Services Negotiations in the WTO: An Overview of the U.S. Offer

Order Code RS21492

Updated September 2, 2003

CRS Report for Congress

Received through the CRS Web

Services Negotiations in the WTO:

An Overview of the U.S. Offer

James K. Jackson

Specialist in International Trade and Finance

Foreign Affairs, Defense, and Trade Division

Summary

On March 31, 2003, the Bush Administration unveiled a plan to liberalize global

trade in services as part of its commitment to meet the World Trade Organization’s

(WTO) deadline for submitting negotiating proposals for trade in services. Some 14

other countries and the European Union have also submitted their services offers; a

number of other countries are also expected to submit offers. The U.S. proposal

expands somewhat beyond its original offer, submitted July 1, 2002, and it attempts to

bind federal and state market openings that have been made unilaterally since the

General Agreement on Trade in Services (GATS) was signed in 1995. The U.S. offer

does not provide for negotiations on a number of sensitive issues: government

monopolies that provide public services; state and federal regulatory interests; U.S.

citizen and minority-specified programs; specified interest of U.S. educational

institutions; and the privatization or deregulation of water distribution. The August 24,

2003 draft Cancun Ministerial text prepared by General Council Chairman Carlos Perez

del Castillo urges members to intensify their efforts to develop a proposal, but services

negotiations are tied to progress in the divisive agricultural negotiations, which have

made little progress to date. This report will be updated as warranted by events.

Background

Services issues are an important part of the World Trade Organization’s alreadyestablished work program. Services negotiations are mandated by the General Agreement

on Trade in Services (GATS), which required that further negotiations on services begin

in 2000. According to Article XIX of the GATS, the negotiations must aim at reducing

or eliminating the adverse effects on services trade of restrictive measures initiated for the

purpose of providing effective market access. This objective was reaffirmed in the Doha

Ministerial Declaration1, which supports continuing negotiations aimed at further

liberalizing trade in services. The Doha Declaration folded services into a broader

1

Ministerial Declaration. World Trade Organization, November, 2001. A copy can be found at:

[http://www-chil.wto-ministerial.org/english/thewto_e/minist_e/min01_e/mindecl_e.pdf]

Congressional Research Service ˜ The Library of Congress

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agenda, including such other topics as agriculture and industrial tariffs, and any final

agreement is likely to be comprehensive.

Under the current round of negotiations, participants are expected to abide by a

number of deadlines. Most of the participants met the deadline of March 31, 2002 for

submitting an initial list of liberalization policies that specified those areas in which they

hope to pursue greater liberalization. With the initial list of offerings as a starting point,

the hard work of negotiating actual commitments is set to begin. During this stage of the

discussions, the participants reserve the right to withdraw, modify, or reduce their offers

depending on how much other participants are willing to open their markets. These

discussions are slated to conclude January 1, 2005. Limited success in the thorny

agriculture negotiations, however, is spurring some negotiators to question the prospects

of reaching an agreement by this deadline. U.S. negotiators have voiced their continued

support for the agricultural talks and argue that they remain committed to meeting the

January 1, 2005 deadline. At the same time, they argue that the limited success

experienced so far in agriculture negotiations should not impede progress in the area of

services trade and in other areas where negotiations are progressing.2

Service industries account for 81 percent of U.S. employment3 and 67 percent of

U.S. gross domestic product (GDP).4 U.S. exports of commercial services (i.e., excluding

military and government) were $266 billion in 2001, doubling from the $137 billion

recorded in 1990.5 Cross-border trade in services accounts for more than 25 percent of

world trade, or about $1.4 trillion annually. Major markets for U.S. services include the

European Union ($99 billion in private sector 2001 exports), Japan ($31 billion), and

Canada ($24 billion). At $14 billion, Mexico is presently the largest emerging market for

exports of U.S. services.

Most observers agree that liberalizing trade in services could provide large economic

benefits for the United States, due to the large role it plays in the U.S. economy. One

estimate indicates that a hefty reduction of 33% in the barriers restricting trade in services

would provide economic benefits to the United States of $134 billion,6 the largest share

of any potential economic gains in the Doha round. The negotiations are just at the initial

stages, however, and it is unclear at this point how expansive the negotiations will be and

how extensive the benefits will be for the participants. One hurdle that complicates the

2

U.S. Trade Representative Robert B. Zoellick Unveiling of U.S. Services Proposal to the WTO,

March 31, 2003. See:[ http://www.ustr.gov/releases/2003/03/2003-03-31-transcript-services.pdf]

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According to the Bureau of Labor Statistics, of the 129 million people in the U.S. labor force

in February 2003, 105 million are in the service producing industries.

See:

[http://www.bls.gov/ces/]

4

McCahill, Robert J., and Brian C. Moyer, Gross Domestic Product by Industry for 1999-2001.

Survey of Current Business, November 2002, p. 32.

5

Borga, Maria, and Michael Mann, U.S. International Services: Cross-Border Trade in 2001 and

Sales Through Affiliates in 2000. Survey of Current Business, October 2002, p. 84-86.

