U.S. Foreign Trade in Services:
Trends and U.S. Policy Challenges
William H. Cooper
Specialist in International Trade and Finance
Rebecca M. Nelson
Specialist Trends and Policy
Issues
Rachel F. Fefer
Analyst in International Trade and Finance
May 15, 2014September 22, 2015
Congressional Research Service
7-5700
www.crs.gov
R43291
U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
Summary
The term “services” refers to an expandingPolicy Issues
Summary
“Services” refers to a growing range of economic activities, such as construction,
retail and wholesale sales, e-commerce, financial services, professional services (such as
audiovisual; construction;
computer and related services; energy; express delivery; e-commerce; financial; professional
(such as accounting and legal services),; retail and wholesaling; transportation,; tourism,; and
telecommunications. They have
Services have become an important priority in U.S. foreign trade flows and trade
policy and of global trade in
general, although their intangibility, the requirement for direct buyer-provider contact, and other
characteristics have limited the types and volume of services that can be traded. Congress is
expected to consider in the future U.S. trade agreements currently under negotiation that include
services as significant components.
Services constitute an important component of U.S. trade flows. The United States is the largest
exporter of services (14% of the global total in 2011) and the largest importer (10% of the global
total in 2011). In 2012, services accounted for 29% of total U.S. exports and 7% of total imports.
Rapid advances in information technology and the related growth of global value or supply chains
have reduced barriers to trade in services, making an expanding range of services tradable across
national borders.
A number of economists have argued that foreign government barriers prevent U.S. trade in
services from expanding to their potential. The United States has negotiated trade agreements to
lower these barriers. It has been a leading force in doing so under the General Agreement on
Trade in Services (GATS) in the World Trade Organization (WTO) and in free trade agreements,
all of which contain significant provisions on market access and rules for liberalizing trade in
services. The United States is in the midst of negotiating with 11 other countries the Trans-Pacific
Partnership (TPP) agreement and is also one of 23 countries negotiating a possible plurilateral
Trade in Services Agreement (TISA). Services trade is also an important component of the
recently launched negotiations on the Transatlantic Trade and Investment Partnership (TTIP)
agreement between the United States and the European Union (EU), two of the world’s largest
providers of and traders in services.
The outlook for these trade negotiations remains uncertain. In each case, the participants have
difficult issues to overcome. Perhaps one of the most difficult issues is whether regional and
plurilateral agreements will support or undermine the pursuit of a more extensive, multilateral
agreement in the GATS. A related issue is whether participants in the regional and plurilateral
agreements can/should encourage recalcitrant countries, such as the emerging economies—Brazil,
China, and general, accounting for $710.6 billion of U.S. exports and 80% of
U.S. jobs. The types and volume of services that can be traded, however, are limited by their
intangibility (as compared to goods), the requirement for direct buyer-provider contact, and other
unique characteristics. The Administration is currently negotiating three trade agreements that
include services as a significant component. If negotiations are concluded, Congress will consider
legislation to implement the agreements.
The United States is the world’s largest exporter of services (14.3% of the global total in 2013)
and the largest importer (9.8% of the global total in 2013). Rapid advances in information
technology and the related growth of global value and supply chains have reduced barriers to
trade in services, making an expanding range of services tradable across national borders. A
number of economists have argued that “behind the border” barriers imposed by foreign
governments prevent U.S. trade in services from expanding to their full potential.
The United States continues to negotiate trade agreements to lower these barriers. It has been a
leading force in doing so under the General Agreement on Trade in Services (GATS) in the World
Trade Organization (WTO), in free trade agreements, all of which contain significant provisions
on market access and rules for liberalizing trade in services, and in a new plurilateral Trade in
Services Agreement. The United States is currently negotiating three trade agreements that
include trade in services:
The Trade in Services Agreement (TiSA), a plurilateral agreement outside of the
WTO with 22 other countries;
The Trans-Pacific Partnership (TPP) free trade agreement with 11 other
countries; and
The Transatlantic Trade and Investment Partnership (T-TIP) free trade agreement
with the European Union (EU), which would cover the world’s two largest
providers of and traders in services.
The outlook for these trade negotiations remains uncertain. In each case, participants have
difficult issues to address. One issue is whether regional and plurilateral agreements will support
or undermine the pursuit of a more extensive, multilateral agreement in the GATS. A related issue
is whether participants in regional and plurilateral agreements can or should encourage other
countries, such as those with emerging and potentially large services markets—Brazil, China, and
India—to join.
Congress and U.S. trade negotiators face other issues, including how to balance the need for
effective regulations with the objective of opening markets for trade in services; ensuring
adequate and accurate data to measure trade in services to better inform trade policy; and
determining whether renewed trade promotion authority is needed to credibly negotiate trade
agreements on services.
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
Contents
Introduction.further international cooperation efforts are needed to improve the
regulatory environment for services trade beyond initial market access. This report provides
background information and analysis on these and other emerging issues and U.S. international
trade in services, in general. In addition, it examines current negotiations, TiSA, TPP, and T-TIP,
as they relate to services trade.
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U.S. Trade in Services: Trends and Policy Issues
Contents
Introduction ..................................................................................................................................... 1
U.S. Foreign Trade in Services ..................................................................................................................... 2
Modes of Delivery ..................................................................................................................... 2
Overall Trends ........................................................................................................................... 2
Geographical Distribution ......................................................................................................... 4
Trade by Services Type .............................................................................................................. 6
The United States and World Trade in Services 7
World Trade in Services ............................................................................................................ 9
Global Value Chains and Services ....................................................................................... 7... 10
Barriers to Trade in Services ..................................................................................................... 8 11
The Economic Effects of Barriers to Services Trade. .............................................................. 10
Establishing Rules on Services Trade .12
Services Trade Agreements and Negotiations ........................................................................................... 11 14
The WTO and GATS ............................................................................................................... 1214
The GATS .......................................................................................................................... 12 14
Services and the Doha Development Agenda (DDA) .........Doha Round) .............................................. 14 16
Services in U.S. FTAs .............................................................................................................. 15 18
Negative List ..................................................................................................................... 1618
Rules of Origin .................................................................................................................. 1618
Multiple Chapters on Services .......................................................................................... 1618
Regulatory Transparency ................................................................................................... 17
A Recent Case Study: The U.S.-South Korea FTA (KORUS FTA) .................................. 17 19
Regulatory Heterogeneity ................................................................................................. 20
Services in the Current Trade Promotion Authority.......................................................... 21
The Proposed Trade in Services Agreement (TISATiSA) ......................................................... 18
TPP and TTIP21
The Proposed Trans Pacific Partnership (TPP) ................................................................. 25
The Proposed Transatlantic Trade and Investment Partnership (T-TIP) ........................... 26
Outlook ........................ 22
Outlook .................................................................................................................. 28
Issues for Congress ........................ 23
Figures
Figure 1. U.S. Exports of Private Services by Area, 2012 .................................................................................. 5
Figure 2. U.S. Imports of Private Services by Area, 2012.............. 28
Figures
Figure 1. U.S. Cross-Border Trade in Goods and Services, 1992-2014 ............................................................... 6
Figure 3. Tariff Equivalents of Services Barriers........................................................................... 11
Tables
Table 1. U.S. Cross-Border Trade in Goods and Services, 1986-2013 ............................................ 3
Table 2 3
Figure 2. U.S. Services Cross -Border Exports by Geographic Region, 2013 ................................ 5
Figure 3. U.S. Services Cross Border Imports by Geographic Region, 2013 ................................. 6
Figure 4. U.S. Services Exports through Affiliates, 2012 ............................................................... 7
Figure 5. U.S. Services Exports by Type of Service ....................................................................... 8
Tables
Table 1. Services Supplied to Foreign and U.S. Markets through Cross-Border Trade and
Affiliates, 2009-2011 2010-2012.................................................................................................................... 4
Table 3. U.S. Cross-Border Trade in Services by Type2. Commercial Services Trade: Leading Exporters and Importers, 2013 ......................................................... 7
Table 4. Top Ten Country Exporters and Importers of Services in 2012 ......................................... 8
Table 5. Top Ten Exporters and Importers of Services in 2012 ....................................................... 8
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
Contacts
Author Contact Information 9
Table 3. Commercial Services Trade: Leading Exporters and Importers, 2013 ............................ 10
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U.S. Trade in Services: Trends and Policy Issues
Contacts
Author Contact Information .......................................................................................................... 29
Acknowledgments ................................................................................................................... 24...... 29
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U.S. Foreign Trade in Services: Trends and U.S. Policy ChallengesPolicy Issues
Introduction
The term “services” refers to an expanding range of economic activities, such as construction,
retail and wholesale sales, e-commerce, financial services, professional services (such as
audiovisual,
construction; computer and related services; energy; express delivery; e-commerce; financial,
professional (such as accounting and legal services), transportation, tourism,; retail and wholesaling, transportation;
tourism; and telecommunications. Services account
for mosta majority of U.S. economic activity—70
68% of U.S. gross domestic product (GDP) and 80% of U.S.
