping. Specific rules with respect to emergency protection of service industries and subsidies/countervail are to be the subject of future multilateral discussions. IW. Article V of the GATS: Multilateral Rules for Regional Agreements Article V of the GATS sets out the conditions that must be satisfied by regional integration agreements involving GATS Members and that imply the preferential liberalization of access to service markets. The Article is entitled 'Economic Integration," not "Free Trade Areas and Customs Unions' (as in Article XXIV of the GATT), reflecting the fact that the GATS covers not only cross-border trade in services, but also other 'modes of supply', including establishment. The wording and content of Article V provides another source of information regarding the (perceived) relationship between regional agreements and the multilateral trading system. Analogous to Article XXIV of the GA1T, Article V of the GATS imposes three conditions on economic integration agreements between signatories of the GATS.' First, such agreements must have 'substantial sectoral coverage" (Art. V: 1(a)). An interpretive note states that this should be understood in terms of the number of sectors, volume of trade affected, and modes of supply. With respect to the latter, economic integration agreemnents should not provide for the a priori exclusion of any mode of supply. Second, regional agreements are to provide for the absence or elimination of substially all 72/ The complete text of the Article is reproduced in Annex 2. 56 discrimination (defined as measures violating national treatment) between or among the parties to the agreement in sectors subject to multilateral commitments. This is to consist of the elimination of existing discriminatory measures and/or the prohibition of new or more discriminatory measures, and is to be achieved at the entry into force of the agreement or on the basis of a reasonable time frame (Art. V: I(b)). Third, such agreements are not to result in higher trade and investment barriers against third countries. These conditions constitute the "price' to be paid for the MFN obligation and specific commitments to be waived by GATS Members, i.e., for the implicit discrimination against non-members resulting from the agreement to be deemed acceptable. The first condition (Art. V: 1(a)) pertains to the internal dimension of economic integration and is analogous to the 'substantially all trade" criterion contained in Article XXIV of the GATT. The rationale underlying this requirement is no doubt also similar: the goal is to 'raise the cost" for GATS signatories to violate the MFN obligation (Finger, 1993). That is, regional integration is to be tolerated so long as it clearly constitutes an attempt to go substantially beyond GATS disciplines and coverage (i.e., is not intended to selectively circumvent the MFN obligation). However, "substantial sectoral coverage' is not the same as "substantially all" sectors, suggesting iat the intention of the drafters of Article XXIV of the GATT was perhaps more restrictive than that of those drafting Article V of the GATS. This conclusion is strengthened when Art. V:l(b) is taken into account, which applies with respect to the magnitude of required liberalization. Article XXIV of the GAIT requires that "duties and other restrictive regulations of commerce" be eliminated on substantially all intra-area trade. Article V:l(b) of the GATS reveals that a mere standstill may be deemed sufficient in the services context. The GATS requirement is not elimination of existing discriminatory measures and prohibition on new measures, but elimination of existing discriminatory measures and/or a prohibition on new measures (see Article V: l .b(ii), reproduced in Annex 2 below). The third condition - pertaining to the external dimension of integration agreements - is also analogous to language found in Article XXIV. Article V:4 states that economic integration agreements are not to raise the overaU level of barriers to trade in services originating in other GATS members within the respective sectors or sub-sectors compared to the level applicable prior to such an agreement. Thus, average levels of protection against the rest of the world should not increase. As a result of the more disaggregated (i.e. sub-sectoral) focus taken in Article V, a contracting party cannot argue - in contrast to GAIT - that the average level or "general incidence" of protection has not changed, regardless of what might occur at the level of individual products (sub-sectors). Averaging has proven to be a difficult issue in the GATT, starting with the creation of the EEC. As discussed below, notwithstanding the apparent greater precision of the GATS in this regard, similar problems are likely to arise in the GATS context. 57 No distinctions are made between customs unions and free trade areas in GATS Article V. The lack of such a distinction appears to be quite deliberate. Until late in the day the draft GATS agreement permitted members of such an agreement to discriminate against service suppliers originating in non- member states if two conditions were met. First, such suppliers must not have been already established in countries participating in the integration agreement; and second, the agreement was not a customs union. It is unclear how govermnents participating in economic integration arrangements that did not pursue a common external policy would be able, if they so desired, to implement such discrimination. In the event, this provision disappeared in the final version of the GATS, and with it any reference, be it implicit or explicit, as to whether it matters whether integration agreements take the form of free trade areas or customs unions. The absence of the distinction may turn out to be of some significance. For one, it implies that countries participating in a free trade area may be permitted to raise some barriers against non-members, as long as the overall level of barriers of all the members of the agreement vis-a-vis non-members, for each of the relevant sectors or sub-sectors, does not increase. This option is clearly a significant difference with the GAIT, which prohibits such 'rebalancing' for members of a free trade area, unless compensation is offered to affected GATT contracting parties. There are a number of possible explanations for why this approach was not followed in the GATS. One may be that participants perceived the distinction between free trade agreements and customs unions as not being very relevant in the services context. Currently the European Union is the only common market in existence where services markets are actually substantially liberalized. But even for the EC arnbiguity exists with respect to the question whether it is a customs union for services - i.e., whether there is a common commercial policy for services, as the EC Member states still retain sorne sovereignty (competence) in the services area.' Another possibility is that there was a perception that integration agreements, even if not formally seeking to put in place a common external policy, will often involve some degree of harmonization of regulatory policies pertaining to specific sectors. This then may imply that some countries have to increase the 'restrictiveness' of their policies, while others become more 'liberal'. It can be noted that as harmonizing up is more likely than harmonizing down, this is unlikely to allow the 731 The EC Commission has maintained for some time that the common commercial policy applies to services as well as goods, although this has met with some disagreement on the part of EC Member states (the EC Council). The issue became particularly pertinen with the initiations of multilatra negotiations on services, as it determines whether the EC - rather than the Member sataes individually - would engage in the negotiations. In the event the Commission negotiated the agreement. It has been established by the European Court of Justice that in reas related to the realization of the common market, where the Commission has competence, it also has competmene with regard to the extenal dimension of such policies. However, Member states continue to retain competence in certin as. See Mengozzi (1993) for a detailed discussion of the issue. 58 balancing requirement of Article V to be met (i.e., overall level of barriers are not to rise on a sectoral basis). In both the GAWT and GATS. compensation of non-members is only foreseen for increases in explicit discrimination (i.e. the raising of external barriers), not for rises in implicit discrimination. As noted earlier, the latter is a central - and inherent - feature of regional integration agreements and is 'tolerated' by Contracting Parties so long ax the necessary conditions noted above are met. Increases in explicit discrimination are not prohibited per se, but if imposed must be accompanied with compensation of negatively affected parties.7' As stated in Article V:5, members of the GATS engaged in economic integration efforts intending to withdraw of modify specific market access and/or national treatment commitments (i.e., raise external barriers) must follow the procedures set out in Article XXI (Modification of Schedules). Article XXI applies to any member of the GATS that is negatively affected by an increase in external barriers that violates a specific commitment. Members intending to alter previously negotiated concessions are required to notify the Council of the GATS of their intentions at least three months before implementing contemplated changes. This is to be followed by consultations and negotiations with affected parties regarding compensation.' This language contrasts with the equivalent GATT provision, Article XXVmI (Modification of Schedules), which pertains only to contracting parties with an initial negotiating interest or to those with a 'principal supplying interest". In practice this excludes many smaller countries from the compensation negotiations. The GATS language is much broader and allows any affected signatory to participate.' GATS disciplines also differ from those of the GATT in that there is no provision made for 'balancing". Article XXIV of the GAIT specifies that due account be taken of reductions of duties on the same tariff line made by other members of a customs union. The GATS allows affected Members to request binding arbitation in irstances where members cannot agree on the level of compensation required when renegotiating concessions. If the findings of the arbitration are not implemented by the country modifying or withdrawing a concession, affected countries that participated in the arbitration may 'retaliate' through the withdrawal of substantially 74/ To repeat, the differenc between the GATT and the GATS is that under the latter there is more scope for a member of a regional agreement to argue that an increase in protection in one sector is offset by a decrease for that sector on the part of another member. In GATT such issues only arise for customs unions. 