General Agreement on Trade in Services
The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) that entered into force in January 1995 as a result of the Uruguay Roundnegotiations. The treaty was created to extend the multilateral trading system to service sector, in the same way the General Agreement on Tariffs and Trade (GATT) provides such a system for merchandise trade.
All members of the WTO are parties to the GATS. The basic WTO principle of most favoured nation (MFN) applies to GATS as well. However, upon accession, members may introduce temporary exemptions to this rule.
Contents
Historical background[edit]
While the overall goal of GATS is to remove barriers to trade, members are free to choose which sectors are to be progressively "liberalised" (i.e. marketised and privatised); which mode of supply would apply to a particular sector; and to what extent that "liberalisation" will occur over a given period of time. Members' commitments are governed by a ratchet effect: commitments are one-way and are not to be wound back once entered into. The reason for the rule is to create a stable trading climate (i.e. a market). However, Article XXI allows members to withdraw commitments, and so far two members have exercised the option (US and EU). In November 2008, Bolivia gave a notification that it will withdraw its health services commitments.
Some activist groups consider that GATS risks undermining the ability and authority of governments to regulate commercial activities within their own boundaries, with the effect of ceding power to business interests ahead of the interests of citizens. In 2003, the GATSwatch network published a critical statement supported by over 500 organisations in 60 countries.[1] At the same time, countries are not under any obligation to enter international agreements such as GATS. For countries that like to attract trade and investment, GATS adds a measure of transparency and legal predictability. Legal obstacles to services trade can have legitimate policy reasons, but they can also be an effective tool for large scale corruption (De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.)
Four modes of supply[edit]
The GATS agreement covers four modes of supply for the delivery of services in cross-border trade:[2]
| Mode | Criteria | Supplier Presence |
| Mode 1: Cross-border supply | Service delivered within the territory of the Member, from the territory of another Member | Service supplier not present within the territory of the member |
| Mode 2: Consumption abroad | Service delivered outside the territory of the Member, in the territory of another Member, to a service consumer of the Member | |
| Mode 3: Commercial presence | Service delivered within the territory of the Member, through the commercial presence of the supplier | Service supplier present within the territory of the Member |
| Mode 4: Presence of a natural person | Service delivered within the territory of the Member, with supplier present as a natural person |
Sectors addressed[edit]
Services Sector Classifications addressed in the GATS are defined in the so-called "W/120 list",[3] which provides a list of all sectors which can be negotiated under the GATS. The title refers to the name of the official WTO document, MTN.GNS/W/120.
The sectors covered by the GATS are twelve service sectors (Business; Communication; Construction and Engineering; Distribution; Education; Environment; Financial; Health; Tourism and Travel; Recreation, Cultural, and Sporting; Transport; "Other")[4] which, in turn, are divided into sub-sectors.
Criticisms[edit]
The GATS agreement has been criticized for tending to substitute the authority of national legislation and judiciary with that of a GATS Disputes Panel conducting closed hearings. WTO member-government spokespersons are obliged to dismiss such criticism because of prior commitment to perceived benefits of prevailing commercial principles of competition and 'liberalisation'.
While national governments have the option to exclude any specific service from liberalisation under GATS, they are also under pressure from international business interests to refrain from excluding any service "provided on a commercial basis". Important public utilities such as water and electricity most commonly involve purchase by consumers and are thus demonstrably "provided on a commercial basis". The same may be said of many health and education services which are sought to be 'exported' by some countries as profitable industries.[5]
This definition defines virtually any public service as being "provided on a commercial basis" and is already extending into such areas as police, the military, prisons, the justice system, public administration, and government. Over a fairly short time perspective, this could open up for the privatisation or marketisation of large parts, and possibly all, of what today are considered public services currently available for the whole population of a country as a social entitlement, to be restructured, marketised, contracted out to for-profit providers, and eventually fully privatised and available only to those who can pay for them. This process is currently far advanced in most countries, usually (and intentionally) without properly informing or consulting the public as to whether or not this is what they desire.
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1. What is the main purpose of the GATS?
