Serving Whose Interests?

The Political Economy of Trade in Services Agreements

Jane Kelsey

• Publisher: Routledge-Cavendish
• Year: 2008
• eBook ISBN: 9781134061211
• Edition: 1
• Topic: Diritto
• Subtopic: Teoria e pratica del diritto

Serving Whose Interests?explores the political economy of trade in services agreements from a critical legal perspective. The controversy surrounding the General Agreement on Trade in Services (GATS) and its variants at the regional and bilateral levels can, it is argued, be seen as a clash between two paradigms. For most of the twentiet

Chapter 1
Reading the GATS as ideology

Economic regulation in the twenty-first century involves a complex, overlapping and often incoherent web of state-sponsored market mechanisms and industry self-regulation. This regulatory network criss-crosses the multilateral, regional and national domains (Picciotto, 1996). Trade in services agreements form one small part of this rapidly expanding and rather chaotic regulatory geography. While the GATS 1994 provides the main reference point for legal analysis, its structure and content have been reorganised, refined and expanded in diverse and sometimes inconsistent ways through bilateral and regional agreements.

At one level, these treaties have to be treated as legal texts. At a deeper level, the GATS and the new generation of agreements need to be understood as hegemonic constructs: their role is to reshape economic and social relations in ways that reflect the contemporary requirements of transnational corporations. This chapter offers a critical and contextual reading of the legal texts. Case study 1 examines how the major powers have attempted to address the dysfunctions of the GATS on behalf of their corporations in the GATS 2000 negotiations, while Case study 2 locates the services component of the bilateral and regional agreements in their geopolitical context.

The GATS as legal text

The GATS 1994 began as a US proposal for a set of multilateral rules that would govern all services (Chapter 2). The text that finally emerged has multiple layers of horizontal disciplines, sector-specific rules, annexes and country schedules of sectoral commitments, which are complemented by ministerial decisions.

The schedules of commitments made by each member state under Part III form part of the legal text.

The rules and obligations of the GATS apply to ‘measures’ by a ‘Member’ ‘affecting’ ‘trade in services’. These four elements are defined in Articles I:2 and XVIII.

Chapter 1: Table 1

Measures encompass every activity that governments employ to regulate services: ‘a law, regulation, rule, procedure, decision, administrative action, or any other form’. This alone takes the GATS into the heartland of domestic governance and state sovereignty.

Members refers to all WTO member states, who are automatically signatories to the GATS. A state’s obligations extend beyond central government. It must ‘take such reasonable measures as may be available’ to ensure observance of its obligations and commitments by regional and local governments, and by non-governmental bodies exercising delegated powers. The GATS therefore binds national legislatures, sub-federal states and provinces, local authorities, and licensing or professional bodies. There is obvious potential for the state’s multilateral obligations to collide with sub-national powers. States or provinces in federal jurisdictions commonly exercise constitutional authority over specific services, such as education or gambling. Even in unitary states, local governments enjoy an increasing level of statutory authority through devolution. Self-regulatory bodies have always been a feature of professions and are increasingly common across services industries, such as construction or real estate, given the trend to light-handed regulation.

This tension is mitigated by the requirement on the state only to take ‘reasonable measures available’ to ensure compliance. Because ‘reasonable measures’ has not been defined, the provision has a potential chilling effect on subordinate regulatory bodies. The political and social ramifications of the sub-national application of GATS rules are illustrated in Case study 9, which discusses the challenge by Antigua and Barbuda (Antigua) to US state and federal laws on internet gambling, and in Case study 15 in relation to local government regulation of supermarkets.

The GATS net is thrown wider still by the reference in Article XVIII(c) to measures affecting trade in services. ‘Affecting’ explicitly includes government policies and regulations ‘in respect of’ the purchase, payments and use of a service. It also extends to measures ‘in respect of’ access to and use of services that are needed to supply a service that must be offered to the general public and ‘in respect of’ the presence of a foreign person or investment to supply a service. In the Bananas dispute brought by the US and other members against the EU (Chapter 8), the WTO’s Appellate Body concluded that ‘the use of the term “affecting” reflects the intent of the drafters to give a broad reach to the GATS’ and is equivalent to ‘have an effect on’ (EU-Bananas, 1997b, para 220).

Trade in services itself is defined in terms of the cross-border movement of factors of production – information, capital and labour. These activities are characterised in Article I:2 as four modes of supply. As the Introduction explained, this disembodied and disaggregated discourse divests the transaction of any human dimension. Relational discourses of services that reflect the experience of people and communities in providing and using services are displaced by a transactional description that reflects the production of services by foreign corporations or personnel. Services ‘exports’ are understood in terms of the nationality of the service provider and services ‘imports’ by reference to that of the consumer. This approach frees the supplier and consumer from having to be located in their country of origin when the transaction takes place.