civilian employment.1 Services are
an important element across the U.S. economy, at the national,
state, and local levels. They not
only function as end-useruse products but also act as the “lifeblood”
of the rest of the economy with transportation services ensuring that goods reach customers and
financial services providing credits for the manufacture. For
example, transportation services move intermediate products along global supply chains and final
products to consumers; telecommunications services open e-commerce channels; and financial
services provide credits for the manufacture and consumption of goods.
Services have become an important component in U.S. foreigninternational trade and, therefore, an
increasingly important priority of U.S trade policy and of global trade in general. The
intangibility of services and other characteristics have limited the types and volume of services
that could be traded across national borders. However, rapidServices
accounted for $711 billion of U.S. exports in 2014.2
Rapid advances in information technology
and the related growth of global value and supply
chains are making an expanding range of
services tradable across national borders.
However, the
intangibility of services and other characteristics have limited the types and volume of services
that can be traded. A number of economists have argued that foreign government barriers prevent
U.S. trade in
services from expanding to their full potential.13 The United States has engagedcontinues to
engage in trade negotiations
on multilateral, plurilateral, bilateral and regional and bilateral agreements to lower these barriers. These current trade
negotiations are occurring within the context of the ongoing policy debate on the value and
appropriateness of trade liberalization.
lower these barriers.
Congress has a significant role to play in negotiating and implementing trade liberalizing
agreements, including those on services. In fulfilling its responsibilities for oversight of U.S.
trade policymaking and implementation, Congress monitors trade negotiations and the
implementation of trade agreements. Members, through consultations with the Administration and
the renewal of trade promotion authority (TPA), establish negotiating priorities for trade
agreementsCongress establishes trade negotiating objectives and
priorities, including through trade promotion authority (TPA) legislation and consultations with
the Administration. More directly, Congress must pass any agreements legislation to implement a trade agreement
requiring changes to U.S. law
before the agreements before it can enter into force in the United States.
This report provides background information and analysis on U.S. foreign trade in services. The
focus of the report is an analysis of the policy challenges that the United States confronts,
especially the challenge of negotiating a set of international international trade in services.
It analyzes policy issues before the United States, especially relating to negotiating international
disciplines on trade in services and
dealing with the complexity of dealing complexities in measuring trade in services. The
report also focuses onexamines emerging
issues and current negotiations, especially those pertaining toincluding the Trade in Services Agreement
(TISA
Agreement (TiSA), the Trans-Pacific Partnership (TPP), and the Transatlantic Trade and Investment
Partnership (TTIP) agreement.
1
See
Investment Partnership (T-TIP).
1
Office of the United States Trade Representative, https://ustr.gov/issue-areas/services-investment/services.
U.S. Department of Labor, Monthly Labor Review: Industry employment and output projections to 2022, December
2013.
2
U.S. Bureau of Economic Analysis, Trade in Goods and Services table: http://www.bea.gov/international/index.htm.
3
See, for example, J. Bradford Jensen, Global Trade in Services: Fear, Facts, and Offshoring, Peterson Institute for
International Economics, August 2011, p. 7.
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U.S. Foreign Policy Issues
U.S. Trade in Services
Modes of Delivery
Because of theThe basic characteristics of services (especially compared to goods),including, are complex due to their
intangibility, and their ability to be conveyed via various formats, such asincluding electronically and direct
direct provider-to-consumer contact,. To address this complexity, members of the World Trade
Organization (WTO) have Organization(WTO) has adopted a system of
classifying four modes of delivery for services. These four modes have been used to classify data
to to
measure trade in services and to classify government measures that affect trade in services in
international agreements. (See (see the text box below.)).
Four Modes of Services DeliveryDelivery4
International agreements on trade in services, including the General Agreement on Trade in Services (GATS), which
is administered by the WTO, identify four modes of supply of services:
Mode 1—Cross-border supply: The service is supplied from one country to another. The supplier and consumer
remain in their respective countries, while the service crosses the border. Example: A U.S. architectural firm is hired
by a client in Mexico to design a building. The U.S. firm does the design in its home country and sends the blueprints
to its client in Mexico.
Mode 2—Consumption abroad: The consumer physically travels to another country to obtain the service.
Example: A
Mexican client travels to the United States to attend training on architecture and stays in a U.S. hotel.
Mode 3—Commercial presence: The supply of a service by a firm in one country via its branch, agency, or whollyownedwholly
owned subsidiary located in another country. Example: A U.S. construction firm establishes a subsidiary in Mexico to
sell services to local clients.
Mode 4—Temporary presence of natural persons: individual suppliers travel temporarily to another country to supply
supply services. Example: aA U.S. computer programmer travels to Mexico to provide training to an employee.
Identifying the various modes of delivery of services is important for measuring the volume of services trade. Each
mode requires a different method of measurement, and the data derived from these measurements are not likely to
be compatible across the four modes, that is, one cannot combine the data on services traded via Mode 1 with data
derived from services traded via Mode 3 in order to obtain a total. Identifying the modes is also important for policy
purposes because issues raised by trade in Mode1can be different from issues raised by trade in another mode. For
example, the trade barriers faced by providers in Mode1 are not necessarily the same as those faced by providers in
Mode 4. Therefore, knowing the different modes helps to frame policy issues and solutions.
Source: The description and examples of modes of delivery are based on, and adapted from, the description
contained in Organization of Economic Cooperation and Development (OECD), GATS: The Case for Open
Services Markets, Paris, 2002. p. 60.
Overall Trends
U.S. foreignMode 1 can be different from issues raised by trade in another mode.
Therefore, knowing the different modes helps to frame policy issues and solutions.
Overall Trends
U.S. international trade in services plays an important role in overall U.S. foreign trade. “Services”
economy and
international trade. Services encompass a range of economic activities including passenger faresexpress delivery,
transportation and other travel and
transportation services; royalties and licensing fees for the use of intellectual
property rights;
express delivery; e-commerce; education services; banking, insurance, and other financial
financial services; accounting, construction, architectural and, engineering, legal services, and other
professional services.
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Measurements of trade in services are captured in two types of data: cross-border trade, which
includes services sold via Modes 1, 2, and 4, described above.25 The second set of data measures
4
The description and examples of modes of delivery are based on, and adapted from, the description contained in
Organization of Economic Cooperation and Development (OECD), GATS: The Case for Open Services Markets, Paris,
2002, p. 60.
5
For example, the purchases by a foreign visitor of a hotel and of other services in the United States are counted as
U.S. exports and such purchases by a U.S. visitor to a foreign country are counted as U.S. imports from that country.