The creation of the GATS was one of the landmark achievements of the Uruguay Round, whose results entered into force in January 1995. The GATS was inspired by essentially the same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs and Trade (GATT): creating a credible and reliable system of international trade rules; ensuring fair and equitable treatment of all participants (principle of non-discrimination); stimulating economic activity through guaranteed policy bindings; and promoting trade and development through progressive liberalization.
While services currently account for over 60 percent of global production and employment, they represent no more than 20 per cent of total trade (BOP basis). This — seemingly modest — share should not be underestimated, however. Many services, which have long been considered genuine domestic activities, have increasingly become internationally mobile. This trend is likely to continue, owing to the introduction of new transmission technologies (e.g. electronic banking, tele-health or tele-education services), the opening up in many countries of long-entrenched monopolies (e.g. voice telephony and postal services), and regulatory reforms in hitherto tightly regulated sectors such as transport. Combined with changing consumer preferences, such technical and regulatory innovations have enhanced the “tradability” of services and, thus, created a need for multilateral disciplines.
2. Which countries participate?
All WTO Members, some 140 economies at present, are at the same time Members of the GATS and, to varying degrees, have assumed commitments in individual service sectors.
3. What services are covered?
The GATS applies in principle to all service sectors, with two exceptions.
Article I(3) of the GATS excludes “services supplied in the exercise of governmental authority”. These are services that are supplied neither on a commercial basis nor in competition with other suppliers. Cases in point are social security schemes and any other public service, such as health or education, that is provided at non-market conditions.
Further, the Annex on Air Transport Services exempts from coverage measures affecting air traffic rights and services directly related to the exercise of such rights.
4. Is it true that the GATS not only applies to cross-border flows of services, but additional modes of supply?
The GATS distinguishes between four modes of supplying services: cross-border trade, consumption abroad, commercial presence, and presence of natural persons.
Cross-border supply is defined to cover services flows from the territory of one Member into the territory of another Member (e.g. banking or architectural services transmitted via telecommunications or mail);
Consumption abroad refers to situations where a service consumer (e.g. tourist or patient) moves into another Member's territory to obtain a service;
Commercial presence implies that a service supplier of one Member establishes a territorial presence, including through ownership or lease of premises, in another Member's territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or hotel chains); and
Presence of natural persons consists of persons of one Member entering the territory of another Member to supply a service (e.g. accountants, doctors or teachers). The Annex on Movement of Natural Persons specifies, however, that Members remain free to operate measures regarding citizenship, residence or access to the employment market on a permanent basis.
5. Why was it necessary to introduce, apart from the traditional concept of cross-border trade, three additional modes of supply?
The supply of many services is possible only through the simultaneous physical presence of both producer and consumer. There are thus many instances in which, in order to be commercially meaningful, trade commitments must extend to cross-border movements of the consumer, the establishment of a commercial presence within a market, or the temporary movement of the service provider himself.
6. Does the GATS affect a Member's ability to pursue national policy objectives and priorities?
The GATS expressly recognizes the right of Members to regulate the supply of services in pursuit of their own policy objectives, and does not seek to influence these objectives. Rather, the Agreement establishes a framework of rules to ensure that services regulations are administered in a reasonable, objective and impartial manner and do not constitute unnecessary barriers to trade.
7. What are the basic obligations under the GATS?
Obligations contained in the GATS may be categorized into two broad groups: General obligations, which apply directly and automatically to all Members and services sectors, as well as commitments concerning market access and national treatment in specifically designated sectors. Such commitments are laid down in individual country schedules whose scope may vary widely between Members. The relevant terms and concepts are similar, but not necessarily identical to those used in the GATT; for example, national treatment is a general obligation in goods trade and not negotiable as under the GATS.
(a) General obligations
MFN Treatment: Under Article II of the GATS, Members are held to extend immediately and unconditionally to services or services suppliers of all other Members “treatment no less favourable than that accorded to like services and services suppliers of any other country”. This amounts to a prohibition, in principle, of preferential arrangements among groups of Members in individual sectors or of reciprocity provisions which confine access benefits to trading partners granting similar treatment.