6

Brown, Drusilla K, and Alan V. Deardorff, and Robert M. Stern, Multilateral, Regional, and

Bilateral Trade-Policy Options for the United States and Japan. RSIE Discussion Paper No.

490, December 16, 2002.

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process of estimating the benefits of the negotiations is in identifying barriers to trade in

services and then assigning monetary values to those barriers.

The General Agreement on Trade in Services

The General Agreement on Trade in Services, or GATS,7 was created as part of the

Uruguay Round of trade negotiations and entered into effect in January 1995. The

Agreement consists of 29 articles, eight annexes, eight Ministerial decisions, and an

Understanding. Article XIX is considered by many to be one of the most important

because it commits the WTO members to “successive rounds of negotiations with a view

to achieving a progressively higher level of liberalization.” Such a commitment was felt

necessary because the Agreement does not rely on a set of rules similar to those applied

for goods, but relies instead on a list of specific commitments supplied by each member

country and details what that country is willing to undertake.

Under the GATS, member countries agreed to abide by a set of general obligations,

which were applied directly and automatically to all members and services sectors, and

a number of specific commitments concerning market access and national treatment in

certain designated sectors. The scope of these sectoral commitments is laid down in

individual country schedules and, therefore, varies widely between members. Under the

Agreement, the general obligations are comprised of two specific issues: most favored

nation treatment, and transparency, or openness regarding laws and regulations. Specific

commitments relate to market access, national treatment, and the movement of natural

persons. Other annexes concern four areas in which the Members agreed to continue

negotiations: air transport, financial services, telecommunications, and maritime transport

services. The Agreement also distinguishes between four different modes of delivery of

services: 1) cross-border trade in services, which represents the most common type of

services trade; 2) consumption abroad, primarily activities associated with tourism; 3)

commercial presence in which a firm from one country establishes a presence in another

country in order to provide a service; and (4) the presence of natural persons, such as

medical doctors, accountants, or teachers from one country entering another country in

order to supply a service.

In principle, the Agreement applies to all services with two exceptions: services

supplied to governments, and air traffic rights and services. The Agreement also provides

that in certain circumstances, member countries can introduce or maintain domestic

measures that are contrary to their obligations under the Agreement. These circumstances

include measures that a nation determines are necessary to: protect public morals or

maintain public order; protect human, animal, or plant life or health; or secure compliance

with laws or regulations that are not consistent with the Agreement, such as laws to

prevent deceptive or fraudulent practices. Exemptions are also allowed in the area of

financial services that allow member countries to take measures to protect investors,

depositors, policy holders, or to ensure the integrity and stability of the financial system.

Finally, member countries are allowed to temporarily restrict trade on a nondiscriminatory basis in the event of a serious balance of payments problem.

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[http://www.wto.org/english/tratop_e/serv_e/gatsintr_e.htm]

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The U.S. Position8

The United States has a clear economic advantage in a large number of services

areas. U.S. services exports for travel and such transportation services as freight and port

services are among the chief export services, but are closely followed by U.S. exports of

education and financial services. U.S. firms also provide a broad array of business

services, including computer and data processing, data base and information services,

legal services, and management services. The U.S. offer, which includes concessions as

well as requests for market openings, is presented in two parts: binding openings that have

been achieved at both the federal and state level; and offerings for liberalization in 15

services sectors. In various services areas, such as insurance and legal services, states

have regulations and supervisory associations that set the standards for licensure and

regulate their members. With the approval of the state involved, the U.S. offer

incorporates changes made in these regulations and by these associations since the 1995

GATS Agreement as a formal part of its overall offer, thereby binding these changes into

the overall U.S. proposal for liberalization. U.S. negotiators believe this offer will be

attractive to the other participants, because it would subject these provisions to WTO

dispute settlement procedures. The U.S. offer also includes 15 areas for further

liberalization:

Accounting services. This proposal is designed to make it easier for accountants

and accounting firms to serve clients in other countries by addressing citizenship and

prior residency requirements for licensing, and would strengthen the Accountancy

Disciplines, adopted by the WTO in 1998.

Advertising and related services. This proposal is intended to provide for full

market access and national treatment of advertising services, while allowing national

governments the ability to set and maintain standards to protect consumers. These

negotiations are especially important given the changes the Internet and the advent

of global advertising have created.

Audiovisual and related services. The United States seeks: 1) a review of the

activities that constitute the audiovisual sector (theatrical motion pictures, television,

home video entertainment, transmission services, and recorded music) to develop a

clear, accurate, and comprehensive understanding of how the sector is classified; 2)

negotiated commitments for the sector that are clear, dependable, and predictable

trade rules; and 3) to develop a set of rules, similar to those in other aspects of the

WTO, for the use of carefully circumscribed subsidies for specifically defined

purposes.