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services sold by an affiliate of a company from one country in the territory and to a consumer of
another country (Mode 3).3
Regarding6
For cross-border trade, in 20132014, services accounted for 30.0% of the $2,343 billion total U.S.
exports (of
goods and services) and 16.5% of total U.S. imports (of goods and services). Table 1 shows that
7% of the $2,852 billion total U.S. imports.7 Figure 1
shows that the United States has continually realized surpluses in services trade, which have
partially offset
large trade deficits in goods trade in the U.S. current account.4
Table 1. U.S. Cross-Border Trade in Goods and Services, 1986-2013
(Billions of Dollars)
Imports
Exports
Balances
Year
Goods
Services
Goods
Services
Goods
Services
1986
223.3
85.4
368.4
80.1
-145.1
5.3
1991
416.9
163.0
491.0
118.5
-74.1
44.5
1996
612.1
237.7
803.3
150.8
-191.2
86.9
1997
679.7
258.8
876.4
166.9
-196.7
91.9
1998
670.2
263.7
917.2
181.0
-247.0
82.7
1999
684.6
272.8
1030.0
189.2
-345.4
83.6
2000
772.2
293.5
1,224.4
217.0
-452.2
76.5
2007
1,148.5
497.2
1,967.9
378.1
-819.4
119.1
2008
1,037.5
535.2
2,137.6
403.4
-1,100.1
131.8
2009
1,069.7
509.2
1,575.5
382.6
-505.8
126.6
2010
1,288.9
553.6
1,934.0
403.2
-645.1
150.4
2011
1,497.4
606.0
2,235.8
427.4
-738.4
178.6
2012
1,561.2
649.3
2,302.7
442.5
-741.5
206.8
2013(p)
1589.7
681.7
2,293.6
452.7
-703.9
229.0
Source: U.S. Department of Commerce. Bureau of Economic Analysis.
Note: p=preliminary.
Many services require direct contact between 8
Figure 1. U.S. Cross-Border Trade in Goods and Services, 1992-2014
($ Billions)
$ Billions
$2,500
Imports: Goods
$2,000
Exports: Goods
$1,500
$1,000
Exports: Services
$500
Imports: Services
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
$0
Source: CRS, based on data from U.S. Department of Commerce, Bureau of Economic Analysis.
Many services require direct contact between the supplier and consumer and, therefore, service
providers often need to establish a presence in the country of the consumer through foreign direct
investment (FDI). For example, providers of legal, accounting, and construction services usually prefer
2
For example, the purchases by a foreign visitor of a hotel and of other services in the United States are counted as
U.S. exports and such purchases by a U.S. visitor to a foreign country are counted as U.S. imports from that country.
3
prefer a direct presence because they need access to expert knowledge of the laws and regulations
of the country in which they are doing business and they require proximity to clients.
In 2012 (the latest year for which published data are available), U.S. firms sold $1,293 billion in
services to foreigners through their majority-owned foreign affiliates. In 2012, foreign firms sold
$801.9 billion in services to U.S. residents through their majority-owned foreign affiliates located
in the United States.9 The data for cross-border trade and for sales by majority-owned affiliates
are not directly compatible due to differences in coverage and classification.10 Nevertheless, the
6
Affiliates are enterprises that are directly or indirectly owned or controlled by an entity in another country to the
extent of 10 percent% or more ownership of the voting stock for an incorporated business, or an equivalent interest for an
unincorporated business.
47
U.S. Bureau of Economic Analysis, online tool http://www.bea.gov/iTable/index_ita.cfm.
8
The current account includes trade in goods and services as well as income earned on foreign investments and
unilateral transfers.
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a direct presence because they need access to expert knowledge of the laws and regulations of the
country in which they are doing business and they require proximity to clients.
In 2011 (the latest year for which published data are available), U.S. firms sold $1,287.0 billion in
services to foreigners through their majority-owned foreign affiliates. In 2011, foreign firms sold
$754.0 billion in services to U.S. residents through their majority-owned foreign affiliates located
in the United States.5 The data for cross-border trade and for sales by majority-owned affiliates
are not directly compatible. Nevertheless, the data presented in Table 2 indicate that in terms of
magnitude, most sales of
9
U.S. Bureau of Economic Analysis, online tool http://www.bea.gov/iTable/index_ita.cfm.
10
More information on services data can be found at
http://www.bea.gov/international/international_services_definition.htm.
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data presented in Table 1 indicate that, in terms of magnitude, a large proportion of sales of
services occur through the commercial presence of companies in foreign
markets.
Table 21. Services Supplied to Foreign and U.S. Markets through
Cross-Border Trade
and Affiliates, 2009-2011
To Foreign Markets
Cross-Border
Trade
Through U.S.
Affiliates
To the U.S. Market
Cross-Border Trade
Through Foreign
Affiliates
2009
492.1
1,071.6
347.7
669.3
2010
537.7
1,130.5
368.0
696.0
2011
606.0
1,287.0
427.4
754.0
Source: Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, October 2013, p. 62.
Conventional trade data do not capture the portion of the total value of exports and imports of
manufactured goods and agricultural products attributed to services. For example, data measure
exports and imports of goods based on the value of the final product. Included in that
measurement, but not disaggregated, is the value of such services as research and development,
design, transportation costs, finance, among others, that are imbedded in the final product.
However, the Organization of Economic Cooperation and Development (OECD) and the WTO
have undertaken a project to measure trade flows based on value-added rather than final cost.
They have estimated that in 2009, close to 50% of the value of U.S. exports of manufactured
goods was attributable to services inputs.6 This finding suggests a larger role for services in
foreign trade than is reflected in conventional trade data.
Geographical Distribution
The United States conducts trade in services (both via cross border trade and foreign direct
investment) with many different regions of the world. (See Figures 1 and 2.) Much of the U.S.
cross-border trade in services in 2012 occurred with EU-member countries. In 2012, 32% of U.S.
exports of services went to the 28 member-countries of the EU, while 35% of U.S. imports of
services came from those countries.7 Japan accounted for 8% of U.S. services exports and 7% of
U.S. services imports, while other Asian and Pacific countries accounted for 12% and 10% of
5
Survey of Current Business, October 2013, p. 64.
OECD, Interconnected Economies: Benefitting from Global Value Chains, Paris, p. 58.
7
As of July 30, 2013, the EU consists of 28 countries with the addition of Croatia.
6
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U.S. exports and imports of services, respectively, in 2012. Canada accounted for 10% and 7% of
U.S. services exports and imports, respectively, in 2012. Of note is India’s emergence as an
important source of services. In 2001, India accounted for 1% of total U.S. imports of services,
and in 2012, it accounted for 5% of total U.S. services imports.8
Figure 1. U.S. Exports of Private Services by Area, 2012
(Cross-border Trade in Percentages of Total)
Source: CRS based on data from the Department of Commerce, Bureau of Economic Analysis.
8
Survey of Current Business, October 2012, pp. 36-37.
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Figure 2. U.S. Imports of Private Services by Area, 2012
(Cross-border Trade in Percentages of Total)
Source: CRS based on data from the Department of Commerce, Bureau of Economic Analysis.
The EU’s dominance in U.S. services trade is even more apparent when taking into account
services that are provided through multinational corporations (MNCs). In 2011 (latest data
available), 43.1% of services supplied by U.S. MNCs were to foreign persons located in EUmember countries, 25.4% to foreign persons located in Asian countries, and 9.8% to foreign
persons located in Canada. In 2011, 54.4% of sales of services by U.S. affiliates of foreign-owned
MNCs to U.S. persons were by MNCs based in EU-member countries, 20.4% by MNCs based in
Asia, and 9.9% by MNCs based in Canada.9
Trade by Services Type
In 2013, business and professional services (accounting, computer services, accounting and legal
services, among others) accounted for 23.8% of U.S. exports and 28.0% of U.S. imports of
services, and insurance and other financial services accounted for 14.6% of U.S. services exports
and for 16.0% of U.S. imports of services. Travel and related services have also played a
significant role in U.S. cross-border services trade, accounting for 21.2% and 20.2% of U.S.
services exports and imports, respectively, in 2013. Passenger fares accounted for another 6.2%
and 8.7% and other transportation services accounted for an additional 6.9% and 13.7% of U.S.
services exports and imports. (See Table 3.)