Derogations are possible in the form of so-called Article II-Exemptions. Members were allowed to seek such exemptions before the Agreement entered into force. New exemptions can only be granted to new Members at the time of accession or, in the case of current Members, by way of a waiver under Article IX:3 of the WTO Agreement. All exemptions are subject to review; they should in principle not last longer than 10 years. Further, the GATS allows groups of Members to enter into economic integration agreements or to mutually recognize regulatory standards, certificates and the like if certain conditions are met.
Transparency: GATS Members are required, inter alia, to publish all measures of general application and establish national enquiry points mandated to respond to other Member's information requests.
Other generally applicable obligations include the establishment of administrative review and appeals procedures and disciplines on the operation of monopolies and exclusive suppliers.
(b) Specific Commitments
Market Access: Market access is a negotiated commitment in specified sectors. It may be made subject to various types of limitations that are enumerated in Article XVI(2). For example, limitations may be imposed on the number of services suppliers, service operations or employees in the sector; the value of transactions; the legal form of the service supplier; or the participation of foreign capital.
National Treatment: A commitment to national treatment implies that the Member concerned does not operate discriminatory measures benefiting domestic services or service suppliers. The key requirement is not to modify, in law or in fact, the conditions of competition in favour of the Member's own service industry. Again, the extension of national treatment in any particular sector may be made subject to conditions and qualifications.
Members are free to tailor the sector coverage and substantive content of such commitments as they see fit. The commitments thus tend to reflect national policy objectives and constraints, overall and in individual sectors. While some Members have scheduled less than a handful of services, others have assumed market access and national treatment disciplines in over 120 out of a total of 160-odd services.
The existence of specific commitments triggers further obligations concerning, inter alia, the notification of new measures that have a significant impact on trade and the avoidance of restrictions on international payments and transfers.
8. What information is contained in services “schedules”?
Each WTO Member is required to have a Schedule of Specific Commitments which identifies the services for which the Member guarantees market access and national treatment and any limitations that may be attached. The Schedule may also be used to assume additional commitments regarding, for example, the implementation of specified standards or regulatory principles. Commitments are undertaken with respect to each of the four different modes of service supply.
Most schedules consist of both sectoral and horizontal sections. The “Horizontal Section” contains entries that apply across all sectors subsequently listed in the schedule. Horizontal limitations often refer to a particular mode of supply, notably commercial presence and the presence of natural persons. The “Sector-Specific Sections” contain entries that apply only to the particular service.
All schedules are available on the WTO website.
9. When did Members' specific commitments enter into force?
The majority of current commitments entered into force on 1 January 1995, i.e. the date of entry into force of the WTO. New commitments have since been scheduled by participants in extended negotiations (see below) and by new Members that have joined the WTO.
10. Can commitments be introduced or improved outside the context of multilateral negotiations?
Yes, any Member is free to expand or upgrade its existing commitments at any time.
11. Can specific commitments be withdrawn or modified?
Pursuant to Article XXI, specific commitments may be modified subject to certain procedures. Countries which may be affected by such modifications can request the modifying Member to negotiate compensatory adjustments; these are to be granted on an MFN basis.
12. Are there any specific exemptions in the GATS to cater for important national policy interests?
The GATS permits Members in specified circumstances to introduce or maintain measures in contravention of their obligations under the Agreement, including the MFN requirement or specific commitments. The relevant Article provides cover, inter alia, for measures necessary to:
protect public morals or maintain public order;
protect human, animal or plant life or health; or
secure compliance with laws or regulations not inconsistent with the -Agreement including, among others, measures necessary to prevent deceptive or fraudulent practices.
Moreover, the Annex on Financial Services entitles Members, regardless of other provisions of the GATS, to take measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system.
Finally, in the event of serious balance-of-payments difficulties Members are allowed to temporarily restrict trade, on a non-discriminatory basis, despite the existence of specific commitments.
13. Are there special provisions for developing countries?
Developing country interests have inspired both the general structure of the Agreement as well as individual Articles. In particular, the objective of facilitating the increasing participation of developing countries in services trade has been enshrined in the Preamble to the Agreement and underlies the provisions of Article IV. This Article requires Members, inter alia, to negotiate specific commitments relating to the strengthening of developing countries' domestic services capacity; the improvement of developing countries' access to distribution channels and information networks; and the liberalization of market access in areas of export interest to these countries.