Distribution services. This proposal addresses barriers faced by wholesalers,

retailers, and other distribution companies in operating supply chains internationally

(e.g., restrictions on real estate purchases, store location, etc.). The proposal seeks

to apply GATS disciplines by promoting transparency and fairness of administration

and to promote national treatment.

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The U.S. submission can be found at: [http://www.ustr.gov/sectors/services/docsvcs.shtml]

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Education and training services. This proposal addresses barriers to market access

and national treatment for suppliers of education and training services of higher

education, adult education, training, and testing. The proposal seeks to remove

obstacles to the transmission of educational training and testing services across

national borders through electronic or physical means, or to the establishment and

operation of facilities to provide services to students.

Energy services. Liberalization of energy services and nondiscriminatory access to

foreign energy services providers are priority issues for U.S. negotiators. These

services include exploration, development, extraction, production, generation,

transportation, transmission, distribution, marketing, consumption, management, and

efficiency of energy, energy products, and fuels.

Environmental services. This proposal aims to reduce barriers to the provision of

environmental services as a means of preventing, reducing, or correcting

environmental degradation. This proposal seeks to improve market access and

national treatment in the areas of environmental services currently recognized by the

WTO (sewage services, refuse disposal services, sanitation services, and other such

services) and to broaden the coverage of the disciplines to include areas of

commercial presence and the movement of personnel.

Express delivery services. This proposal addresses barriers faced by express

delivery companies in providing integrated services and seeks the adoption of a

separate classification for express delivery services and requests countries to

undertake commitments on market access and national treatment. Express delivery

services is a relatively new sector and consists of time-sensitive services, which

utilize advanced technologies for communication, and are integrated or controlled

from end-to-end.

Financial services. This proposal would establish benchmarks for further financial

services liberalization to include commitments constituting fundamental

liberalization, and commitments on transparency and other principles for regulation

in the areas of insurance, banking, securities, asset management, pension funds,

financial information, financial advisory, and other financial services. Priority areas

include removing: restrictions on the types of allowable commercial presence and

the ability to provide services across borders; quantitative limitations on the number

of suppliers; and removing discrimination between domestic and foreign suppliers

regarding application of laws, regulations, and practices.

Legal services. This proposal is intended to have Members examine liberalization

opportunities with regard to market access and such national treatment barriers as

commercial presence, citizenship and residency requirements for licensing, scope of

practice, and association of foreign-qualified lawyers with local lawyers and

association of foreign-partner law firms with local law firms.

Movement of natural persons. This proposal would address the regulatory hurdles

corporations face in moving personnel to foreign locations on a temporary basis. It

would not apply to permanent entry or stay of individuals as service suppliers. In

particular, the U.S. proposal seeks to improve access to information, including laws

and regulations, that govern entry, stay, and work authorization of natural persons,

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and procedural transparency that could include timely responses as well as an

explanation of actions taken and opportunities to comment on new or amended

regulation by government entities to applications for temporary entry and stay.

Small and medium-sized services enterprises. The U.S. proposal seeks to remove

the following barriers: 1) transparency in domestic regulation; 2) requirements that

firms maintain a local or commercial presence, which hinders smaller firms that used

advanced technologies to provide services over the Internet; 3) requirements on the

movement of natural persons; 4) “unnecessary” government regulation of electronic

commerce that hampers the electronic delivery of services; and 5) commitments in

related services.

Telecommunications, value-added network, and complementary services. The

goals for this proposal are to: ensure market access and national treatment for

providers of both network infrastructure and key service sectors; remove barriers to

investment and competition; promote competition in basic telecommunications; and

avoid unnecessary restrictions on services offered by competitive suppliers.

Tourism services. This proposal seeks to have all members undertake additional

commitments relating to travelers and international conferences to promote

expansion of international tourism. The proposal lists practices that frustrate growth

in this sector, such as limits on foreign investment or ownership, taxes, regulations

governing requirements with local suppliers, the entry and exit of personnel and

event organizers, and discrimination against foreign partners, and franchises.

Transparency in domestic regulation. The proposal seeks to allow all market

participants equal access to information on regulation, procedures, and other

measures that affect their ability to compete effectively. To improve transparency,

the U.S. proposal encourages: 1) prior notification and comment periods on

government regulations; 2) a simple and clear application process that applies

equally to domestic and foreign applicants; and 3) procedural review and remedies

in the event of a dispute.

Other Positions

The U.S. offer is well beyond those offered by other participants and has generally

been well received. In addition to the 15 proposals offered by the United States, other

members have offered proposals in such services areas as: advertising, architectural

services, business services, computer, construction and engineering services, logistics,

postal and courier, professional, sporting, and transport services. Canada, for instance,

offered improved market access in financial services, business services, communications,

and transport services. Japan offered improved commitments in the movement of natural

persons, business services, and tourism. Australia offered improved access in computer

and related services, legal services, and financial services. New Zealand also offered

significant market opening offers in services. Although developing countries might

obtain benefits from liberalized trade in services, it is unclear at this stage of the

negotiations which areas they will support for liberalization.