75/ Such compensation is to be applied on an MFN basis. 76/ The Unignay Round's Final Act contains some modifications to Article XXVIII of the GAIT that would give smaller countries greater access to much negoiations. 59 equivalent benefits. There is no need for authorization by the GATS Council. In this respect Article XXI of the GATS also goes beyond GATT' Article XXIV, which only provides for countries concerned to refer disagreements regarding compensation to the Contracting Parties, who may in turn 'submit their views.' Both the GATT and GATS contain provisions relating to transparency and surveillance matters. Countries intending to form, join or modify a preferential agreenent must notify the relevant multilateral bodies, make available relevant information that may be requested by non-members, and may be subjected to the scrutiny of a Working Party to determine die consistency of the agreement with multilateral rules. In both the GA`17 and GATS, a Working Party's report on the consistency of an agreement may lead to members acting jointly to make "recommendations" to member countries "as they deem appropriate." The GATT differs from the GATS, however, in that Article XXIV contains stronger language than Article V on the 'conditionality' attached to the time frame for implementation. Article XXIV requires that if a Working Party finds that the plan or schedule for an interim agreement is not likely to result in a GAIT-consistent customs union or free trade area, its members "shall not maintain or put into force [an] agreement if they are not prepared to modify it in accordance with ... the recommendations." No such provision exists in Article V. Article XXIV of GATT and Article V of GATS both contain loopholes allowing for the formation of agreements that do not fully comply with multilateral disciplines. The GATT CONTRACTING PARTIES (i.e., GATT members acting jointly) may by a two-thirds majority approve a proposed regional trade agreement that does not fully comply with Article XXIV, provided that such proposals lead to the formation of a customs union or free trade area in the sense of Article XXIV. Articles V:2 and V:3(a) of the GATS respectively allow for consideratior. to be given to the relationship between a particular regional agreement and the wider process of economic integration among member countries, and give developing countries flexibility regarding the realization of the internal liberalization requirements (i.e., Art. V: 1). Given that a standstill may already be sufficient, presumably this flexibility will be invoked with respect to sectoral coverage.' It is also worth noting that Article V:3(a) does not speak of agreements between developing countries, but of agreements that have developing countries as parties. Thus, in principle, this 'flexibility' extends to agreements that have bo:h developed and developing country signatories. Moreover, Article V:3(b) allows developing countries negotiating integration agreements among themselves to give more favorable treatment to firms that originate in parties to the agreement. That is, it allows for discrimination against firms originating in non-members, even if the 77/ It is suggestive in this connection that some recently concluded integmtion agreements between developing countries only focus on one or two service sectors, e.,., dLe 1991 Free Trade Agreement between Chile and Mexico (UNCTAD and World Bank, 1994). 60 latter are established within the area. These 'special and differential treatment' type of provisions are unlikely to be very effective in attracting the inward foreign direct investment (investment creation) that is often sought by participants in integration agreements.' Summing up, the GATS' provisions are arguably weaker than those of the GATT in both substantive and procedural terms with respect to loopholes. 1. Implementing Article V The Working Parties that have been established to determine the multilateral consistency of preferential liberalization agreements notified to the GAiT have been singularly unsuccessful in reaching unanimous conclusions. As the Chairman of a recent GATT Working Party established to investigate the 1989 Canada-United States Free Trade Agreement recently noted, "lwhilel over fifty previous Working Parties on individual customs unions or free trade areas have been unable to reach unanimous conclusions on the compatibility of these agreemnents with the GATT, 1...3 no such agreement has been explicitly disapproved."7 Only four Working Parties have been able to agree that a regional agreement satisfied the requirements of Article XXIV (Schott, 1989). The reasons for this are well known. As noted by Snape (1993), political considerations weighed heavily in the decision of GAiT Contracting Parties not to scrutinize too closely the fornation of the EEC, the Community's six original member states having made sufficiently clear that a GATT finding that the EEC violated Article XXIV could well result in their withdrawal from the multilateral body. To paraphrase Finger (1993), at the end of the day the GA1T 'blinked." Given that the EEC most likely did not meet the requirements of Art. XXIV (Patterson, 1966; Dam, 1970), this created a precedent that has tended to be followed subsequently. Although regional agreements have been "tolerated' in the GAIT for political reasons, it is certainly the case that the criteria and language of Article XXIV are also ambiguous. Legitimate differences of opinion may exist conceming the interpretation of "substantially all' trade, or how to determine whether the extenal trade regime of a customs union has not become more restrictive 'on 78/ It appes that this laguage was introduced in the final stages of negotiations in order to meet the concerns of counmtes that were parties to agreements with equivalent language. This was also the reason for the inclusion of Article V bis on common labor markets, which was required in order to safeguard agreemn such as those between Austrlia and New Zealand, or between the Nordic countries. 79/ GA TFoas, November-December 1991, p. 5. 61 average." This is not the place for a comprehensive discussion of Article XXIV of the GATT.0 The relevant question in the context of this study is whether GATT-like problems can be expected to arise in the GATS context. Abstracting from notifi;cation/transparency requirements, the GATS, liike the GA1T, imposes two broad conditions on economic integration agreements. To repeat, external barriers may not be increased unless affected parties are compensated, and internal (preferential) liberalization must have substantial sectoral coverage. With respect to both dimensions, it is likely that GATS Working Parties will have less difficulty in reaching unanimous conclusions than those formed under GA1T auspices. In part, this is a result of the introduction under the GATS of binding arbitration. Paradoxically, it is also a reflection of the fact that Article V disciplines are in some respects weaker. As far as the internal dimension of integration agreements is concerned, the minimum that is required under the GATS is a standstill commitment. It can be speculated that the drafting of this rather minimalistic requirement was in no small measure linked to the outcome of the 1989 Canada-United States FTA which largely consisted of a standstill agreement applied to a finite list of covered services." Tmis condition should be easily met by most regional agreements, as the only binding condition is that the standstill have substantial sectoral coverage. As noted earlier, the requirement is not substantially all sectors, as under the GATT. And, to the extent that members of a regional integration agreement seek to go beyond a standstill (i.e. achieve some degree of rollback of protective measures), the drafting of Article V suggests that a mix of standstill and liberalization will be enough, as long as the agreement has 'substantial sectoral coverage'. In those instances where this is clearly not the case, Article V:2 allows participants in integration arrangements to argue that such an agreement should nonetheless be accepted insofar as it is part of a wider process of economic integration or trade liberalization among member countries. The existing regional agreements among OECD countries - the European Union, the European Economic Area, the NAFrA, or the Australia-New Zealand Closer Economic Relations Agreement all easily satisfy Article V requirements regarding internal liberalization. Taking into account the special language for developing countries, the same conclusion applies to arrangements between developing countries - e.g., the MERCOSUR agreement or the above mentioned free trade agreement between Chile and Mexico (which has some prospective liberalization in the transport area). 80/ See, e.g., Curzon (1965). Patterson (1966), Dam (1970), Finger (1993), and Snape (1993) for a fuller discussion of this subject. 