While the notion of progressive liberalization is one of the basic tenets of the GATS, Article XIX provides that liberalization takes place with due respect for national policy objectives and Members' development levels, both overall and in individual sectors. Developing countries are thus given flexibility for opening fewer sectors, liberalizing fewer types of transactions, and progressively extending market access in line with their development situation. Other provisions ensure that developing countries have more flexibility in pursuing economic integration policies, maintaining restrictions on balance of payments grounds, and determining access to and use of their telecommunications transport networks and services. In addition, developing countries are entitled to receive technical assistance from the WTO Secretariat.
14. What is the so-called “built-in agenda” of the GATS?
The GATS, including its Annexes and Related Instruments, sets out a work programme which is normally referred to as the “built-in” agenda. The programme reflects both the fact that not all services-related negotiations could be concluded within the time frame of the Uruguay Round, and that Members have already committed themselves, in Article XIX, to successive rounds aimed at achieving a progressively higher level of liberalization (see below). In addition, various GATS Articles provide for issue-specific negotiations intended to define rules and disciplines for domestic regulation (Article VI), emergency safeguards (Article X), government procurement (Article XIII), and subsidies (Article XV). These negotiations are currently under way.
At the sectoral level, negotiations on basic telecommunications were successfully concluded in February 1997 and negotiations in the area of financial services in mid-December 1997. In these negotiations, Members achieved significantly improved commitments with a broader level of participation.
15. Are the results of the extended sectoral negotiations in telecommunications and financial services legally different from other sector-specific commitments?
No. The results of sectoral negotiations are new specific commitments and/or MFN exemptions related to the sector concerned. Thus, they are neither legally independent from other sector-specific commitments nor constitute agreements different from the GATS. The new commitments and MFN exemptions have been incorporated into the existing Schedules and Exemption Lists by way of separate Protocols to the GATS.
16. Why was a new services round necessary?
In services, the Uruguay Round was only a first step in a longer-term process of multilateral rule-making and trade liberalization. Observers tend to agree that, while the negotiations succeeded in setting up the principle structure of the Agreement, the liberalizing effects have been relatively modest. Barring exceptions in financial and telecommunication services, most schedules have remained confined to confirming status quo market conditions in a relatively limited number of sectors. This may be explained in part by the novelty of the Agreement and the perceived need of Members to gather experience before considering wider and deeper commitments. Moreover, many administrations needed time to develop the necessary regulation — including quality standards, licensing and qualification requirements — that ensures that external liberalization is compatible with, and conducive to, core policy objectives (quality, equity, etc.) in socially or infrastructurally important services.
More than ten years have passed since the Agreement's inception, and the economic importance of services — in terms of production, income, employment and trade — has continued to rise. There thus appears ample scope for new and/or improved commitments in new negotiations.
17. What has been achieved to date in the new services round?
Under Article XIX, Members are (self-)committed to launch successive rounds of services negotiations with a view to achieving a progressively higher level of liberalization. The first such round was to begin no later than five years from the date of entry into force of the Agreement and, accordingly, started in January 2000. The initial focus was mainly on the built-in agenda with a view to creating a sound basis for the negotiations of new specific commitments. During a stock-taking session in March 2001, Members agreed on the Negotiating Guidelines and Procedures for the new round (document S/L/93) and discussed a first series of sector proposals which had been submitted by individual countries; the Guidelines and all proposals are available on the WTO Web Site.
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General Agreement on Trade in Services (GATS)
The General Agreement on Trade in Services (GATS) is the first multilateral agreement covering trade in services. It was negotiated during the last round of multilateral trade negotiations, called the Uruguay Round, and came into force in 1995. The GATS provides a framework of rules governing services trade, establishes a mechanism for countries to make commitments to liberalize trade in services and provides a mechanism for resolving disputes between countries.
About the GATS
Similar in principle to the General Agreement on Tariffs and Trade (GATT), which deals with trade in goods, the GATS has two primary objectives: first, to ensure that all signatories are treated equitably when accessing foreign markets; and second, to promote progressive liberalization of trade in services (over time, eliminating trade barriers to enable further participation in one another's markets).