9
Survey of Current Business, October 2013, p. 62.
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Table 3. U.S. Cross-Border Trade in Services by Type, 2013
(Percentages of Total)
U.S. Exports
Travel
U.S. Imports
21.2%
20.2%
Passenger Fares
6.2%
8.7%
Other Transportation
6.9%
13.7%
19.6%
9.7%
4.0%
1.5%
14.6%
16.0%
2.1%
1.8%
23.8%
28.0%
1.6%
0.4%
Royalties & Fees
Education
Insurance & Other Financial
Telecommunications
Business & Professional
Other
Source: CRS based on data from the Department of Commerce, Bureau of Economic Analysis.
Sales of services by MNCs include a broader range of industries. In 2011 (latest data available),
25.8% of sales in terms of value of services to foreign persons by U.S.-owned MNCs were
accounted for by wholesale and retail trade services. Another 19.6% were accounted for by
financial services, while 14.1% were attributable to sales of professional services, including
computer systems and design, architectural, engineering, and related services, and other
professional services. Another 21.7% of these sales were accounted for in an “other industries”
category that includes mining, utilities, and transportation services.10 Similarly, in 2011, 22.5% of
sales of services to U.S. persons by U.S. affiliates of foreign MNCs were accounted for by
wholesale and retail trade, with another 20.9% accounted for by financial services providers and
23.5% by providers from “other industries.”11
The United States and World Trade in Services
The United States is a major power in world trade in services. According to the WTO, if the EU
countries are treated separately, the United States was the largest single-country exporter (14.1%)
and importer (9.9%) of global commercial services in 2012. (See
10
11
Ibid., p. 34.
Ibid., p. 66.
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Table 4.) The United States was the second largest exporter (18.3%) and second largest importer
(12.7%) in 2012, if the EU is treated as a single entity and intra-EU trade in services is excluded.
(See Table 5.)12
12
World Trade Organization, World Trade Report 2012, Geneva, pp. 32-33.
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Table 4. Top Ten Country Exporters and Importers of Services in 2012
(EU Members treated separately)
Country
Share of World Exports
of Services
United States
14.1%
Country
Share of World Imports of
Services
United States
9.9%
United Kingdom
6.4%
Germany
6.9%
Germany
5.9%
China
6.8%
France
4.8%
United Kingdom
4.3%
China
4.4%
Japan
4.2%
India
3.4%
France
4.2%
Japan
3.2%
India
3.0%
Spain
3.2%
Singapore
2.8%
Singapore
3.1%
Netherlands
2.8%
Netherlands
2.9%
Ireland
2.8%
Source: World Trade Organization, World Trade Report 2012, Geneva, p. 36.
Note: These data do not cumulate data for EU-27 countries.
Table 5. Top Ten Exporters and Importers of Services in 2012
(EU-27 treated as a single entity)
Country
Share of World Exports
of Services
Country
Share of World Imports of
Services
EU27
24.6%
EU27
20.0%
United States
18.3%
United States
12.7%
China
5.7%
China
8.8%
India
4.4%
Japan
5.4%
Japan
4.2%
India
3.9%
Singapore
4.0%
Singapore
3.7%
Hong Kong
3.8%
Canada
3.3%
South Korea
3.3%
South Korea
3.3%
Switzerland
2.6%
Russia
3.2%
Canada
2.6%
Brazil
2.4%
Source: World Trade Organization, World Trade Report 2012, Geneva, p. 37.
Note: These data exclude intra-EU trade.
Barriers to Trade in Services
Because of the fundamental differences between goods and services, the impediments that service
providers face are often different from those faced by goods suppliers. Many impediments in
goods trade—tariffs and quotas, for example—are at the border.
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Restrictions on services trade occur largely within the borders of the importing country. Some of
these restrictions are in the form of government regulations. The right of governments to regulate
some service industries is widely recognized as prudent and necessary to protect consumers from
harmful or unqualified providers. For example, doctors and other medical personnel must be
licensed by government-appointed boards; lawyers, financial services providers, and many other
professional service providers must be also certified in some manner. In addition, governments
apply prudential capital requirements on banks to ensure their solvency. The question in foreign
trade is whether these regulations are applied in a discriminatory and unnecessarily trade
restrictive manner to foreign services providers. Because services transactions more often require
direct contact between consumer and provider than is the case with goods trade, many of the
“trade barriers” that foreign companies face pertain to the establishment of a commercial
presence in the consumers’ country in the form of direct investment (Mode 3) or to the temporary
movement of providers and consumers across borders (Modes 2 and 4).
The GATS under the WTO identifies specific “market access” restrictions as proscribed under its
provisions. These include limits on: the number of foreign service suppliers; the total value of
service transactions or assets; the number of transactions or value of output; the type of legal
entity or joint venture through which services may be supplied; and the share of foreign capital or
total value of foreign direct investment.
In many cases the impediments are government regulations or rules that are ostensibly legitimate
but may intentionally or unintentionally discriminate against foreign providers and impede trade.
Examples of such barriers include
•
restrictions on international payments, including repatriation of profits,
mandatory currency conversions, and restrictions on current account transactions;
•
restrictions on the movement of personnel, including visa and work permit
restrictions;
•
requirements that foreign professionals pass certification exams or obtain extra
training that is not required for local nationals;
•
mandatory hiring of local labor;
•
restrictions on information transfer imposed to protect data and maintain
privacy—“data localization;”
•
“buy national” requirements in government procurement;
•
lack of national treatment in taxation policy or protection from double taxation;
•
government-owned monopoly service providers and requirements that foreign
service providers use a monopoly’s network access or communications
connection providers;
•
government subsidization of domestic service suppliers;
•
discriminatory licensing and certification of foreign professional services
providers; and
•
limitations on foreign direct investment, such as:
•
equity ceilings;
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•
restrictions on the form of investment, that is, a branch, subsidiary, joint
venture, etc.; and
•
requirements that the chief executive officer or other high-level company
officials be local nationals or that a certain proportion of a company’s
directors be local nationals.13
The Economic Effects of Barriers to Services Trade
Measuring the effects of trade barriers in general, and barriers to trade in services, in particular, is
challenging. This challenge occurs because the most significant barriers to trade in services are
nontariff measures that are not readily quantifiable. Economists have constructed methods to at
least estimate the effects, which can help to inform trade policy.
Economists at the Peterson Institute for International Economics (PIIE) recently published the
results of one such method in several related studies. They first determined that U.S. trade in
“business services”—a broad category that includes such activities as information; finance and
insurance; real estate; professional, scientific, and technical services; and management services—
is lower than one might expect given U.S. comparative advantage in those services. To come to
this conclusion, the PIIE economists first determined that many business services are tradable,
that is, capable of being sold from one region to another because many of them are “traded”
between regions within the United States. They then compared the trade profiles of
manufacturing firms and those of service firms and concluded that while about 27% of U.S.
manufacturing firms export, only 5% of U.S. firms providing business services engage in
exporting, even though the United States has a comparative advantage in business services. The
PIIE study concludes that foreign government trade barriers are a major factor in the relatively
low participation of U.S. service providers in trade. It also calculated the export/total sales ratios
of manufacturing firms compared to business services firms, with the former being 0.20 and the
latter 0.04. The study argues that if the ratio of business services could be raised to 0.1 or half of
the manufacturers’ ratio, it would increase total U.S. goods and services exports by 15%.14
Presumably, U.S. imports of services would also increase.
Most economists would argue that by reducing barriers to trade in services, economies can more
efficiently allocate resources, increasing general economic welfare. Opponents of liberalization in
trade in services argue, however, that the United States would be forced to relinquish some
regulatory control that could affect the viability of service sectors.