81/ The need to 'protect the services outcome of the Nor± American Free Trade Agreement, which at the time of drafting GATS Article V was in the midst of being negotiad and whose outcome in terfm of both sectoral covemge and liberalison was quite unclear, alo played - influential role in debaus over the contents of GATS Axticle V. 62 Turning to disciplines against the raising of external barriers for non-members, the GATS is more clear-cut than the GATr in that the constraint applies on a sectoralJsub-sectoral basis. Tbis language improves upon the GA1T insofar as there is less scope for member countries to argue that the overall or average level of protection has not increased. Nonetheless, 'averaging' problems still remain as the constraint imposed by Article V is that the overall level of barriers to trade within sectors and sub-sectors not increase subsequent to the implementation of a regional integration agreement. While the scope of the problem may have been narrowed down insofar as it is clearer what the focus of investigations should be, the magnitude of the problem has not really declined, as investigations will have to determine the impact of integration on a sector-by-sector basis. Moreover, the number of regional agreements that may involve GATS members changing their external policies may well be much greater than in the GATT context, as under the GATS all types of agreements may lead to some 'rebalancing', not just customs unions. In the GATT context, both Working Parties and the Contracting Parties more generally devoted considerable efforts to issues such as the methodology that should be used in establishing the impact of customs union formation on external trade policy, e.g., use of arithmetic versus weighted tariffs. The problem here largely resulted from the vagueness of the drafting of Article XXIV. Clarification of this issue was achieved in the Uruguay Round, Article XXIV(5) being revised to require the use of import weighted average applied tariffs as benchmarks, as well as customs duties collected. In the services context, the simplification associated with the requirement that the focus of attention should be on sectors and sub-sectors is likely to be offset by the ambiguity and complexity associated with the fact that the barriers concerned are non-tariff - i.e. regulatory - in nature. Consequently, in many instances, determining - and measuring changes in - the overall level of barriers, whether ex post or ex ante, will remain difficult as these consist of regulatory and other measures that restrict market access and limit national treatment. Given that negotiators were clearly aware of this problem, one can speculate that this was an important factor leading to the introduction of binding arbitration for disputes relating to the modification and/or re-negotiation of country schedules. It is likely indeed that arbitration panels will need to develop a GATS 'jurisprudence' in this area. That being said, the binding nature of arbitration should facilitate the implementation of the procedures contained in Article V. X. Regional Agreements and the GATS: Complements or Substitutes? A key issue determining whether regional liberalization of service markets should be viewed as a complement or substitute for broader multilateral disciplines is whetier regional agreements effectively lead to significant liberalization, and if so, whether such liberalization goes substantially beyond what is feasible in the multilateral context. Among the various agreements reviewed in this paper, the EC-92 63 programme involves a degree of liberalization that is unlikely to be matched at the multilateral level in the near future. The same conclusion holds if the EC is compared with the other regional agreements. However, the EC also involves much more than inter-governmental co-operation, its ultimate goal being economic (and a degree of political) union. Liberalization of services under the NAFTA and the CER represents a significant improvement over the Canada-United States FTA, although much remains to be done. Both agreements are arguably superior to the GATS in architectural terms. However, this does not necessarily imply that the GATS will involve markedly less liberalization. This depends on the schedules of commitments offered by participants. and the extent to which MFN exemptions will be invoked. Given the successful negotiation of the GATS, the foregoing review of regional trade agreements among OECD countries and which cover services suggests that regional and multilateral agreements display a fairly strong degree of complementarity. One important reason for this is the fact that regional agreements appear to have been useful laboratories in which to experiment with ever more sophisticated services, investment and procurement rules and disciplines. There has been a substantial amount of cross- fertilization between the regional agreements and the GATS. Although agreements differ in ternis of sectoral ;overage, the core instruments of liberalization that are embodied in them are broadly similar. Sectoral annexes are also frequently comparable. In the case of NAFTA, for instance, the wording of disciplines on financial services and telecommunications was taken in large part from the GATS. The GATS in turn clearly built upon the experiences gained in achieving progressive liberalization within the EC, the FTA and CER. Thus it followed the FTA in adopting a positive list approach to coverage, and the CER with respect to the distinction between national treatment and market access. All of the agreements drew upon the EC experience, recognizing to a greater or lesser extent the importance of disciplines on licensing, accreditation, mutual recognition, standards harmonization, as well as the need for a right of establishment. Complementarity is further evinced by the observed tendency for both liberalized and excluded sectors to be broadly similar in the various agreements.' Under all of the agreements reviewed, cross- 82/ The sectors that are given priority in terms of liberalization are oftn similar. Financial services ae an example. Financial service providers in the US and the EC have recently become more interested in obtaining greater market access opportunities in each otheres markets and in third-country maukets (e.g. Japan, ASEAN, Latin America). In part, this desire was driven by recent advances in information and telecommunication technologies that increased the tradability of many financial services - at both the retail and the wholesale levels (Hoekman and Sauve, 1991). American finmcial services firms - banks, secunties finns and insuance companies - have been especially active in both regional and multilateral services negotiations. They were prime movers behind the formation of the Coalition of Service Industries, and created a Financial Services Group in mid-1989 to lobby US and otier countries' negotiators. The industry was influential in opposing attempts by the US Treasury to have financial services excluded fiom a multilateral agreement on trade in servces (Wesdake, 1990) and was 64 border services and associated investment liberalization is progressive in nature. Apart from the EC, which continues itself to encounter resistance to liberalization in a number of sectors (basic telecomnmunications, air transportation, investment services), significant market access limitations (both discriminatory and non-discriminatory) will remain in place for the foreseeable future under all trade agreements. The issue of whether or not regional agreements are building blocks for multilateral liberalization depends in large part on the extent to which the formation of a regional trading area implies discrimination against non-members. Agreement to negotiate - or complete -- the GATS was influenced by the emnergence of the EC-92 programme and the NAFT`., and it can be argued that progress made in the multilateral discussions was in part driven by the existence of regional liberalization agreements and/or negotiations. The threat of trade and investment diversion increase the incentives to engage in multilateral talks. Statistics on trade and foreign direct investment in services also provide support to the complementarity hypothesis. While it is still too early to evaluate the impact of the various agreements on trade and investment flows, available data do suggest that most service providers will exploit market access liberalization by establishing a presence in foreign markets. Although trade in comrnercial services has been growing faster than merchandise trade, it remains relatively modest. As of the early 1990s, the share of services in global trade was only 21 per cent, up f:om 18 per cent in 1970 (see also Table 1 above).' While service trade flows remain relatively small, a review of available disaggregated data on international trade in services reveals that: (i) intra-industry trade is high for those countries that report such data; and (ii) the relative importance of intra-regional trade in services is significavt, although smaller tha for merchandise trade flows. The significance of intra-regional trade is an indicator of the likelihood of countries forming a regional agreement as it reveals the extent to which benefits of a regional agreement may already be 'internalized.' For the EC as a whole the share of intra-regional trade flows in services in total trade flows averaged 45 percent during 1979-82, rising to 47 percent in 1986 able to induce the American Government to oppose the reciprocity provisions contaidned in the first dnmft of the EC's Second Banking Directive. Somewhat paradoxically, (though linked to thd outcome of the round on financial services), the industry has been supportive of the reciprocity provisons embedded in the proposed Fair Trade in Financial Services Act currently before Congress. As mentioned earlier, the FTA, GATS and the NAFTA ll contain separate but increasingly more sopl'isticated provisions aimed at securing greater effective access to financial markets. 83/ Comnercial services comprises the sum of transport, travel (expenditure by foreign visitors), and an aggregate category caled 'other services nd imcome'. The latter comprises all other services, as well as labor and i3tellectual property inome. Other services have shown the most dynwamic growth over the Ist e cade, changing the composition of commerc services trade. Transport has become relatively less important while various types of business services have seen a significant rise in their relative importance. It should be emphasized that trade in services data is of low quality, and that the reported satistics are likely to substanialy understate actual flows. For more detsil and discussion of semices trade data, see GATr (1989) or Hoekn and Stem (1991). 