Snapshot
- The GATS is the service trade rules of the WTO
- Service trade has tremendous trade potential for India as it has a skilled labour force.
- At the same time, countries are putting restrictions on service trade and there amidst low tradability of services.
- GATS define services in four modes.
What is GATS?
GATS envisage the objective of establishing a sound multilateral framework or principles and rules for trade in services. Many countries directly have laws, which restrict entry of foreign services enterprises in areas like finance, media, communications, transport etc.
The GATT looks upon these regulations relating to investment in the service sector as distorting factors affecting free trade. Hence these distortions have to be eliminated or minimized. The GATS Agreement covers all services (there are 161 tradable services under GATS) – financial services (banking insurance etc), education, telecommunications, maritime transport etc.
Service trade expansion has big prospects though countries are in general reluctant to liberalise it. According to the WTO, “while services currently account for over 60 percent of global production and employment, they represent no more than 20 per cent of total trade (BOP basis).”
The Four Modes of Services Supply
The GATS define services in four ‘modes’ of supply: cross-border trade, consumption abroad, commercial presence, and presence of natural persons.
Mode 1: Cross Border
Services which themselves cross-frontiers from one country to another e.g. Distance learning, consultancy, BPO services.
Mode 2: Consumption abroad
Services, which are made available within a country for foreign consumers’, e.g.: tourism, educational students for students, medical treatment etc.
Mode 3: Commercial Presence
Services supplied by an entity of one country, which is commercially pressed in another e.g.: banking, hotel etc.
Mode 4: Movements of natural persons
This is a foreign national providing services like that of doctor, nurse, IT engineer etc. functioning as a consultant, employee, from one country to another.
Services given by governments are exempted from GATS. These are services provided on a non-market basis (e.g. Social security schemes, health Education etc). Besides, Air Transport Services are also exempts from coverage that affects traffic rights. GATS divides services liberalization commitments into two – general obligations and specific obligations.
The GATS is basically a primary step towards service trade that was reached at the Uruguay Round. Service trade liberalization under it is at the entry level stage. As a Multilateral rule making and trade liberalization regime, the GATS has to be expanded by making further discussions.
Taking an inspiration from GATT (General Agreement on Tariffs and Trade) which is a multilateral agreement regulating international trade, in January 1995 a treaty was passed by the World Trade Organization (WTO) in Uruguay Round negotiations known as GATS (General Agreements on Trade in Services). Need for multilateral disciplines in service industry were felt due to a dynamic advancement in technology and removing of monopolies by many countries. The GATS established a rule-based framework for international trade in services and specified the obligations of members within the framework. It ensures fair & equitable treatment of all members and promotes progressive liberalization through successive rounds of negotiations. All members of WTO are parties to the GATS.
The GATS include all services except services supplied in the exercise of a governmental authority (but only if supplied neither on commercial basis nor in competition with other suppliers) and Air Transport Services consisting of air traffic rights and services directly related to the exercise of such rights.
The pillars of the GATS are general obligations, which virtually apply to all members and services and specific commitments resulting from negotiations, limited to sectors and modes of supply in which a member has chosen to undertake access obligations. General obligations include MFN, Transparency. While specific commitments involve market access and national treatment.
MODES OF SUPPLY
The GATS defines trade in services as the supply of a service through any of four modes of supply:
(a) Cross border supply- Occurs when a service crosses a national border. It includes supply of services flowing from territory of one member into the territory of another member. Services are supplied through Tele-Communication, Postal infrastructure. E.g. College having cloud campus, Banking services.
(b) Consumption abroad- It means when a consumer of services moves into another member territory to obtain a service. E.g. Patients coming in India from US for treatment, Tourists.
(c) Commercial Presence- It includes establishing territorial presence in another member territory by a service supplier to provide a service. E.g. Hotel chains, Hospital chains.
(d) Presence of natural persons- It means when a person of one member entering the territory of another member to supply a service. E.g. Doctors going abroad to provide service, Teachers going to foreign universities for teaching.