13
OECD, Working Party of the Trade Committee Assessing Barriers to Trade in Services—Revised Consolidated List
of Cross-Sectoral Barrier, Paris, February 28, 2001.
14
Gary Hufbauer, J. Bradford Jensen, and Sherry Stephenson, Framework for the International Services Agreement,
Peterson Institute for International Economics, Policy Brief, Number PB12-10, April 2012, p. 19.
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Figure 3. Tariff Equivalents of Services Barriers
(Average Ad Valorem Equivalents)
Source: Hufbauer, Schott, and Wong in J. Bradforn Jensen,Global Trade in Service: Fears, Facts, and
Offshoring,Peterson Institute for International Economics, August 2011, p. 152.
A number of economists have developed methods to quantify the impact of barriers on services
trade. Figure 3 shows the results of one method by PIIE economists. The graph measures barriers
to services as average tariff equivalents for each of 21 countries representing a range of levels of
development. The graph shows that Norway and Switzerland, with 0% and 3% rates, respectively,
and United States and the EU each with 6% rates, are among the least restrictive and the most
open markets in terms of trade in services. Japan and South Korea, which are also developed
economies, are more restrictive with 17% and 25% rates ad valorem equivalent rates,
respectively. Other less developed economies are even more restrictive.
Establishing Rules on Services Trade
The United States has been working with trading partners to develop and implement rules on
several fronts in order to reduce barriers and facilitate trade in services without infringing on the
sovereign rights of governments to regulate services for prudential and sound regulatory reasons.
The broadest and most challenging in terms of the number of countries involved are the
multilateral rules contained in the GATS that entered into force in 1995 and is administered by the
159-member World Trade Organization (WTO). The United States has also sought to go beyond
the GATS (WTO-plus) under more comprehensive rules in the free trade agreements (FTAs) it
has in force and in ongoing negotiations on the TISA, the TPP, and the TTIP with the EU. The
U.S. overall objective in each of these fora has been to establish a more open, rules-based trade
regime that is flexible enough to increase the flow of services and to take into account the
expansion of types of services, but clear enough to not impede the ability of governments to
regulate the sectors.
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The WTO and GATS
The seeds for multilateral negotiations in services trade were planted more than a quarter century
ago. In the Trade Act of 1974, Congress instructed the Administration to push for an agreement
on trade in services under the General Agreement on Tariffs and Trade (GATT) during the Tokyo
Round negotiations. While the Tokyo Round concluded in 1979 without a services agreement, the
industrialized countries, led by the United States, continued to press for its inclusion in later
negotiations. Developing countries, whose service sectors are less advanced than those of the
industrialized countries, were reluctant to have services included. Eventually services were
included as part of the Uruguay Round negotiations launched in 1986.15 At the end of the round,
countries agreed to a new set of rules for services, the GATS, and a new multilateral body, the
WTO, to administer the GATS, the GATT, and the other agreements reached.
The GATS
The GATS provides the first and only multilateral framework of principles and rules for
government policies and regulations affecting trade in services among the 159 WTO countries
representing many levels of economic development. In so doing, it provides the foundation or
floor on which rules in other agreements on services are based. As with the rest of the WTO, the
GATS has remained a work in progress. The agreement is divided into six parts.16
Part I (Article I) defines the scope of the GATS. It provides that the GATS applies—
•
to all services, except those supplied in the routine exercise of government
authority;
•
to all government barriers to trade in services at all levels of government—
national, regional, and local; and
•
to all four modes of delivery of services.
Part II (Articles II-XV) presents the “principles and obligations,” some of which mirror those
contained in the GATT for trade in goods, while others are specific to services. They include
•
unconditional most-favored-nation (MFN), non-discriminatory treatment –
services imported from one member country cannot be treated any less favorably
than the services imported from another member country;17
•
transparency—governments must publish rules and regulations;
•
reasonable, impartial and objective administration of government rules and
regulations that apply to covered services;
15
Geza Feketekuty, International Trade in Services: An Overview and Blueprint for Negotiations, American Enterprise
Institute,. Ballinger Publishers. 1988. p. 194.
16
This description of the GATS is based on WTO Secretariat—Trade in Services Division. An Introduction to the
GATS, October 1999, available at http://www.wto.org. Not all services issues were resolved when the Uruguay Round
was completed in 1993.
17
The GATS differs from the GATT in that it has allowed members to take temporary exemptions to MFN treatment.
The exemptions are listed in a special annex to the GATS. The GATS allows only these one-time exemptions. The
GATS (as is the case of the GATT) also allows MFN exemptions in the cases of regional agreements.
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•
monopoly suppliers must act consistently with obligations under the GATS in
covered services;
•
a member incurring balance of payments difficulties may temporarily restrict
trade in services covered by the agreement; and
•
a member may circumvent GATS obligations for national security purposes.
Part III (Articles XVI-XVIII) of the GATS establishes market access and national treatment
obligations for members. The GATS—
•
binds each member to its commitments once it has made them, that is, a member
country may not impose less favorable treatment than what it has committed to;
•
prohibits member-country governments from placing limits on suppliers of
services from other member countries regarding: the number of foreign service
suppliers; the total value of service transactions or assets; the number of
transactions or value of output; the type of legal entity or joint venture through
which services may be supplied; and the share of foreign capital or total value of
foreign direct investment;
•
requires that member governments accord service suppliers from other member
countries national treatment, that is, a foreign service or service provider may not
be treated any less favorably than a domestic provider of the service; and
•
allows members to negotiate further reductions in barriers to trade in services.
Importantly, unlike MFN treatment and the other principles listed in Part II, which apply to all
service providers more or less unconditionally, the obligations under Part III are restricted. They
apply only to those services and modes of delivery listed in each member’s schedule of
commitments. Thus, unless a member country has specifically committed to open its market to
service suppliers in a particular service that is provided via one or more of the four modes of
delivery, the national treatment and market access obligations do not apply. This is often referred
to as the positive list approach to trade commitments. Each member country’s schedule of
commitments is contained in an annex to the GATS.18 The schedules of market access
commitments are, in essence, the core of the GATS.
and Affiliates, 2010-2012
(Billions of Dollars)
U.S. Exports
U.S. Imports
Cross-Border
Trade
Through U.S.owned Affiliates
Cross-Border
Trade
Through Foreignowned Affiliates
2012
$654.9
$1,293.0
$450.4
$801.9
2011
$627.8
$1,247.0
$435.8
$781.6
2010
$563.3
$1,155.2
$409.3
$701.2
Source: Department of Commerce, Bureau of Economic Analysis available online at http://www.bea.gov.
Although services contribute to the value of manufactured and agricultural products, conventional
trade data, which are not on a value-added basis, do not attribute any portion of their traded value
to services trade. Data measure exports and imports of goods based on the value of the final
product (e.g., medical device or t-shirt). Included in that measurement, but not disaggregated, is
the value of such services as research and development, design, transportation costs, and finance,
among others, that are imbedded in the final product. However, the Organization of Economic
Cooperation and Development (OECD) and the WTO have undertaken a project to measure trade
flows based on value-added11 rather than final cost. They estimate that in 2009, close to 50% of
the value of U.S. exports of manufactured goods was attributable to services inputs.12 This finding
suggests a larger role for services in international trade than is reflected in conventional trade
data, and is likely to grow in importance with the growth of global supply chains. An economist
at Standard Chartered also argues that there are discrepancies in trade statistics, showing that by
traditional measures services are only 20% of global exports but, by his estimates of value-added,
services account for 45%.13
Geographical Distribution
The United States conducts trade in services (both via cross border trade and FDI) with many
different regions of the world (See Error! Reference source not found. and Error! Reference
urce not found.). Europe accounted for the majority of U.S. cross-border exports, with the United
Kingdom (UK) alone accounting for 9% of U.S. services exports and 10% of services imports in
2013. Apart from the UK, 28% of U.S. exports of services went to the rest of Europe, while 32%
of U.S. imports of services came from those countries. Canada accounted for 9% of U.S. services
exports and 7% of U.S. services imports; China was 6% and 3% respectively, while other Asian
and Pacific countries accounted for 16% of both U.S. exports and imports of services in 2013.14
11
Trade in value-added is a statistical approach that estimates the source(s) of value (by country and industry) that is
added in producing goods and services for export (and import). It traces the value added by each industry and country
in the global supply chain and allocates the value-added to these source industries and countries.