The service itself is the subject of the first two modes:

• mode 1, the supply of the service across the territorial border (for example, by the internet); and
• mode 2, consumption of the service abroad (for example, by a tourist).
  The other two modes refer to the supplier:
• mode 3, establishing a commercial presence (foreign direct investment); and
• mode 4, the temporary presence of foreign personnel to deliver a service (e.g. a consultant).

The ‘trade’ rubric disguises more controversial ways of understanding these activities. The clearest example is mode 3. The GATS is, in part, a multilateral agreement to liberalise foreign direct investment in relation to services. The services pathway has become especially important since moves to secure a Multilateral Agreement on Investment (MAI) at the OECD were rebuffed in 1998, and demands from the EU for negotiations on ‘new issues’, including investment, in the WTO were rejected in 2003. Many bilateral and regional treaties have abandoned the pretence that mode 3 involves trade in services and integrated it into chapters on the establishment and protection of foreign investment. That approach confers broader rights on investors. For example, the North American Free Trade Agreement (NAFTA) and many subsequent US bilateral agreements allow foreign investors in services from one party to seek damages for ‘measures tantamount to expropriation’ directly from another state party through an arbitral tribunal.

Since the late 1990s both the global balance of services exports across these modes and the political dynamics of services negotiations have shifted dramatically. This shift reflects the growing importance of physical and ‘virtual’ migration (e-services) for countries that are the major sources, mainly in the South, and to destinations, mainly in the North. Most attention is focused on mode 4, which facilitates the cross-border movement of the labour factor in the production of services. While the GATS Annex on Movement of Natural Persons asserts that every member retains the right to regulate entry and temporary stay in its territory, such measures must not be applied in ways that nullify or impair the member’s scheduled commitments. Hence, mode 4 commitments can constrain immigration laws and policies (Chapter 6).

Legally, the four modes are unconnected. Organically, modes 3 and 4 are essential to transnational corporate expansion. Most Northern governments therefore seek commitments that link the two modes. Although the Annex and the definition of mode 4 cover all categories of services workers, Northern governments also routinely treat the GATS as conferring rights on intra-corporate transferees, professionals and other élite personnel, and reject equivalent rights for lower strata services workers. This limited coverage is often more explicit in bilateral agreements.

Conversely, the governments of many Southern countries are reluctant to make binding commitments under mode 3; but they see mode 4 as providing a way to secure temporary access to foreign labour markets for their semi- and unskilled service workers. Governments in countries such as India view mode 4 (especially movement of IT professionals) and mode 1 (which covers back office operations and call centres) as complementary sources of comparative advantage in the international services economy.

Further complexities over the modes arise when considering e-commerce transactions, which for legal purposes must take place in one jurisdiction. These can be viewed from the location of the purchaser as mode 1 (in which fewer commitments have been made) or the supplier as mode 2 (which has many more commitments). The US-Gambling case appears to have settled that question in favour of mode 1 (Case study 9) (Mattoo and Wunsch, 2004, p 11).

‘Trade in services’ is defined in terms of the supply of services through these four modes. Article XXVIII defines ‘supply’ as including the ‘production, distribution, marketing, sale and delivery’ of a service, a description that incorporates almost every step in the service supply chain (Chapter 8) and potentially overlaps with other discrete services sectors, such as distribution or advertising. Footnote 9 to Article XVI: Market Access says a commitment does not cover measures that limit ‘inputs’ for the supply of services. However, there is no clear boundary between inputs and the various elements of ‘supply’. Moreover, that caveat only applies to market access limits in Article XVI(c); some commentators argue that quantitative limits on inputs to services, such as water to hotels, could breach other market access categories (Ostrovsky et al., 2003, pp 33–4).

These expansively defined ‘measures of a Member affecting trade in services’ are subject to (largely) horizontal disciplines in Part II and sector specific commitments on market access, national treatment and other commitments in Part III.

General obligations and disciplines

The organising principles of the GATS are partly adapted from the GATT and partly experimental. The South/North divisions that pervaded the Uruguay round, as discussed in Chapter 2, are translated into the text through the principles of development and progressive liberalisation, respectively.

The Preamble acknowledges there is an imbalance between the global North and South in national and international services markets:

Desiring to facilitate the increasing participation of developing countries in trade in services and the expansion of their service exports including, inter alia, through the strengthening of their domestic services capacity and its efficiency and competitiveness; [and]

Taking particular account of the serious difficulty of the least developed countries in view of their special economic situation and their development, trade and financial needs;…

This recognition was hard won. Yet it is largely hortatory, because the references to development in the text are weak. Article IV: Increasing Participation of Developing Countries repeats the preambular commitment to enhance the capacity, effectiveness and competitiveness of services exports from developing and least developed countries. But instead of enforceable rights, it merely creates expectations on developed countries to schedule their commitments with beneficent intentions. There is no reference to ‘special and differential treatment’ for developing countries, only to facilitating their participation in the global services economy.