65 88. This compares to 53.5 and 58.5 percent for merchandise (EUROSTAT, 1991). Virtually all of the increase in intra-EC trade in services occurred for the category "other commercial services (non- transport, non-tourism), which increased from 38.5 percent to 42.5 percent over this period. For Canada, trade with the United States in the late 1980s accounted for 60 percent of total trade in commercial services. However, for the United States trade with Canada accounted for only 9 percent of total services trade. The relative importance of intra-industry trade is often regarded as a indicator of the extent to which significant adjustment pressures are likely to arise as a result of liberalization. Table 4 reports the Grubel-Lloyd index of intra-industry trade in services for a subset of OECD countries. This index is defined as GL= (Xi M - £, IXI-MI E (XI + M) where X; and M; are a country's exports and imports of industry i, respectively. It can be seen from Table 4 that intra-industry trade is quite high for all industrialized countries except Spain. On average, it appears that the magnitude of intra-industry trade in services is very similar to that in merchandise for the countries reported. Intra-industry trade in services is significantly greater than for merchandise in Canada, Denmark, and Gennany, while the opposite holds only for Spain. It is well known that intra- industry trade in merchandise has grown substantially over the last two decades. The mean Grubel-Lloyd index for merchandise trade of the OECD countries for which we have services data was 67.4 in 1970, 70.4 in 1980 and 75.4 in 1985. The average index for services also demonstrates an upward trend, but increases are smaller. The average of the services indices increased from 72.0 in 1979 (the first year for which EC data is available) to 74.2 in 1985 to 76.7 in 1989. lhe relatively high magnitude of intra- industry trade in services for OECD countries helps explain the revealed preference for regional agreements. Available data on trade in services provide some support for the hypothesis that service firms located in North America and Europe will have an interest in keeping regional markets open and trading with the rest of the world. Trade specialization or 'revealed comparative advantage' (RCA) indices are defined as the ratio of exports of a 'product' category to a country's total exports, divided by the same ratio for the sum of all the countries in the sample Ci.e., [ /[X l/YJ, where X1 are exports of product i by country j, Yj are total exports of goods and services by country j, and t stands for the group total: the sum of all countries. The value of this index may range from zero to a very large number. If the 66 Table 4 Grubel-Lloyd Intra-Industry Services Trade Indices Services Merchnd i se 1980 1983 1985 1987 1989 1980 1985 Belgiun- 84.2 86.3 87.1 84.4 83.8 84.1 86.7 Lux Derark 77.5 73.9 80.2 82.3 79.3 67.4 72.6 France 85.0 82.3 81.1 85.6 85.7 86.1 85.5 Germny 71.0 76.4 76.6 73.6 74.6 55.4 68.2 ItEty 62.0 59.3 64.0 71.2 79.5 69.6 69.5 Kether- 69.2 72.0 68.3 68.9 68.8 77.9 76.3 Lands ___ _ Spain 52.0 49.6 47.6 45.2 51.8 50.4 68.2 United 80.8 85.3 82.9 83.5 80.9 80.8 84.3 Kingdom __ _ _ _ _ _ _ _ _ _ _ ___ _ _ _ _ _ _ _ _ _ _ _ Canada 88.2 81.4 85.6 83.8 B5.3 64.5 76.4 United 78.3 70.6 69.0 73.9 77.7 68.2 66.5 States IIIIII Sorce: Hoekman (1992b). If the index is greater than one this implies that the country is relatively specialized in the product concerned.' RCA indices are useful for determining the export orientation of industries, and may provide some information on the possible preference of different countries for multilateral liberalization. The more specialized a country is in exporting services relative to the world, the more likely it may be expected to favor multilateral liberalization. Table 5 reports RCA indices for the developing and industrialized country groups and for the United States, Canada, and the major EC countries.' 84/ A similr ratio can be calculated using data on imports, production or employment. If production or employment statistics are used, the specialization ratios will not necessarily reveal anything about comparative advantage. For example, lesa efficient countries will tend to use more labor per unit of service output, while production ratios iray depend in part on differences in tastes across countries. Nonetheless, they do provide information on 'revealed' specialization. A study by Hoekman and Karsenty (1994) has shown that production and employmentbsed ratios are not correblted with trade specialization ratios and thus cannot be used as proxies. 851 The choice of EC countries was determined by availability of comparable disaggregated data on trade in serces- 67 Table 5 Revealed Comparative Advantage Indices ror Trade in Services, 1989 Country/region Goods Al scrviccs Transport Travcl OLher scrvicca Dcvcloped counbic 98.5 106.5 105.2 98.9 111.3 Dcvcloping countrica 104.4 81.0 79.1 111.5 67.0 | Canada 110.2 SS.S 14.5 76.2 68.8 Denmark 92.6 132.3 178.8 103.3 117.7 Finland 104.2 81.7 104.5 64.3 76.6 France 90.0 143.7 138.9 118.8 163.9 Gennany 107.7 66.6 62.2 39.3 89.8 [WdY W6 113.9 91.2 114.8 127.9 Netherlands 98.2 107.6 165 41.2 114.7 Norway 89.S lS0.0 345.4 61.1 70.8 RPortugal1 93.7 127.2 _ r 7_4 275.3 49.5 Sp3Fain 0 77.9 196.1 138.7 405.7 70.5 USA 95.5 119.5 ~~~~~~120.1 129.4 108.9 Source: Hoekrnan (1992b). Developing countries as a group tend to be relatively specialized in merchandise trade, while industrialized countries tend on average to be specialized in trade in services. Of the OECD countries, Norway, Deranark and the Netherlands are highly specialized in transport, Portugal and Spain in travel (tourism), while France, Italy, the Netherlands, and the United States are relatively specialized in 'other" services (i.e., non-transport, non-travel-related services such as telecommunications, business services, professional services, etc.). The relative specialization of OECD countries in services suggests that service firms originating in these countries should support multilateral liberalization efforts. Thus, the fact that it is the OECD countries that are engaged in the most far-reaching regional integration efforts does not imply that the industries involved will lose interest in access to third markets. It can also be noted that even though developing countries as a group tend to be relatively specialized in exports of merchandise, if the developing country group is disaggregated, a large number of individual countries turn out to be relatively specialized in services (Hoekman and Karsenty, 1992).m 861 And, of course, countries with a comparative disadvantage in services production and export should still favor liberalization as it will encourage specialization in those activities in which there is a compartive advantage. 68 Global flows of FDI in services rose significantly during the 1980s. Major investing countries such as Japan and the US registered large increases in the share of outward FDI flows invested in services. For Japan, this share increased from 40 per cent in the early 1970s to 67 per cent in the late 1980s. Figures for the US are comparable - the services share rising from 29 to 47 per cent. Most European countries registered similar changes (United Nations, 1992). Not only did the share of services increase significantly, the absolute magnitude of FDI flows grew dramatically in the second half of the 1980s. increasing by 25 per cent pe.r year in the period 1986-90.' Foreign direct investment in services currently accounts for half or more of the total stock in many countries (see Table 6). Table 6 reveals that the bulk of FDI in services involves OECD countries." While the shift towards services cannot be attributed solely to regional integration efforts, the expansion of integration agreements to cover services may be one factor leading to increased direct investment in services. Between 1984 and 1989, about 65 per cent of the flow of direct investment into the EC was services- related (EUROSTAT, 1992).wo The FDI data suggest that outward-oriented service industries that rely on establishment to contest markets will continue to support multilateral liberalization. The magnitude of intra-OECD FDI in services also suggests that many new opportunities may lie in third countries. Moreover, import-competing firms may already have been confronted with substantially more external competition as a result of membership within a regional trade agreement. If so, the marginal cost of offering access to additional countries in the multilateral context may be perceived as being relatively low by service industries, especially if the quid pro quo is greater access to new and dynamic foreign markets. An important effect of the regional liberalization of service markets is to enhance the competitiveness of firms - whether producers of goods or services - located within the region. The costs of intra-regional exchange are reduced as service providers are induced to specialize and differentiate their 87/ The fact that FDI has been growing substantially faster than trade in services might have to be qualified to some extent as it is weUl known that trade in services statistics are biased downward (GATT, 1989). However, in the last five years a number of OECD countries have greatly improved their data collection efforts. If anything, the recent growth rates for trade in services are likely to be biased upward. 88/ In the mid 1980s, 84 per cent of the stock of foreign direct investment in services was located in OECD countries, compared with 75 per cent of all foreign direct investment (UNCTC, 1991). 89/ The growth of service-relaed direct investment flows to the Community has been substantial. Although EC-wide data are not avilable, the share of services in the inward stock of seven European countries increased from about 25 per cent in he early to mid 1970s to almost 40 per cent in the mid 1980s. The countries involved are France, Germany, the Netherlands, Italy, the United Kingdom, Spain and Belgium. Calculated from UNCTC (1989), Table 1.4. 