Jul 18, 1986

THIRD WORLD CAUTIONED AGAINST COMMITMENTS ON SERVICES.

GENEVA, JULY 14 (IFDA/CHAKRAVARTHI RAGHAVAN) -- Third world countries have been cautioned against accepting international commitments on services that would restrict their freedom to negotiate successfully with TNCS or increase the scope of major trading countries for retaliation and trade restrictions in goods.

The caution from the U.N. Conference on Trade and Development is in its new report (TD/B/1100) on services and development process to the trade and development board.

While a large part of the report is devoted to actions that third world governments should take to develop and strengthen their domestic indigenous service sectors, and especially producer services, the report also reviews the ongoing efforts to create an international framework in services.

The thrust of the main proposals for international co-operation (presented in GATT) are aimed at negotiating general rules and principles for services trade to provide a framework for more specific arrangements of a sectoral nature and for settlement of disputes.

The principles most often mentioned for an "umbrella" agreement are "national treatment", "access to markets", usually defined as a variation of the "right of establishment" or "right of commercial presence", the most-favoured-nation treatment, subsidies, and dispute settlement.

The GATT concept of "national treatment", UNCTAD notes, is aimed at ensuring that tariff concessions in GATT schedules or other GATT provisions (such as MFN treatment or prohibition of quantitative restrictions) are not frustrated or nullified by domestic laws applied differently to imports.

Thus while the GATT concept is intended to protect the integrity of negotiated levels of protection, in services there are no such levels, nor even agreement on which measures would be appropriate for negotiations.

Since by its nature trade in services precludes application of duties at the frontier, protection to domestic services could only be afforded by restricting entry of foreign services, or of persons capably of providing such services (usually seen as an immigration issue in the importing country), or denying foreign corporations the right to establish, or if established, restricting their activities within the country.

"National treatment" to services trade, UNCTAD comments, thus involves treatment of enterprises.

The OECD international instrument in this area, calls for equality of treatment to foreign and domestic enterprises. But in many OECD countries there are wide deviations from this rule – in areas of subsidies, taxes, government procurement, etc. – and equality of treatment is conditional on reciprocity.

The OECD itself is now considering "more workable concepts" such as "fair or equivalent treatment" to deal with problems peculiar to the services sector.

Some of the proposals on services, UNCTAD notes, have emphasises that because of the peculiar characteristics of services, "some form of "presence" in the market" would be needed for penetration of foreign markets.

In this connection, though various terms like "right to do business", "right of access", "right of commercial presence" have been used, in fact "the basic issue is the familiar one of "right of establishment" of "foreign enterprises".

"This is an investment issue, and there is no equivalent concept in GATT", UNCTAD comments.

There have been some efforts to disassociate trade and investment concepts, by stressing that what is sought is "that presence in the market necessary to conduct business".

In some service sectors, UNCTAD notes, considerable investment would be required to sell services on the domestic market. But in others only a minimal presence – a computer terminal and access to data from home base – might be required, while in some others no presence or establishment might be required at all.

From the viewpoint of maximising the contribution of services to development, the actual presence of foreign firms might be less relevant than that of ensuring that the presence effectively contributes to development objectives and does not displace domestic firms or prevent their entry into the market.

"What is important is not whether the foreign firms are present in the domestic market, but what activities they are allowed to conduct".

Foreign Banks, for example, could be allowed to provide useful services to traders, "but not be allowed to draw off and internationalise savings".

Thus "right of establishment" and "national treatment" could not be considered separately, and the concepts themselves would need to be defined more precisely.

Also, given that the same degree of "presence" on the market may have vastly different economic and social consequences from sector to sector, or that the need to apply regulations specifically to foreign firms may differ radically from sector to sector, it may be necessary to adopt a sectoral approach, UNCTAD suggests.

On the MFN issue, UNCTAD notes that since "non-discrimination" in services is the exception rather than the rule, a "conditional MFN" approach for services seems to be envisaged.

The negotiation of multilateral rules on services, UNCTAD argues, would also involve the issue of how to deal with "unfair" practices in general, and subsidies in particular.

Any effort to extend to services the anti-dumping and countervailing duty provisions, which already have a negative impact on trade by their excessive use, could create a potential problem, UNCTAD suggests.

"There is a strong case for reform of these (GATT) measures, not merely their extension to other fields".

The main implication of proposals for international co-operation on services within GATT, UNCTAD says, is that it would establish "a common multilateral framework of rights and obligations for goods and services, giving rise to the question of enforcement of such rights and obligations".

In the ongoing debate on services it notes, there has been much emphasis on effective dispute settlement mechanism, and the deficiencies of many international organisations in this regard.

But the GATT dispute settlement mechanism, not only enables disputes to be raised over previously negotiated concessions, but over any measure which a Contracting Party might consider to be nullifying of impairing the benefit of a concession.

This would imply that if services were included in GATT, even in the form of vague general principles, some CPS could argue that actions contrary to such general principles or alleged to be denying them the benefit of concessions, justify the invocation of the dispute settlement provisions, and, "in due course, retaliation in the form of restriction against trade in goods".

The U.S. trade and tariff act of 1984, UNCTAD points out, already provides for "such cross-sectoral retaliation".

Since one of the main disadvantages of GATT, from the viewpoint of third world countries and "other smaller trading partners", has been that ultimate recourse in any dispute is retaliation, "such countries would seem to not have a major interest in increasing the scope of the major trading countries for retaliation and trade restriction", UNCTAD comments.

On the argument that putting services into GATT would make GATT more relevant to the future trading world, UNCTAD notes that some of the proponents refer to the inclusion in the Havana charter of some provisions related to services.

However, UNCTAD says, the Havana charter also contained provisions on restrictive business practices (RBPS), on commodity price stabilisation, and on common macroeconomic objectives – all of which were left out of GATT.

"Perhaps what is called for is a general revision of those unadopted proposals for a new international trade organisation, along the lines of that envisaged in the Havana charter, but taking into account the issues facing the modern trading world".

In this context, UNCTAD points out, concessions such as right of establishment and national treatment (in the area of services) "are enjoyed by enterprises, not by governments".

"Such concessions should be granted in return for obligations accepted by the enterprise in question.

"The strengthening of the service sector in developing countries will reflect to a large extent their ability to successfully negotiate with TNCS, and they should be vigilant to avoid accepting commitments or principles which would restrict their freedom of action in this respect".