OBLIGATIONS OF MEMBERS
1. General Obligations– These includes to all services and to all members.
MFN Treatment: Most Favoured Nation treatment means treating one’s trading partners equally. Under GATS, if a country allows foreign competition in a sector, equal opportunities in that sector should be given to service providers from all other WTO members. It is based on Favour one, favour all principle.
Transparency: Members are required to publish promptly “all relevant measures of general application” that affect operation of the agreement. Members must also notify the Council for Trade in Services of new or changed laws, regulations that affect trade in services covered by their specific commitments under the agreement. Each member is required to establish an enquiry point, to respond to requests from other members for information.
2. 2. Specific obligations-Obligations which apply on the basis of commitments, laid down in individual country schedules concerning market access and national treatment in specifically designated sectors.
Market Access: The granting of market access is a commitment undertaken by individual Members in specified sectors after negotiations. It may be made subject to one or more limitations. For example, limitations may be imposed on the number of services suppliers, service operations or employees in a sector, the value of transactions.
National Treatment: National Treatment requires equal treatment for foreign providers and domestic providers. Once a foreign supplier has been allowed to supply a service in one’s country there should be no discrimination in treatment between the foreign and domestic providers. This is not the same as MFN.
Exemptions: Members are allowed to introduce or maintain measures in contravention of their obligations under the Agreement, including the MFN requirement or specific commitments in specific circumstances. These circumstance cover measures necessary to protect public morals or maintain public order, protect human, animal or plant life or health.
The General Agreement on Trade in Servcies (GATS): An Analysis
On 15 April 1994, at the Marrakech Ministerial Meeting, Ministers from over 100 countries signed the Final Act of the Uruguay Round of Multilateral Trade Negotiations. This concluded the eighth Round of GATT Trade Negotiations, which had been launched in September 1986 in Punta del Este, Uruguay. Under the umbrella of the Agreement establishing the World Trade Organisation (WTO), the package comprises agreements on such diverse issues as agriculture, textiles, intellectual property and trade-related investment measures. And, for the first time, parties established worldwide rules on trade in services through the General Agreement for Trade in Services (GATS). It is expected that the GATS, together with the WTO, will enter into force on 1 January 1995.
The initiative for including services in the Uruguay Round came from OECD countries. In view of the growing importance of services trade in world economic relations, the need for a rules-based framework which would in particular incorporate the most advanced non-Members of OECD had become apparent. Now that this goal has been achieved, the present paper is intended to provide an in-depth description of the new worldwide rules governing trade in services.
The GATS, like all other Uruguay Round agreements, is an annex to the Agreement establishing the World Trade Organisation (WTO). It therefore does not have its own signature and ratification process, but will enter into force at the same time as the WTO Agreement and all other Annexes. There is no opting out of the GATS: those who want to benefit from the other elements of the Uruguay Round have to adhere also to the GATS.
The GATS consists of two main parts: The "General Framework" with its annexes, on the one hand, and participating countries' individual "Schedules of Commitment", on the other hand. This construction resembles somewhat that of the OECD Codes of liberalisation which consist of a body of Articles and individual country "schedules" of reservations attached. As is the case under the Codes, it is only possible to define an individual GATS participant's obligations by reading both elements together.
The General Framework of GATS is composed of a preamble and 28 Articles, followed by eight annexes, eight ministerial declarations and decisions, and one "understanding" on financial services. Most of the annexes contain specific provisions applying to certain sectors, whereas the declarations and decisions address general institutional issues, such as the setting up of working parties, work programmes, mandates, etc. The individual country schedules of commitment, plus a consolidated European Union schedule, are grouped in an "Appendix" to the Framework. Several countries have also submitted lists of MFN exemptions together with their schedule. Finally, certain instruments outside the GATS, such as the Understanding on Settlement of Disputes and certain institutional provisions of the WTO Agreement itself, also apply as part of the WTO package.
The presentation of this report is organised as follows: Section II deals with the general principles and obligations, including dispute settlement and institutional rules. Section III analyses, sector by sector, the specific sectoral provisions contained in the annexes, decisions, declarations and understanding. Sections IV and V contain some brief remarks on schedules of commitments and MFN exemption lists, respectively.