There is little room to interpret the text creatively. The Preamble describes the objective of establishing a framework of multilateral principles and rules as ‘the expansion of [trade in services] under conditions of transparency and progressive liberalization and as a means of promoting the economic growth of all trading partners and the development of developing countries’ (emphasis added). However, the potential to interpret ‘and’ disjunctively is neutralised by the subsequent objective of ‘early achievement of progressively higher levels of liberalization through successive rounds of multilateral negotiations aimed at promoting the interests of all participants on a mutually advantageous basis and at securing an overall balance of rights and obligations’. Part IV: Progressive Liberalization sets the mechanisms for securing this goal, effectively subsuming development within the process of progressive liberalisation. Although the development rhetoric lacks legal potency, it has nevertheless been important strategically as a basis for advocacy and passive resistance by Southern governments.

Progressive liberalisation emerges from the text as the overriding objective. It is to be advanced in two ways. The first, through future rounds of negotiations, is discussed below. The second is through regional (including bilateral) trade agreements that involve a WTO member (Case study 2). Under Article V: Economic Integration any Regional Trade Agreement (RTA) must deepen the existing levels of liberalisation of members by reducing or removing discrimination between the parties across a ‘substantial’ range of sectors, with no a priori exclusions. In other words, they must be ‘GATS-plus’ in content, and can be ‘GATS-minus’ by removing flexibilities that restrict liberalisation. Unlike the comparable provisions in Article XXIV of the GATT, developing countries are allowed some greater flexibility, particularly in the degree of liberalisation and the time frame for implementation. What that means remains to be tested and is hostage to the power politics of bilateral and regional negotiations. There is additional leeway for labour integration agreements under Article V bis because they are assumed to deal with entry to employment markets, whereas mode 4 of delivering trade in services purports to provide for temporary entry by natural persons into a country’s services markets (Chapter 6).

The GATS framework imports the primary GATT pillar of non-discrimination through Article II: Most Favoured Nation and Article XVII National Treatment. The MFN provision requires service providers and services from all WTO members to be given equally favourable treatment; national treatment requires foreign providers and services to be treated at least as favourably as their domestic equivalent. The concept of ‘non-discrimination’ is imbued with the virtuous human rights discourse of equality and equity. Contextualised, MFN and national treatment intrinsically benefit the transnational enterprises that enjoy the advantages of scale, technology, research and development capacity, access to capital, distribution networks, marketing and brand recognition, combined with the patronage of major powers. Articles II and XVII guarantee those corporations the right to compete on an equal footing with local services firms and less endowed competitors from poorer countries. The deep digital divide heightens their advantage, as very few Southern governments can genuinely compete in providing, or survive against, cheaper cross-border delivery of services (Case studies 9 and 11).

Non-discrimination appeals to negotiators as an organising principle when it applies to others, but is problematic for sensitive sectors at home. Annex II permits the service ‘importing’ country to lodge exemptions to MFN. There was only one opportunity to do so, in 1994. These exemptions were, in principle, to run for a maximum of 10 years to 2005; however, most remain. The adoption of a ‘positive list’ approach to schedules in the GATS allows members to limit their exposure to national treatment, as discussed below.

Disciplines on domestic regulation are often represented as the GATS equivalent of disciplines on non-tariff barriers to trade in goods. The Preamble recognises ‘the right of Members to regulate, and to introduce new regulations, on the supply of services within their territories in order to meet national policy objectives’. However, Article VI: Domestic Regulation restricts the right of governments to choose how they regulate. This reaches far beyond any traditional notion of ‘trade’ into a government’s core responsibilities. A member cannot limit the application of Article VI in its schedule of sectoral commitments.

Article VI relates to three forms of domestic regulation: qualification requirements (for example, nursing or teaching); licensing requirements (for example, to run taxis, casinos or rubbish tips, or to work as a surveyor or lawyer); and technical standards (for example, water purity or building codes). These regulations are required to be ‘based on objective and transparent criteria, such as competence and the ability to supply the service’ and to be ‘not more burdensome than necessary to ensure the quality of the service’. Strong resistance to this incursion on regulatory sovereignty meant the rules were initially restricted under Article VI:5 to services on which a government made a market access and/or national treatment commitment and where the measure in question could reasonably have been anticipated at the time that commitment was made.

A further general obligation in Article VIII: Monopolies and Exclusive Service Supplier requires members to ensure that these kinds of operations do not undermine their commitments through the cross-subsidisation of activities in competitive markets. The underlying aim is to promote the unbundling of monopolies and open the more profitable aspects of the operations to competition and foreign ownership. As one prominent financial sector lobby group observed: ‘Opening service markets to foreign providers is self-evidently inconsistent wit...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Preface
• Abbreviations
• Introduction: taking services to market
• 1 Reading the GATS as ideology
• 2 How the GATS was won (and lost?)
• 3 Trade-related development
• 4 The illusion of public services
• 5 Ruling the services infrastructure
• 6 Trade in people
• 7 Minds and markets
• 8 Dominion over the earth
• 9 Energy wars
• Conclusion: serving whose interests?
• Notes
• Bibliography