69 Table 6 Stocks of FDI by Source Country and Host Region, various years (percentage of total and US $ billion) Country Period Developed Countries Developing Countries Total (US Sbn) Primary Mranufact. Services Primary Nanufact. Services Canada 1975 16.1 46.2 14.3 4.9 4.2 14.1 10.7 1989 11.0 42.4 32.5 2.6 2.5 9.4 66.9 Germany, 1975 1.5 35.3 37.1 2.6 13.0 4.7 20.0 Fed. Rep. 1990 1.2 33.6 49.7 1.1 9.6 4.8 143.4 Japan 1975 10.9 8.8 26.5 17.2 23.6 13.0 16.0 1990 2.5 17.7 485 3.5 8.5 19.3 310.8 Nether- 1973 40.4 33.7 9.5 7.1 5.5 3.7 15.8 tlrnds 1990 28.9 19.7 39.9 3.5 4.3 3.7 100.0 LUnited 1974 7.0 49.3 22.4 4.3 11.5 8.0 23.6 Kirgdm 1984 27.5 27.3 26.9 5.9 4.5 8.0 101.1 lUnt tteeds 1975 19.9 36.6 14.4 3.8 84 7.0 124.2 1990 7.5 24.5 24.7 4.3 6.4 10.9 550.5 Source: UNCTAD and World Bank (1994). products. The associated cost reductions and income gains increases the attractiveness of the region as a market, and creates pressures on other regulatory jurisdictions to follow suit as finns located outside the region perceive themselves to be placed at a competitive disadvantage. Both demonstration and domino effects may therefore be set into motion, the former consisting of emulation, the latter stemming from the implicit incentive that is created for non-member countries to seek accession to a regional arrangement.' An important question arising in the context of regional integration is whether industries located within the region (continue to) have an incentive to source intermediate inputs globally and to resist attempts to increase barriers against trade with the rest of the world. If the economic impact of effective liberalization of service markets is to enhance the efficiency of firms located inside the region, the incentive to seek to close the regional market should decline. 90/ See Baldwin (1993) for a discussion of this issue. 70 The main issue then from a policy perspective is what the economic impact of regional liberalization of service markets will be, which in turn depends importantly on the extent of such liberalization. A key question in this connection is whether the conditions imposed by Article V of the GATS (i.e., the substance of the disciplines regarding the formation of regional integration agreements) are adequate to ensure that regional liberalization will be far-reaching, and thus help to safeguard the interests on non-members. The answer to this is arguably no. The relatively weak requirements regarding the extent of internal liberalization that must occur under Article V imply only a limited constraint on 'strategic violations of the MFN obligation and the specific conunitments on market access and national treatment made under the GATS. It appears that virtually any type of agreement, even one with only limited sectoral coverage and no more than a standstill commitment, could satisfy the conditions imposed by the GATS. Very much therefore depends on the intentions and objectives of the countries that negotiate integration agreements for service sectors, and little should be expected as far as the exercise of multilateral disciplines is concerned. In addition to the weakness of the disciplines imposed by the GATS in this regard, the absence of any requirement in Article V that integration agreements be *open' in principle (i.e., contain an accession clause) is an important shortcoming. Given the difficulty of determining simple, quantifiable criteria with which to ensure that integration agreements liberalizing both trade and factor flows are not detrimental to non-members, adoption of a requirement of such an accession clause would have helped ensure that the systemic effects of regional economic integration attempts are positive.' Another potential source of concern relates to the approach taken in the GATS towards sectoral coverage and the scheduling of specific commitments. The decision to schedule commitments by modes of supply gives governments substantial leeway to shape the conditions of foreign competition in domestic service markets, reduces tansparency and is likely to increase substantially the burden that the GATS will impose on the integrated dispute settlement procedures under the WTO. There is some danger that the architectural shortcomings of the GATS approach will increase the incentive to pursue regional liberalization of access to service markets. Hopefully the decisions not to make national treatment a general obligation and to link specific commitments to modes of supply will not come to constitute bottlenecks to more far-reaching multilateral liberalization of access to service markets in the future. For the time being, however, the latter remains an open quutsion. 21I See, e.g., Bhagwati (1990) and Snipe, Adams and MorgBn (1993). 71 XI. Conduding Remarks While there are certainly major differences between regional agreements and between these agreements and the GATS, these are essentially 'architectural' in nature. The broad similarity of the specific rules and disciplines found in the various agreements suggests that regional agreements are generally quite complementary to the multilateral process. An important consideration in this regard is that regional agreements have proven useful laboratories in which to exper;ment with ever more sophisticated services, investment and procurement rules and disciplines. Agreement to negotiate the GATS was heavily influenced by the EC-92 programme and the NAFTA. The progress that was made in the multilateral discussions was in part driven by the existence of regional liberalization agreements and/or negotiations. Not only did the threat of trade and investment diversion increase the incentives to engage in multilateral negotiations, but the regional developments constituted a source of information and know-how for both participants and outsiders. Complementarity is further evidenced by the observed tendency for both liberalized and excluded sectors to be broadly similar in the various agreements. Liberalization of cross-border services and associated investment is generally progressive under all of the agreements. The incremental nature of liberalization in both the regional and multilateral contexts also supports the conclusion that both negotiating settings may be viewed as exhibiting complementarities. Aside from the possible exception of the EC which continues itself to encounter resistance to liberalization in a number G' sectors (basic telecommunications, air transportation, investment services). significant market access limitations (both discriminatory and non-discriminatory) will remain in place for the foreseeable future under all trade agreements. The consideration of services in the trade policy context has revealed that standard political economy arguments apply as much to services as to goods. and are helpful in understanding why a regional approach to liberalization of service markets has been pursued. There is a need for reciprocal liberalization in order to satisfy political constraints: export interests must balance those groups that oppose the liberalization of domestic markets. In principle, such reciprocity can be sought in either a bilateral/regional or in a multilateral context. But the nonstorability and intangibility of services create strong incentives to go regional'. Because services tend to be nonstorable, service transactions often require that the provider and demander/consumer of the service interact. Thus, foreign service providers that desire to oontest a market must be able to establish a physical presence in that market - be it temporarily or on a longer-term basis (i.e., engage in foreign direct investrnent). Not only will a physical presence often be necessary, but such establishment will be subject to regulatory regimes insofar as governments attempt to offset the quality uncertainty that is associated with the intangible nature of many services. Industries and final consumers that seek access to cheaper and/or higher quality services - be 72 they of domestic or foreign origin - therefore must often lobby for changes in regulatory structures. Indeed, even if cross-border trade in services is technically feasible, regulatory authorities may have objections to allowing such trade to take place. as it is inherently more difficult for them to exercise control over industries that are located in foreign jurisdictions. Thus, regulators may prefer that establishment be required as a mnode of supply, as this ensure-s that they will maintain their control of the activity involved. But, this market access will not imply effective liberalization if prudential or quality standards differ significantly across countries. For liberalization to be effective, some harmonization of- - or progressive convergence in - regulatory regimes and agreement to recognize the standards and regulations of partner countries may well he needed. To the extent this is feasible at all, it will be more easily achieved in a bilateral or regional setting. Before the recent revival in interest in regionalism much attention was devoted in the international business literature to the 'globalization' of the world economy. At first glance regionalization appears to be inconsistent with globalization. Indeed, an alternative way of posing the building-stumbling block question is to ask whether regionalism is consistent with globalization. Globalization is largely a services- driven phenomenon, as it is technological change in the service sector - in transport, telecommunicationv or management - that has allowed the 'spliiitering' of the production processes to numerous activities carried out in geographically dispersed (though 'connected') locations. Contrary to what often was predicted in the early 1980s, technological advances have not, however, eliminated the importance of economic geography. Even in a world without barriers to trade and factor flows, regional concentration of economic activity would still occur. For example, satisfying the demand for (and supply of) differentiated services related to distribution or after-sales service implies the need for a local presence. Technological developments have made it possible to use services to link and control the various stages of a geographically diversified production process.92 As a result firms are able to reap economies of scale and scope and increase productive efficiency, while consumers obtain access to a greater variety of differentiated products at lower cost. The trade in services between countries that results from the globalization process is a mix of intra-firm and inter-firm (arms-length) transactions. Such trade largely consists of intermediate inputs, as this is a corollary of greater specialization. Such intermediates may be either goods or services, examples of the latter being finance. data processing, management or similar types of information-intensive products. Many of these services will be exchanged within multinational enterprises, as their foreign direct investment. joint venture or alliance strategies require a substantial flow of information and 'management services'. An important consideration in this connection is that such services are either not subject to regulatory restrictions (alternatively to minimally constraining or least 22/ See Jones and Kierzkowsci (1990) for a conceptual discussion of how technological changes allows mavice. to be used to link an ever increasing number of production activities (or blocks in their terminology). 