6:28 AM Jul 14, 1994

SERVICES SUBSIDIES NEED SECTOR-SPECIFIC APPROACHES

Geneva 13 July (Chakravarthi Raghavan) -- The heterogeneity of the service sectors and the four modes of delivery of traded services, the differences in the way trade takes place as between sectors, and the differing ways in which services could be subsidised would make it difficult to adopt a common approach to identify the trade impact of subsidies and formulate rules to deal with them, according to the UN Conference on Trade and Development.

The UNCTAD secretariat is in a background note for next week's meeting of its Standing Committee on Developing Services Sectors.

The mandate of the Standing Committee is related to fostering competitive services sectors in developing countries and the background note is in relation to the work programme in the area of services trade subsidies.

Article XV of the Uruguay Round Marrakesh General Agreement on Trade in Services (GATS) recognizes that "in certain circumstances, subsidies may have distorting effects on trade in services" and envisages future negotiations to develop multilateral disciplines to avoid such trade-distorting effects. A GATS work programme is to determine how, and in what time frame, such negotiations are to be conducted.

The Article requires the negotiations address the appropriateness of countervailing procedures (used in trade in goods), the role of subsidies in development programmes of developing countries and needs of GATS members, particularly developing country members, in this area.

It also requires, for the purpose of negotiations, members exchanging information on all subsidies related to services provided by them to their domestic service suppliers.

Analysing the complexities of the services sectors, modes of delivery and differing subsidies, UNCTAD suggests that the traditional GATT methods of country notifications and their availability to members would not be useful in identifying the services subsidies, and that more systematic identification of subsidies to services production and trade would be needed.

Available information would have to be gathered from official journals and gazettes, budget documents of countries, trade action reports of administrative agencies, reports on procurement and grants for research and development, reports of foreign aid and development agencies and rules of origin in regional trading arrangements and other relevant materials.

The multilateral GATT trading system in goods, UNCTAD notes, has always had difficulty in coming to grips with issue of subsidies and an international consensus on defining subsidies has always eluded the trading community.

The GATT Tokyo Round Code on subsidies and countervailing measures, accepted only by a minority of cps, sought to come to grips with the problem, but was ineffective in clarifying rules on subsidies in general, but recognized subsidies were an inherent part of economic development programmes of developing countries.

The Uruguay Round agreement (in goods) on subsidies (which everyone has to accept), UNCTAD adds, classifies subsidies into 'prohibited', 'actionable' and 'non-actionable' categories and tightens disciplines on countervailing measures.

The essence of its definition of subsidies is that it should result in a benefit conferred through a financial contribution by a government, including direct payments, or foregoing of revenues otherwise due, or providing goods and services other than general infrastructure, by government purchasing goods or by income or price supports.

The agreement, UNCTAD notes, already addresses certain services. For e.g. preferential provision of internal transport and freight on export shipments, provided or mandated by governments on terms more favourable than for domestic shipments is a prohibited export subsidy. But government assistance to consultancy services for research is non-actionable subsidy. But a variety of services, including infrastructural services for agriculture are exempt from reduction commitments.

So far, input and infrastructural services for exports or production for exports -- provision of utilities at lower rates when used for export, government financed construction of infrastructures including storage and processing facilities and preferential rates for government owned transport --, have been determined to be countervailable subsidies.

But the GATS definition of trade in services is wider than of trade in goods. Services trade could also be effected by commercial presence, movement of natural persons to supply a services and movement of consumers.

This, UNCTAD says, would imply that benefits accruing to enterprises -- such as preferential tax regimes for foreign operations, which benefit directly or indirectly their foreign-based subsidiaries might be considered as subsidies for export of the services. Also, subsidies to a parent firm in the home country could provide competitive advantages to foreign subsidiaries abroad. Special fiscal or other benefits favouring foreign consumers purchasing services in a country might also fall in this category.

The dilemma of providing infrastructural services in an efficient manner while at the same time ensuring access to basic services for the widest possible proportion of the population, including those with low purchasing power, has led governments to subsidize transportation and utility services. In many cases they support establishment or development of industries such as fishing, forestry, agricultural production or natural resource extraction and refining, and services such as tourism. Where these affect trade in goods, they have provoked levy of countervailing duties in importing countries.

Such subsidies could impact on trade in services, when carried to the international arena, notably air and maritime transport -- government subsidies to ensure national shipping or airlines -- heavy fiscal and non-fiscal subsidies (for construction or operation) in maritime transport sector.

Education and health services are heavily subsidized in many countries. And when these services attain a degree of efficiency, they can be exported -- sold to foreign consumers in country of origin or through domestic enterprises or individual persons offering such services in foreign countries. In particular, educational and health institutions, benefiting from a variety of government subsidies, could offer services to foreign clients on a profit basis.

Some developed countries are major exporters of such services through several modes of delivery while a number of developing countries are trying to develop exports of specialized medical services as a way of cross-subsidizing such services to their own nationals.

In the telecommunications area there are government subsidies for telecom infrastructures to facilitate provision of a variety of such services and subsidising users by government entities that provide such services at less than full cost. The current boom in telecom trade had enabled most public telecom operators in OECD countries to show higher profits while reducing rates.

But the situation of developing countries is different and the GATS has accepted the view that developing countries could retain cross-subsidisation schemes under which international communications are overcharged to finance development of national infrastructures.

Some countries have provided telecom facilities at less than full cost to support operations of exporters of data processing and other information services.

But as telecom firms, both public and private, are increasingly more active in seeking clients wishing to establish international networks, export subsidization or non-competitive actions of monopolies could become an important issue in this sector in future.