More information on Trade in Value Added can be found at: http://www.oecd.org/sti/ind/whatistradeinvalueadded.htm.
12
OECD, Interconnected Economies: Benefitting from Global Value Chains, Paris, p. 58.
13
John Calverley, "The Global Economy Needs More Trade in Services," Wall Street Journal, July 1, 2015.
14
U.S. Bureau of Economic Analysis (BEA), online tool http://www.bea.gov/iTable/index_ita.cfm .
(continued...)
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Figure 2. U.S. Services Cross -Border Exports by Geographic Region, 2013
(Percentage of Total)
Source: CRS, based on data from the Department of Commerce, Bureau of Economic Analysis.
Figure 3. U.S. Services Cross Border Imports by Geographic Region, 2013
(Trade in Percentage of Total)
Source: CRS, based on data from the Department of Commerce, Bureau of Economic Analysis.
(...continued)
Due to data limitations, BEA is not able to disaggregate all services trade data to a country or sector level.
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Europe’s dominance in U.S. services trade is even more apparent when taking into account
services that are provided through multinational corporations (MNCs) (See Figure 4). In 2012
(latest data available), 49.6% of services supplied by U.S. MNCs were to foreign persons located
in European countries, 25.9% to foreign persons located in Asian countries, and 9.9% to foreign
persons located in Canada. In 2012, 61.1% of sales of services to U.S. persons by U.S. affiliates
of foreign-owned MNCs were by MNCs based in European countries; 22.5% by MNCs based in
Asia, Middle East, Africa; and 10.1% by MNCs based in Canada.15
Figure 4. U.S. Services Exports through Affiliates, 2012
(Percentages of Total)
Source: CRS, based on data from the Department of Commerce, Bureau of Economic Analysis.
Trade by Services Type
The U.S. Bureau of Economic Analysis divides services into nine categories16:
Maintenance and repair services;
Transport;
Travel (for all purposes including tourism, education);
Insurance services;
Financial services;
Charges for the use of intellectual property (e.g., trademarks, franchise fees);
15
Ibid.
As of June 4, 2014, the Bureau of Economic Analysis (BEA) updated its presentation of trade in services to align
with the International Monetary Fund Balance of Payments Manual. For additional information, see “Comprehensive
Restructuring and Annual Revision of the U.S. International Transactions Accounts,” published in the July 2014 BEA
Survey of Current Business.
16
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Telecommunications, computer, and information services;
Other business services (e.g., research and development, accounting, engineering); and
Government goods and services.
In 2014, U.S. exports covered a diverse range of services (See Figure 5). Travel accounted for the
largest percent of cross-border U.S. exports at 25%. Royalties and fees generated from
intellectual property as well as other business services each contributed another 18%.
Transportation and financial services were 13% and 12% respectively of cross-border exports.17
Figure 5. U.S. Services Exports by Type of Service
(Billions of Dollars)
Source: CRS, based on data from the Department of Commerce, Bureau of Economic Analysis.
Note: n.i.e. indicates “not included elsewhere”
Sales of services by MNCs via commercial presence (Mode 3) include a broader range of
industries. In 2012 (latest data available), 26.2% of the value of services sold to foreign persons
by U.S.-owned MNCs was from wholesale and retail trade services. Additionally, financial
services accounted for 17.5% of the value; sales of professional services, including computer
17
Ibid.
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systems management and design, architectural, engineering, and other professional services for
15.1%; information-related services for 13.3%; and “other industries” (a category that includes
mining, utilities, transportation, and other services) for 22.1%. Manufacturing accounted for the
smallest share at 2.4%, followed by real estate at 3.4%.18
The total value of services supplied to U.S. persons by U.S. affiliates of foreign MNCs was less
than two-thirds the size of the value of services supplied to foreign persons by U.S.-owned
MNCs. The composition of the services supplied, though, was similar in both directions. In 2012,
for sales of services to U.S. persons by U.S. affiliates of foreign MNCs, wholesale and retail trade
accounted for 23.1%, and financial services providers for 21.0%. Another 23.6% was by
providers from “other industries.”19
World Trade in Services
The United States is a major exporter and importer of services in global markets. According to the
WTO, if the European Union (EU) 20 countries are treated separately, the United States was the
largest single-country exporter (14.3%) and importer (9.8%) of global commercial services in
2013 (See Table 2). The United States was the second-largest exporter (18.7%) and importer
(12.7%) in 2013, if the EU is treated as a single entity (See Table 3).
Table 2. Commercial Services Trade: Leading Exporters and Importers, 2013
Rank
Exporter
Value
($ bn)
Share
(%)
Annual
%
Change
Rank
Importer
Value
($ bn)
Share
(%)
Annual
%
Change
1
United
States
662
14.3
5
1
United
States
432
9.8
4
2
United
Kingdom
293
6.3
2
2
China
329
7.5
18
3
Germany
286
6.2
8
3
Germany
317
7.2
8
4
France
236
5.1
10
4
France
189
4.3
8
5
China
205
4.4
7
5
United
Kingdom
174
4.0
-1
6
India
151
3.2
4
6
Japan
162
3.7
-7
7
Netherlands
147
3.2
12
7
Singapore
128
2.9
4
8
Japan
145
3.1
2
8
Netherlands
127
2.9
7
9
Spain
145
3.1
6
9
India
125
2.8
-3
10
Hong Kong,
China
133
2.9
6
10
Russian
Federation
123
2.8
18
Source: World Trade Organization, World Trade Report 2014, p. 36.
18
Ibid. Note that U.S. Bureau of Economic Affairs uses the terms “MNE” to signify multinational enterprises which is
equivalent to MNC, “MOUSAs” for majority-owned U.S. affiliates, and “MOFAs” for majority-owned foreign
affiliates.
19
Ibid.
20
As of July 30, 2013, the EU consists of 28 countries with the addition of Croatia.
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Table 3. Commercial Services Trade: Leading Exporters and Importers, 2013
Rank
Exporter
Value
($ bn)
Share
(%)
Annual
%
Change
Rank
1
Extra-EU(28)
exports
891
25.2
6
1
2
United
States
662
18.7
5
3
China
205
5.8
4
India
151
5
Japan
6
Importer
Value
($ bn)
Share
(%)
Annual
%
Change
ExtraEU(28)
exports
668
19.7
4
2
United
States
432
12.7
4
7
3
China
329
9.7
18
4.3
4
4
Japan
162
4.8
-7
145
4.1
2
5
Singapore
128
3.8
4
Hong Kong,
China
133
3.8
6
6
India
125
3.7
-3
7
Singapore
122
3.5
4
7
Russian
Federation
123
3.6
18
8
Korea,
Republic of
112
3.2
1
8
Korea,
Republic of
106
3.1
1
9
Switzerland
93
2.6
5
9
Canada
105
3.1
-1
10
Canada
78
2.2
0
10
Brazil
83
2.5
7
Source: World Trade Organization, World Trade Report 2014, p. 37.
Note: Excludes Intra-EU trade.
Global Value Chains and Services
U.S. firms are leveraging advances in information technology and expanding global value chains
to bring goods and services to market. Today, more than half of global manufacturing imports are
intermediate goods traveling within supply chains while over 70% of the world’s services imports
are intermediate services.21 Intermediate services embedded within a value chain include, not
only transportation and distribution to move goods along, but also research and development,
design and engineering, as well as business services such as legal, accounting, or financial
services. Global value chains have expanded and redefined the role that services play in
international trade and increased the number of jobs in the U.S. economy that are tied directly and
indirectly to international trade.