73 trade-restrictive regulations) or that applicable regulations do not constrain their in-house provisionlexchange. There are limits to the extent of specialization and geographic diversification of economic activities that will emerge from the globalization process. These are determined by economic and as well as regulatory factors. The main constraint relates to the service links that connect discrete production activities. At some point it will become too costly to source globally because of search and monitoring costs, uncertainty, or the existence of agglomeration externalities. The latter in particular create offsetting incentives to centralize economic activities. To a significant extent such activities will be distribution rather than production-related. It is generally recognized that such activities often must be tailored to the needs of the customer and thus require a local approach. The resulting limitations on the extent to which such services can be sourced globally reflect economic considerations. Insofar as the consequence is regional concentration of distribution and related activities (after-sale support, maintenance, etc.) this cannot be considered to be detrimental to an open trading system or to hinder the globalization process, as long as foreign direct investment is allowed. As mentioned earlier, much of the trade in services that supports the globalization process is intra- fim. Although the globalization process depends crucially on the existence of efficient transport services (both physical and telecommunications), regulatory differences across jurisdictions generally prevent the provision by non-residents of regulated services. Regulatory regimes may then effectively restrict access to service markets, be it on a dejure or a defaao basis, even though specific measures will usually be applied on a nondiscriminatory basis. Although the general policy stance of industrialized countries and many developing countries vis-a-vis foreign direct investment is relatively accommodating, in the services area such market access is often not enough. Differences with respect to the regulation of service industries will often effectively prohibit foreign providers from contesting markets. This is likely to be case in particular for services related to the distribution of products, services that satisfy final demand (e.g., retail distribution), and/or services that are subject to prudential supervision and 'miniunum quality' standards (e.g., retail financial services, or medical and education services). Addressing such 'regulatory barriers' is easier in a bilateral or regional context than in a multilateral one where there may simply be too many players, many of which have little or no stake in tie game being played. What matters then is that regional agreements be open to third parties. Although the existing agreemrents reviewed in this paper are likely to be complementary to the multilateral process, the weak disciplines imposed on regional integration in the GATS and the approach taken in the GATS with respect to scheduling specific commitments are offsetting sources of concern. It appears that virually any type of agreement, even one with only limited sectoral coverage and no more than a standstill commitment, could satisfy the conditions imposed by the GATS. Very much therefore 74 depends on the intentions and objectives of the countries that negotiate integration agreements for service sectors. Little can be expected as far as the exercise of multilateral disciplines is concerned. 'Me distinction made in the GATS between general commitments (e.g., MFN) and specific commitments (market access, national treatment), and the decision to schedule specific conunitments on A sector-by- sector and mode of supply basis provides governments with significant opportunities to 'fine tune' the market access conditions that apply to foreign service suppliers. For example, it allows governments to grant market access/national treatment for a sector, but to require that establishment be used as the mode of supply by not scheduling cross-border trade. There is some danger that the architectural shortcomings of the GATS approach to scheduling specific commitments may prove to be an obstacle to substantial multilateral liberalization of access to service markets in future negotiations, and thus constitute an indirect incentive to pursue regional options. 75 ANNEX I Policy Instruments Arfecting Market Access for Services' I. Quantitative restrictions and similar nonprice-based measures 1. Import guotas - Restrictions on quantity and/or value of imports of specific products for a given time period or limitations on the number of foreign service providers allowed access to a market; may be in absolute terms or relative to domestic output (i.e., market share); administered globally, selectively or bilaterally. May be unallocated, i.e. administered on a first come first served basis, or allocated to specific suppliers. If allocated, this may be free of charge or may be auctioned. Quotas may or may not be tradable (transferable). 2. Export limitations - Same as above but with reference to exports. 3. Voluntary export restraints - Restrictions imposed by an importing country but administered by the exporting country or countries; requires system of licensing; essentially similar to an orderly marketing arrangement, the main difference being that the latter is concluded at the government level, the former at the industry level. 4. Prohibitions - May be selective in respect of commodities/activities and countries of origin/destination; includes embargoes on exports and imports; may carry legal sanctions. An example in the service context a z restrictions on transborder data flows. 5. Domestic content and purchase requirements - Requires that an industry use a certain proportion of domestically produced components and/or materials in producing its products. Local content requirements may be 100% for specific inputs (e.g. existing telecormnunication networks are be used; ban on establishment of new (private) infrastructure). Includes residency requirements for specific service providers and requirements relating to the use of marketing media (e.g., prohibitions on the use of specific media to advertize certain services. 6. Discriminatory trade agreements - Preferential trading arrangements that may be selective by commodity and country; includes free trade areas and preferential sourcing arrangements. Requires rules of origin. 7. Offsets and counterpurchase requirements - Arrangernents whereby imports or market access is conditional on agreements to counterpurchase a given value or quantity of goods and services (including offset requirements). 8. Exchange and other financial controls - Restrictions on receipts and/or payments of foreign exchange designed to control international trade and/or cross-border movements of suppliers of suppliers 1/ Most of the policy istruments in the first threc major categories may pertain to a specific mode of supply or to all thiee modes. Virtualy aUl of the instuments idenified may be used to influence the production of, and tmde in, tangible products (goods) as well. This list draws in part on Deardorff and Stern (1985). 76 and/or consumers; will generally require some system of licensing; may involve multiple exchange rates for different k;nds of transactions. 9. Matching requirements - Market access is only allowed to the extent that domestic firms offer the same or similar goods or services. 10. Restrictions on the scope of business - Foreign firms only allowed to compete in specific lines of business, or prohibited from offering specific ancillary or complementary services. 11. Transfer of technology requirements - Imports (market access) conditional on associated transfer of technology. In the service context this may be met through training or joint R&D programmes. May also involve a requirement that imports pass through locally-owned firms (e.g., joint ventures) that deal with distribution and marketing. Domestic purchase, performance and content schemes (see above) are often driven by transfer of technology considerations. UI. Charges, taxes and related price-based policies 1. Tariffs and Iax Tariffs are taxes imposed on imports or exports when entering or leaving the country at the frontier. They may be specific (per unit of quantity) or ad valorem (percentage of the value). Instead of being collected at the border, taxes on foreign products or service suppliers may also be imposed at the point of production or consumption. 2. Variable levies - Based on a target domestic price of imports, a levy is imposed so that the price of imports reaches the target price whatever the cost of imports. Equivalent to the imposition of a minimum price requirement for products sold on the domestic market. 3. Advance deposit reauirements - Some proportion of the value of imports must be deposited in advance of the payment, with no allowance for any interest accrued on the deposit. 4. Antidumping duties - Imposition of a special import duty when the price of imports is alleged to lie below what is charged by the producer on its home market or below some measure of its costs of production; minimum prices may be established to "trigger" antidumping investigations and actions. GAIT rules require that dumped imports be shown to injure domestic producers of the like product. 