Export market development is another area of important category of subsidized services -- with government providing assistance to cover a variety of costs of activities to penetrate new markets abroad or for preparation of feasibility studies and project proposals -- all programmes primarily intended to lead to exports of final product or services.

Such subsidization of feasibility studies and preparation of bids in particular have been a subject of complaint from engineering and consultancy services of developing countries which find themselves unable to compete with such subsidized foreign firms -- neither in foreign markets nor even in their own home markets.

Such subsidized feasibility study, the report notes, could lead to export of major projects which might also be subsidized by export credits tied to purchase of both goods and services from country of origin -- such as has been found to exist by the US in Canada's Program for Export Market Development.

Developing countries have used incentive schemes -- tax incentives, banking credits and accelerated depreciation allowances -- to promote development of export capability in engineering and construction services. But with few exceptions they have found themselves unable to compete in the fact of the financing packages available to firms in developed countries.

This, UNCTAD suggests, has also been responsible for developing countries' reluctance to include construction and engineering services in their GATS offers.Trade in this sector is so distorted by subsidies and other anti-competitive practices that it would have been unwise on their part to enter into market access commitments without concrete GATS disciplines on subsidies and anti-competitive practices.

Subsidization is also prevalent in media services. Film production, advertising and publishing often receive considerable financial support from governments -- including direct grants for conception or production of a film, subsidized postal rates etc -- and are generally available to all cultural industries.

These are generally a response to the peculiarities of the trade in this subsector -- such as a cinema film or a tv program where most of the cost of production are in turning out the first copy, while additional copies can be produced with little expense. Such initial costs can easily be written off in large homogenous markets, protected by differences in cultural attitudes.

Only two percent of US tv programs are imported.

Subsidies and quotas are in essence a response in imports that could technically be considered dumped in the market.

Similar is the situation about editorial content of newspapers and magazines (which are syndicated abroad and sold at varying prices in various markets).

In financial services, the UNCTAD document notes, subsidies can be provided through the tax system -- primarily in treatment of losses carried forward or back from one tax period to another.

In recent years, banks in all industrialized countries have been increasing their loss reserves. How these are taxed or not taken as taxable income is important consideration for banks and property mortgage firms.

Also, government-financed rescues of financial institutions (such as the savings and loans associations in the US) can be a subsidy to the financial services subsector in the country concerned. Without such government funding, the financial institutions would have had to absorb all the costs of rescuing a failed firm or incur costs arising from increased lack of confidence on the part of financial service consumers

Another implicit subsidy lies in national prudential regulations affecting capitalization of financial service firms: the lower level of 'capital adequacy' requirements, the greater the volume of loans the bank can provide, and thus the higher the income earned on a given volume of capital.

Just as subsidized service inputs have been deemed to constitute subsidies in production and exports of goods, subsidies to goods can also constitute subsidies to exports of traded services.

In some cases, such as in maritime services, subsidies to service providers are conditional on use of domestic goods. Thus, in the US an operating differential subsidy is provided to US operators of ships built in the US of US materials.

There are also similar subsidies related to production and maintenance of aircraft, and these affect competitiveness of air transportation and airline companies.

There is also a similar link between subsidised goods and services as when the services fall under the subsidy programme applied to a particular goods export -- such as for advertising agricultural products of the US as part of its Export Entitlement Programme.

Monopolies, including de facto monopolies in the private sector, are more prevalent in the services than in the goods sector.

GATS provides its Members ensure that monopolies and exclusive service providers don't supply a monopoly service in a manner inconsistent with a Member's obligations. But this mainly applies to a domestic monopoly service provider in dealings with foreign service providers in other sectors using its services.

However, says UNCTAD, there is need for a further study of the extent to which such monopolies could compete unfairly on the international market, as well as the extent to which they could cross-subsidize or provide services at less than cost on their exports.

In the GATT, subsidies are dealt with through countervailing measures. But such a system may not be suitable for trade in services.

However, some countries are beginning to arm themselves with mechanisms to deal with unfair trade practices -- such as through subsidies and dumping -- prevalent in some services sectors. The EU, for example, has armed itself with powers to deal with unfair trade practices in maritime sector.

But many countries are avoiding use of countervailing duties to deal with this problem, preferring to deal with problems of price discrimination through anti-dumping actions.

Actions to countervail government subsidies could be politically sensitive and could produce reactions, while actions against dumping by private firms are seen as less likely to provoke reactions.

But it is difficult to envisage a system where action could be taken against subsidized imports but not dumped ones, or provide for substantially different mechanisms to deal with injurious dumped and subsidized imports, UNCTAD adds.

All these, UNCTAD says, underlines the need for pioneering work to identify subsidies on services and assess their trade impact.

While GATS provides for exchange of information on the subsidies provided by each party to its domestic producers, there are differing interpretations of what constitute subsidies.

Trade in Services extends beyond trade in goods in that it covers commercial presence and movement of natural persons. A proper compilation of subsidies in services would need analysis of all government programmes, many of which may not even be directly trade-related. Programmes involving trade in goods might also have an effect on services. Actual practices may differ from announced policies and compilation of such information could be time-consuming.

Past GATT experience about self-notifications suggest these would be unsatisfactory in that governments would be reluctant to designate their practices as subsidies lest they attract countervailing actions, UNCTAD notes and suggests that there is thus need for more systematic identification of subsidies to services production and trade.

In terms of UNCTAD's own work programme and priorities, the document suggest focus on a sectoral basis in areas where subsidies have a major impact on trade in sectors of export interest to developing countries, such as in construction and engineering services.

Specific issues related to the different modes of delivery could also be looked into, with studies examining possible benefits received by corporations to allow them to compete more effectively in world trade in services -- including through commercial presence in foreign markets.