The growth of global value chains in which economic activities are fragmented across multiple
countries and regions has heightened the interdependence and interconnectedness of economies.
U.S. industries could potentially gain access to a wider marketplace for raw materials, less
expensive labor, lower production costs, as well as talents and specializations from across the
world. By creating global supply chains, businesses may increase productivity and efficiency,
lower costs, and create new offerings for companies and consumers. Using global supply chains,
however, entails potential costs and risks. Managing a complex supply chain across countries
and/or time zones can be difficult and create additional costs. Some analysts point out that the
benefits of increasingly interconnected supply chains may also be offset by potential costs
21
OECD, Interconnected Economies: Benefitting from Global Value Chains – Synthesis Report, 2013.
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associated with over-reliance on foreign or dispersed suppliers, or increased exposure or
vulnerability to external shocks from abroad, such as environmental disaster (e.g., earthquake) or
market disturbances (e.g., financial crash or truck driver strike).22
Barriers to Trade in Services
Because of the fundamental differences between goods and services, the impediments that service
providers face are often different from those faced by goods suppliers. Many impediments in
goods trade—tariffs and quotas, for example—are at the border.
By contrast, restrictions on services trade occur largely within the importing country, “behind the
border” barriers. Some of these restrictions are in the form of government regulations. The right
of governments to regulate service industries is widely recognized as prudent and necessary to
protect consumers from harmful or unqualified providers. For example, doctors and other medical
personnel must be licensed by government-appointed boards; lawyers, financial services
providers, and many other professional service providers must be also certified in some manner.
In addition, governments apply minimum capital requirements on banks to ensure their solvency.
Each government can determine what it deems to be a prudent level of regulation. However, one
concern in international trade is whether these regulations are applied in a discriminatory and
unnecessarily trade restrictive manner to foreign service providers that limits market access.
Because services transactions more often require direct contact between the consumer and
provider than is the case with goods trade, many of the “trade barriers” that foreign companies
face pertain to the establishment of a commercial presence in the consumers’ country in the form
of direct investment (Mode 3) or to the temporary movement of providers and consumers across
borders (Modes 2 and 4).
The GATS under the WTO identifies specific “market access” restrictions as proscribed under its
provisions. These include limits on the following: the number of foreign service suppliers, the
total value of service transactions or assets, the number of transactions or value of output, the type
of legal entity or joint venture through which services may be supplied, and the share of foreign
capital or total value of foreign direct investment.
In many cases the impediments are government regulations or rules that are ostensibly legitimate
but may intentionally or unintentionally discriminate against foreign providers and impede trade.
Examples of such barriers include:
restrictions on international payments, including repatriation of profits,
mandatory currency conversions, and restrictions on current account transactions;
requirements that foreign professionals pass certification exams or obtain extra
training that is not required for local nationals;
forced localization requirements;
restrictions on data flows and information transfer imposed to protect data and
maintain privacy or other localization requirements;
“buy national” requirements in government procurement;
lack of national treatment in taxation policy or protection from double taxation;
22
Aaditya Mattoo, Services Trade and Regulatory Cooperation, E15, July 2015, http://e15initiative.org/.
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government-owned monopoly service providers and requirements that foreign
service providers use a monopoly’s network access or communications
connection providers;
government subsidization of domestic service suppliers;
discriminatory licensing and certification of foreign professional services
providers;
restrictions on the movement of personnel, including temporary business visa and
work permit restrictions; and
limitations on foreign direct investment, such as: equity ceilings; restrictions on
the form of investment and rights of establishment, that is, a branch, subsidiary,
joint venture, etc.; and requirements that the chief executive officer or other highlevel company officials be local nationals or that a certain proportion of a
company’s directors be local nationals.23
The Economic Effects of Barriers to Services Trade
Measuring the effects of trade barriers in general, and barriers to trade in services in particular, is
challenging. This challenge occurs because the most significant barriers to trade in services are
nontariff measures that are not readily quantifiable. Economists have constructed methods to at
least estimate the effects, which can help to inform trade policy. However, these studies have
limitations, are sensitive to the assumptions made, and may not necessarily reflect the entire range
of factors influencing trade flows.
Most economists argue that by reducing overall barriers to trade in services, economies can more
efficiently allocate resources, increasing general economic welfare. Opponents of liberalization in
trade in services argue, however, that the United States would be forced to relinquish some
regulatory control that could affect the viability of service sectors
Economists at the Peterson Institute for International Economics (PIIE) published the results of
one such method in several related studies. They first determined that U.S. trade in “business
services”—a category that includes such activities as information, financial, scientific, and
management services—is lower than one might expect given U.S. comparative advantage in those
services. To come to this conclusion, the PIIE economists first determined that many business
services are tradable, that is, capable of being sold from one region to another because many of
them are “traded” between regions within the United States. Based on these assumptions, they
compared the trade profiles of manufacturing firms and those of service firms and concluded that
while about 27% of U.S. manufacturing firms export, only 5% of U.S. firms providing business
services engage in exporting, even though the United States has a comparative advantage in
business services. The PIIE study concludes that foreign government trade barriers are a major
factor in the relatively low participation of U.S. service providers in trade. It also calculated the
export/total sales ratios of manufacturing firms compared to business services firms, with the
former being 0.20 and the latter 0.04. The study argues that if the ratio of business services could
be raised to 0.1 or half of the manufacturers’ ratio, it would increase total U.S. goods and services
exports by 15%.24 Given that four-fifths of the U.S. private sector workforce is in services, a
23
OECD, Working Party of the Trade Committee Assessing Barriers to Trade in Services—Revised Consolidated List
of Cross-Sectoral Barrier, Paris, February 28, 2001.
24
Gary Hufbauer, J. Bradford Jensen, and Sherry Stephenson, Framework for the International Services Agreement,
Peterson Institute for International Economics, Policy Brief, Number PB12-10, April 2012, p. 19.
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U.S. Trade in Services: Trends and Policy Issues
change in the ratio of exporting service businesses could have a significant impact.25 Presumably,
U.S. imports of services would also increase.
Nontariff barriers for services specifically related to digital trade and data flows establish
restrictions that may impact what a firm offers in a market or how it operates. For example, data
transfer regulations that restrict cross-border data flows (“forced” localization barriers to trade),
such as requiring locally based servers, may limit the type of financial transactions and services
that a firm can sell in a given country (see text box below). Similarly, country-specific data
regulations may create a disincentive for U.S. firms to invest in certain markets if a firm is
hindered in its ability to export its own data from a foreign affiliate to a U.S.-based headquarters
in order to aggregate and analyze information from across its global operations. The proponents
of data localization seek to ensure privacy of citizens, security, and domestic control. Others point
out that maintaining data within a country does not necessarily guarantee security or protect a
country from exposure to foreign attacks.26 Opponents of localization restrictions on digital trade
also point to lost efficiencies and increased costs of not allowing a free flow of information across
borders. According to the U.S. International Trade Commission, based on 2014 estimates,
decreasing barriers to cross -border data flows would increase GDP in the United States by 0.1 to
0.3 percent.27
Localization Requirements as Trade Barriers
Localization requirements by other countries can create trade barriers to U.S. businesses, whether in developed or
developing economies. For example, under a Canadian federal initiative to consolidate information technology
services across 63 Canadian federal government email systems, the government prohibits the contracting company
from allowing data to go outside of Canada based on a national security rationale. U.S. firms leveraging new
technologies such as cloud-based services are therefore precluded from competing for the project. Also citing
national security and consumer rights, China recently asked U.S. technology firms to promise to store Chinese user
data only in China and provide the Chinese government authorities access to that data. Agreeing to such promises
creates a challenge for U.S. companies seeking to do business in the growing Chinese market.28
An OECD study on services trade restrictions (STRI) analyzed the relationship between services
trade restrictions, cross-border trade in services, and trade in downstream manufactured goods.29
The study finds that more restrictive countries not only import less in services but also export
less, suggesting that restrictions also hurt the competitiveness of domestic industry. The negative
effect of trade restrictions holds true across the various service sectors the researchers
investigated, with STRIs having the largest impact on financial services.