5. Countervailin! duties - Imposition of a special import duty to counteract an alleged foreign Government subsidy to output or exports. GATT rules require that the foreign subsidy be shown to injure domestic producers of the like product. 6. Price undertakines and price surveillance - Commitment by exporters, accepted by the authorities of the importing country, to increase export prices in instances where dumping or subsidization has been deemed to occur. Undertakings usually are substitutes for antidumping or countervailing duties. Equivalent to minimum prices. 7. Border tax adiustments and duty drawbacks - Border tax adjustments arise when indirect (e.g. sales or value added) taxes are levied on the destination principle, imports will be subject to such taxes but exports will be exempt; the effects on trade will be neutral except in cases in which the adjustments more than compensate for the taxes imposed or exempted, or when the size of the tax differs across 77 commodities. Duty drawbacks consist of exemptions or repayments of tariffs on imported inputs to the extent that these are embodied in products that are exported. 8. TaIiffguotas - A system under which a low tariff is imposed on imports up to a certain limit (which may be in a quantity or value terms); once this limit has been reached a higher tariff is imposed on additional imports. 9. Erice ceilings and minimum prices - Imposition of upper or lower limits on prices for certain imported goods or services. 10. Subsidies - Government actions designed to aid particular firms, industry sectors, and regions to adjust to changes in market conditions or to achieve social (non-economic) objectives. Government financed R&D and related technology policies: actions designed to offset externalities (correct market distortions) and aid private firms; includes technological spillovers from Government programmes, such as defence and public health. Direct and indirect subsidies to exports and import-ompeting industries, including tax benefits and concessionary credit. m. Administrative practices, technical standards and regulatory regimes 1. Customs valuation, classification and clearance Drocedures - Use of specially constructed measures of price rather than the invoice or transactions price for the purpose of levying tariffs. Use of national methods of customs classification rather than an internationally harmonized method for the purpose of levying tariffs and taxes, enforcement of quotas, rules of origin and standards. Clearance procedures relate to documentation requiremnents, inspection procedures and related practices which may impede trade. Includes pre-shipment inspection policies whereby products are inspected at the point of origin rather than at the point of importation. 2. Licensing, rules of origin, and import surveillance - Some system of licensing is required to administer quantitative restrictions on imports or exports. May be subject to specific conditions (e.g. export performance requirements). Licensing may also be automatic, in which case it may be used for statistical purposes. However, automatic licensing may be used to monitor import penetration trends for individual products. Such import surveillance is often implemnented where there is a likelihood of imposition of "emnergency" protection (safeguard action) to prevent "market disruption' due to -excessive" imports.. Rules to determine the origin of products will also be required if quotas differ across sources of supply (i.e., are not global), and more generally whenever policies discriminate across foreign sources of supply. 3. Standards. professional licensing systems.. etc. - Actions designed to achieve domestic objectives, including the maintenance of public and animal health, safety, protection of the environment, and minimum quality standards. Standards may discriminate against imports (i.e., be more restrictive and/or more costly to satisfy). Even if applied on a nondiscriminatory basis standards may impede trade if they differ across countries. Distortions may also arise if pioduction for export is exempted from domestic standards. 4. Aplication of domestic standards to production for export - E.g., policies designed to prohibit or restrict bribes and related practices in connection with foreign trade and investment. 78 5. Standards of coLmpeitio - Antitrust and related policies designed to foster or restrict competition and which may have an impact on foreign trade. 6. CoDyrights trademarks. brandnames and franchises - Instruments to determine property rights to intangible assets. Differences across countries in the recognition arnd enforcement of such rights may distort trade and may effectively restrict imports or exports. Relatively unimportant for most services, with exception of software and entertainment/broadcasting, where copyright piracy is an issue. IV. Other Government policies affecting market access, production and trade 1. Immigration policies - General or selective policies L signed to limit or encourage international movement of labor and which have an impact on foreign traL . May differ according to skill levels, duration of stay, or domestic labor market conditions (i.e., means test requirements). 2. Government procurement - Preferences given to domestic over foreign firms in bidding on public-procurernent contracts, including prohibitions of foreign sourcing, explicit criteria for foreign sourcing to be permitted (e.g., minimum cost differenti d informal procedures favoring procurement from domestic firms. 3. State tra; Tuonopolies and exclusive franchises - Government actions which may result in tradedistortions, inca. Govermnent-sanctioned, discriminatory international transport agreements and discriminatory access telecommunication networks. Also includes discriminatory cost-sharing rules for jointly owned or operated distribution systems. 79 ANNEX 2 GATS Article V: Economic Integration 1. MThis Agreement shall not prevent any of its Members from being a party to or entering into an agreement liberalizing trade in services between or amnong the parties to such an agreement, provi.led that such an agreement: (a) has substantial sectoral coverage'. and (b) provides for the absence or elimination of substantially all discrimination, in the sense of Article XVII, between or among the parties, in the sectors covered under sub- paragraph (a), through: (i) elimination of existing discriminatory measures, and/or (ii) prohibition of new or more discriminatory measures, either at the entry into force of that agreement or on the basis of a reasonable time-frame, except for measures permitted under Articles Xi, XI], XIV and XIV bis. 2. In evaluating whether the conditions under paragraph o(b) are met, consideration may be iven to the relationship of the agreement to a wider process of economic integration or trade liberalization among the countries concerned. 3. (a) Where developing countries are parties to an agreement of the type referred to in paragraph 1, flexibility shall be provided for regarding the conditions set out in paragraph 1, in particular sub-paragraph (b), in accordance with the level of development of the countries concerned, both overall and in individual sectors and sub-sectors. (b) Notwithstanding paragraph 6 below, in the case of an agreement of the type referred to in paragraph I involving only developing countries, more favorable treatment may be granted to juridical persons owned or controlled by natural persons of the parties to such an agreement. 4. Any agreement referred to in paragraph I shall be designed to facilitate trade between the parties to the agreement and shall not in respect of any Member outside the agreement raise the overall level of barriers to trade in services within the respective sectors or sub-sectors compared to the level applicable prior to such an agreement. 5. If, in the conclusion, enlargement or any significant modification of any agreement under paragraph 1, a Member intends to withdraw or modify a specific commitment inconsistently with the terms and conditions set out in its schedule, it shall provide at least 90 days advance notice 1rThis condition is amderstood in terms of number of sectors, volume of trade affected and modes of supply. In order to meet this condition, agreements should not provide for the a priori exclusion of any mode of supply. 80 of such modification or withdrawal and the procedure set forth in paragraphs 2-4 of Article XXI shall apply. 6. A service supplier of any other Member that is a juridical person constituted under the laws of a party to an agreement referred to in paragraph I shall be entitled to treatnent granted under such agreement, provided that it engages in substantive business operations in the territory of the parties to such agreement. 7. (a) Members which are parties to any agreement referred to in paragraph I shall promptly notify any such agreement and any enlargement or any significant modification thereto the Council for Trade in Services. They shall also make available to the Council such relevant information as may be requested by it. The Council may establish a working party to examine such an agreement or enlargement or modification thereto and to report to the Council on its consistency with this Article. (b) Members which are parties to any agreement referred to in paragraph I which is implemented on the basis of a time-frame shall report periodically to the Council for Trade in Servicec on its implementation. The Council may establish a working party to examine such reports if it deems it necessary. (c) Based on the reports of the working parties referred to in paragraphs (a) and (b), the Council may make recommendations to the parties as it deems appropriate. 8. A Member which is a party to any agreement referred to in paragraph I may not seek compensation for trade benefits that may accrue to any other Member from such agreement. Article V bis Labor Markets Integration Agreenents T-his Agreement shall not prevent any of its Members from being a party to an agreement establishing full integration2 of the labor markets between or among the parties to such an agreement, provided that such an agreement: (a) exempts citizens of parties to the agreement from requirements concerning residency and work permits; (b) is notified to the Council for Trade in Services. lRypicaIly, such integration provides citizen of the parties concerned with a right of fiee entry to the employment markets of the parties and includes measures concerning conditions of pay, other conditions of employmt and social benefits. 81 References Ahdar, R. 1991. 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"Trading Blocs and the Trading System: The Services Dimension," JournaI of Economic Integration, forthcoming. Revision of Center for Economic Policy Research Discussion Paper No. 749, London. Hoekman, Bernard. 1993. "Developing Countries and the Uruguay Round: Negotiations on Services.' PRE Discussion Paper No. 1220. The World Bank: Washington D.C. Hoekman, Bernard. 1994. "Conceptual and Political Economy Issues in Liberalizing International Transactions in Services," in Alan Deardorff and Robert Stern (eds.), Analytical and Negotiating Issues in the Global Trading System. Ann Arbor: University of Michigan Press. Hoekman, Bernard and Guy Karsenty. 1992. 'Economic Development and International Transactions in Services,' Developmnent Policy Review, (Overseas Development Institute, London), 10, 211-36. Hoekman, Bernard and Guy Karsenty. 1994. "Employment and Production Based Proxies for Trade Specialization in Services," The Service Iri tries Journal, 13(3). Hoekman, Bernard and Michael Leidy. 1993. "Holes and Loopholes in Alternative Trade Agreements: History and Prospects," in Kym Anderson and Richards Blackhurst (eds.), Regional Integration and the Global Trading System. London: Harvester-Wheatsheaf. Hoekman, Bernard and Pierre Sauv6. 1991. Integration and Interdependence: Information Technology and the Transfornation of Financial Markets. Montreal: ATWATER Institute. Hoekman, Bernard and Robert Stern. 1991. "Evolving Patterns of Trade and Investment in Services," in Peter Hooper and J. David Richardson (eds.), International Economic Transactions: Issues in Measurement and Empirical Research. Chicago: University of Chicago Press. Hufbauer, Gary and J. Schott. 1993. NAFTA: An Assessment. Washington, D.C.: Institute for International Economics. 83 Jones, Ronald and Henryk Kierkowski. 1990. 'The Role of Services in Production and International Trade: A Theoretical Framework," in Ronald Jones and Anne Krueger (eds.) 7he Political Economy of International Thade. Oxford: Basil Blackwell. Lloyd, Peter. 1991. 7he Future of CER: A Single Market for Australia and New Zealand, Committee for Economic Development of Australia Monograph No. 96, Wellington, Victoria University Press. Mengozzi, Paolo. 1993. 'Trade in Services and Conunercial Policy," in Marc Maresceau (ed.), The European Community's Commercial Policy After 1992: The Legal Dimension. Dordrecht: Martinus Nijhoff. Messerlin, Patrick. 1990. "The European Community," in Messerlin, P. and S-iuvant, K. (eds.). 7he Uruguay Round: Services in the World Economy. Washington D.C.: The World Bank. Patterson, G. 1966. Discrimination in International 7Tade: The Policy Issues, 1945-1965. Princeton: Princeton University Press. Pelkmans, J. 1990. 'Europe 1992: Internal and External," in Laursen, F. (ed.), EFTA and the EC: Implications of 1992, European Institute of Public Administration, Maastricht. Primo Braga, Carlos. 1992. "NAFTA and the Rest of the World," in N. Lustig, B. Bosworth and R. Lawrence (eds.), North American Free Trade: Assessing the hnpact. Washington D.C.: Brookings Institution. Roessler, Frieder. 1993. "The Relationship Between Regional Integration Agreements and the Multilateral Trade Order," in Anderson, K. and Blackhurst, R. (eds.), Regional Integration and the Global Trading System. London: Harvester-Wheatsheaf. Roth, W.-H. 1988. "The European Economic Community's Law on Services: Harmonization," Common Market Law Reiew, 25:35-94. Sauve, P. and Gonzalez-Hermosillo, B. 1993. "Implications of the NAFTA for Canadian Financial Institutions', The NAFTA Papers: C.D. Howe Commenrtary, C.D. Howe Institute, No. 44, Toronto, April. Schott, Jeffrey (ed.). 1989. Free Trade Areas and U.S. Trade Policy. Washington D.C: Institute for International Economics. Schott, Jeffrey and Murray Smith. 1988. "Services and Investment," in Schott, J. and Smith, M. (eds.), The Canada-United States Free Trade Agreement: 7he Global Impact. Washington D.C.: Institute for International Economics. Snape, Richard. 1993. "History and Economics of GATT's Article XXIV," in Kym Anderson and Richard Blackhurst (eds.), Regional Integration and the Global Trading System. London: Harvester- Wheatsheaf. 84 Snape. Richard. Jan Adanms and David Morgan. 1993. Regional hading ArranVements: Imnpllcations and Optionsfor Australia. Canberra: Australian Government Publishing Service. Thomas, D. J. 1976. 'The GATT and the NAFTA Agreement," Journal of Common Market Studies, 15:29-41. Thomson, G. 1989. 'A Single Market for Goods and Services in the Antipodes," 7he World Econory, 12:207-18. United Nations Center for Transnational Corporations. 1989. Foreign Direct Investment and Transnaxional Corporations in Sen-ices. New York: United Nations. United Nations Center for Transnational Corporations. 1991. World Investment Report, 1991. New York: United Nations. United Nations 1992. World Inw'stment Report. 1992. New York: United Nations. UNCTAD and World Bank. 1994. Liberalizing international Transactions in Services: A Handbook. Geneva: UNCTAD (forthcoming). Viner. Jacob. 1950. whe Customs Union Issue. New York: Carnegie Endowment for International Peace. Westlake, M. 1990. "Towards a New Financial Order." Euromoney. November, 74-78. Whalley, John. 1991. Services and tne U.S.-Canada Relationship Beyond tie FTA, University of Western Ontario, mimeo, February. 85 Distibutors of World Bank Publicaions ARGENTINA ma Middle get Otbver ITALY PORTUCAL CadlaHIIL GSRL 41. 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Tabran ~~~AyalaAvenue, HMV dels DWMINCA.CREADA.GUWAMA DENMAIUC T - U E C: oo JAMCA.C MONTEAT, Sr. Samfunrl-utteratur IREIAND MAakatMeoManla KITrS & NEVIS. ST. LUCA. Rasnoems Ail nSuppm ST.VINCENT&GRENADINU DICCVOmFedwrubapC lcAeRncd PLAND pysy oStka lt OOMINICAN REPUBIUC DubUn2 J PPz3li/37 n9ie WaS Edit Talk. C pr A. SAEL 0D477 W ww Tnldad. Wet ladle RotmuraCos Iel Ia 1 01 C 309 Yamnat U tlsa Ed. Apndo deaCor 2190 ZL_ O.O BOxSIM For suhtrjWa and: UNITED KINGDOM Salo DarnITn Tel Aviv 6160 D[sJu lrunals !iloionia L UL.Okzvm&3 ROL aox 3 ECYPT ARAR REPUBUC OF 02-916 Warswa Alti .HampehinCl04 2P0 Al AC am Engand Al Calm Snert Cairo Recent World Bank Discussion Papers (.aitatinrdJ) No) 215 (Caiaa kRl. r/ona i ail) Delolnlaaeatia I 9902-9 l'allrT I IAlTt.lul mAnd Rlav I All No. 210 liar Rijar oaj uuacil I XPeriad tiaran' .'kra aal:aaac limu a v Blara aim. ()alin Kauadw-mii. alad 1111 im NasIi No} 217 AlaraqViaaa Iisdier' Rroa,r.i - III' i yJ lu"iana Cv :i-Slituaiired by lh I l Hank uakad lP'rraaaa. .1amtar)'lo iaJwhrm%n lid n Limana m,err. lIame 199 2 1tlujrdi A - I tv 7.1 No. 218 Coapernaarativ d aJar flrr.a1' of ItB 1lr 11 1 aa a ar1 Iaorra 1 l i laa.ai Klaus W. No. 21') IDevlopmertnt of-Rarcal Fariaiaa,aal MI,arkarr irs Saal-Sahaara,a .lmtaaa Salapatdiv TIhiiIar;aj. No. 221\ liar Alarifameilra'oat'pa'r Crm I ams 1t lcrn No 221 lolaqmh-lisrmd I'ma.re liar lixprnrraall I'miriar.q'aul. Tht a1.panew l )vttlloIpanit llatik iaaidl Ti'japan L:conimac teswarch I stitlate No 222 A lacoreconnu Aara'lensrnl arfaf In :aaa P'roarrdaap 4i.i IIrIj1X.a.ra) Iliaa . . mIt 199 4. I :dA IstcLI I IV l'ic r I I arrIld*. E- (U iw'a;. and 1Ltjivavwe Noi 223 'l7w IaIr Dealpnra .n1 uae r .%fh etr s1a .%,eal) l:o'orn}m all lramfior I a1 (.rf .II'uag'laa I Iiig I lanLi No. 224 'i;jurd at l.ina'rom,rnetlaI .Srartey br .jy a1. Carter liranidoiF and I(amcali Ramauanktattv No. 225 "lvrtr'ess laarope" and (Oh/ar eIytda alkna 7lrdl 1 Policies grinaurd Mlrdrandzr lanptlrhr ir rir l:C and (rler .A-la yor I,ada.stuial I&oaosn aem, (aaad Ilaat I Ale ran Im l)emealopangy Goaname). Jean lianctl No. 22( .Alonigolia: J:inariaci,q lidacarior danaV l:-aonolinir Tran,sairaa. Kin BUIg Wla No. 227 Ciaies itlihoit latd! Markers: Ix emas l'ste l:aded ,ci.alia lExperimnre. Alama Berrunad and Bertrand Iteniud No. 228 Portfolio Invaestiene in l)eellolamig (ouanaae. aditcd by Stjn (ilacsscns 2nd Sudarshan Gooptt No. 22k) An ,4sscssmnena of' V,laaerable Grovups an Men gol a: Stratrryies /.r S,oial Policy P'larnning. Caroline Hlarper No. 230 Raisinedtie Produacutivity of 'Imn E:aaners a Saib-Sahaaran .Afrca. Katrine Saito No. 231 Agrial:ia.ral Extension in Afrca. Aruna Hagehec No. 232 7elecommuraicarioais Sector ReJ.rmn in .4sia: Iiuward d Neat' Prararat.ma. Petcr L. Smiiithi and iGregory St,ple No. 233 Land ReJfonn and Earln Resmatartngt iaa Raussia. Karen Bnrooks and Zvi Leninani No. 234 Popidarion Grouan/, Slaifring ald:itaaioma, anid I Iasnitainabic Agrisamitral I)mraelopmeir: A Case Stidy in Aladaqas car. Andrew Keek. Narendra P. Sharna. aaid Gershol Fedcr No. 235 7lae I)esiyq and Admiraistra:iora of InterMo'ernmeneal Transfen: Iasctal D)ecentralization in I,atita Amnrica I)onald Rt. Winkicr No. 236 Paiblic and Pria-are Agricflta.ral lExaension: Beyond riadiional Frontiers. lina L. Umali and Lisa Schwartz No. 237 Indonesian Experiernce uirtl 1Pinaancial Sector Refonn. I)onald P. Hanina No. 238 PesticidE Policies its Developing Countries: Do 7ary lincoiarae lx-cessiae I (e?Junianah Farah No. 239 Inrerygovernmenat Fiscal Relations itn Ivadoriesia: Issues and Rer.onn Option.n Anwar Shah arid Zia Qureshi No. 240 Managing Redundancy in Oa'rexploired islherics. Joshua John No. 241 ltsritnional Clange atid t PAeblic Sentor in 7ransitional Ecoraoanies. Salvatore Sciiiavo-Campo No. 242 Africa Can Comnpetel: Export Opportnini:ies and Claalkcn.es for C.armcnts and I lome Prodatas in dhe U.S. M-arkhe. Tyler Biggs. Gail R. Moody.Jan-1-4cndnk van Lecuwen. and E. I)iane Whitc The World Bank Headquaners European Office TIokyo OrlieU 1IHlH II Strect, N W I.d Avrmuir ,if '1t1g,z K-,kus%j ial.lilm g WAlimgtton. 1)t) 2tl431. LJ S A 751 I f. I!l%. Ia,. i-i Mannnui3-h II u 1.11ir (himvudi-kLI. I ikVo lHIm. rJip 1rlelinl.iic (2412) 477-1234 I rIphIolis. (1) 411 t," M (tIl Fracmile: (2332) 477-639'I I-jclruilr (1)411't) 31161 1 rirpiiumiir (3) 3214-SINIIE Ielex: Wuite4145 WORE II1IANK 1lrx 6411t651 [.,lsinillr (3) 3214-35.57 ltisA 24M423 woRt Imm I -IrX 26HM1 Cable Addrcess INri11AItAID WA%SIINI;lfONIW ISBN 0-8213-2858-1