25
U.S. Chamber of Commerce, Trade in Services Agreement, Issue Brief, April 16, 2015,
https://www.uschamber.com/.
26
For more on data vulnerabilities and cybersecurity, see CRS Report R43317, Cybersecurity: Legislation, Hearings,
and Executive Branch Documents, by Rita Tehan.
27 United States International Trade Commission, Digital Trade in the U.S. and Global Economies, Part 2, 2014, p.1314.
28
Ambassador Michael B.G. Froman, 2015 National Trade Estimate Report on Foreign Trade Barriers, Office of the
United States Trade Representative, 2015, p. p.150.
Paul Mozur, "China Tries to Extract Pledge of Compliance From U.S. Tech Firms," New York Times, September 16,
2015.
29
Nordås, H. K. and D. Rouzet (2015), “The Impact of Services Trade Restrictiveness on Trade Flows: First
Estimates”, OECD Trade Policy Papers, No. 178, OECD Publishing.
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U.S. Trade in Services: Trends and Policy Issues
Services Trade Agreements and Negotiations
The United States is working with trading partners to develop and implement rules on several
fronts in order to reduce barriers and facilitate trade in services without infringing on the
sovereign rights of governments to regulate services for prudential and sound regulatory reasons.
The broadest and most challenging in terms of the number of countries involved are the
multilateral rules contained in the GATS that entered into force in 1995 and are administered by
the 161-member World Trade Organization (WTO). The United States has also sought to go
beyond the GATS (WTO-plus) under more comprehensive rules in the free trade agreements
(FTAs) it has in force and in ongoing negotiations on the TiSA, TPP, and T-TIP. The U.S. overall
objective in each of these fora has been to establish a more open, rules-based trade regime that is
flexible enough to increase the flow of services and to take into account the expansion of types of
services, but clear enough to not impede the ability of governments to regulate the sectors.
One complication for the United States is that while trade negotiations are handled by the federal
government, it is often the states that regulate services, including licensing and certification
requirements. While regulations may vary across states, they all must comply with the
commitments made by the federal government in international trade agreements.
The WTO and GATS
The seeds for multilateral negotiations in services trade were planted more than forty years ago.
In the Trade Act of 1974, Congress instructed the Administration to push for an agreement on
trade in services under the General Agreement on Tariffs and Trade (GATT) during the Tokyo
Round negotiations. While the Tokyo Round concluded in 1979 without a services agreement, the
industrialized countries, led by the United States, continued to press for its inclusion in later
negotiations. Developing countries, whose service sectors are less advanced than those of the
industrialized countries, were reluctant to have services included. Eventually services were
included as part of the Uruguay Round negotiations launched in 1986.30 At the end of the round in
1993, countries agreed to a new set of rules for services, the GATS, and a new multilateral body,
the WTO, to administer the GATS, the GATT, and the other agreements reached.
The GATS
The GATS provides the first and only multilateral framework of principles and rules for
government policies and regulations affecting trade in services among the 161 WTO countries
representing many levels of economic development. In so doing, it provides the foundation or
floor on which rules in other agreements on services are based. As with the rest of the WTO, the
GATS has remained a work in progress. The agreement is divided into six parts.31
Part I (Article I) defines the scope of the GATS. It provides that the GATS applies:
to all services, except those supplied in the routine exercise of government
authority;
30
Geza Feketekuty, International Trade in Services: An Overview and Blueprint for Negotiations, American Enterprise
Institute,. Ballinger Publishers. 1988, p. 194.
31
This description of the GATS is based on WTO Secretariat—Trade in Services Division. An Introduction to the
GATS, October 1999, available at http://www.wto.org. Not all services issues were resolved when the Uruguay Round
was completed in 1993.
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U.S. Trade in Services: Trends and Policy Issues
to all government barriers to trade in services at all levels of government—
national, regional, and local; and
to all four modes of delivery of services.
Part II (Articles II-XV) presents the “principles and obligations,” some of which mirror those
contained in the GATT for trade in goods, while others are specific to services. They include:
unconditional most-favored-nation (MFN), nondiscriminatory treatment—
services imported from one member country cannot be treated any less favorably
than the services imported from another member country;32
transparency—governments must publish rules and regulations;
reasonable, impartial, and objective administration of government rules and
regulations that apply to covered services;
monopoly suppliers must act consistently with obligations under the GATS in
covered services;
a member incurring balance of payments difficulties may temporarily restrict
trade in services covered by the agreement; and
a member may circumvent GATS obligations for national security purposes.
Part III (Articles XVI-XVIII) of the GATS establishes market access and national treatment
obligations for members. The GATS—
binds each member to its commitments once it has made them, that is, a member
country may not impose less favorable treatment than what it has committed to;
prohibits member-country governments from placing limits on suppliers of
services from other member countries regarding the number of foreign service
suppliers, the total value of service transactions or assets, the number of
transactions or value of output, the type of legal entity or joint venture through
which services may be supplied, and the share of foreign capital or total value of
foreign direct investment;
requires that member governments accord service suppliers from other member
countries national treatment, that is, a foreign service or service provider may not
be treated any less favorably than a domestic provider of the service; and
allows members to negotiate further reductions in barriers to trade in services.
Importantly, unlike MFN treatment and the other principles listed in Part II, which apply to all
service providers more or less unconditionally, the obligations under Part III are restricted. They
apply only to those services and modes of delivery listed in each member’s schedule of
commitments. Thus, unless a member country has specifically committed to open its market to
service suppliers in a particular service that is provided via one or more of the four modes of
delivery, the national treatment and market access obligations do not apply. This is often referred
to as the positive list approach to trade commitments. Each member country’s schedule of
commitments is contained in an annex to the GATS.33 The schedules of market access
commitments are, in essence, the core of the GATS.
32
The GATS differs from the GATT in that it has allowed members to take temporary exemptions to MFN treatment.
The exemptions are listed in a special annex to the GATS. The GATS allows only these one-time exemptions. The
GATS (as is the case of the GATT) also allows MFN exemptions in the cases of regional agreements.
33
More information on GATS schedules can be found at https://www.wto.org/english/tratop_e/serv_e/guide1_e.htm.
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U.S. Trade in Services: Trends and Policy Issues
Parts IV-VI (Articles XIX-XXIX) are technical elements of the agreement. Among other things,
they require that, no later than 2000, the GATS members start new negotiations (which they did)
to expand coverage of the agreement and that conflicts between members involving
implementation of the GATS are to be handled in the WTO’s dispute settlement mechanism. The
GATS also includes eight annexes, including one on MFN exemptions. Another annex provides a
“prudential carve out,” that is, a recognition that governments take “prudent” actions to protect
investors or otherwise maintain the integrity of the national financial system. These prudent
actions are allowed, even if they conflict with obligations under the GATS.
Not all of the issues in services were resolved when the Uruguay Round negotiations ended in
1994. Fifty-six WTO members, mostly developed economies, negotiated and concluded an
agreement in 1997 in which they made commitments on financial services. The schedules of
18
See out-of-print CRS Report 95-1051, Services Trade and the Uruguay Round, by Arlene Wilson, p. 17 (available
from author).
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
commitments largely reflected national regimes already in place.1934 Furthermore, 69 WTO
members negotiated and concluded an agreement in 1997 on telecommunications services. That
agreement laid out principles on competition safeguards, interconnection policies, regulatory
transparency, and the independence of regulatory agencies. Both agreements were added to the
GATS as protocols.2035 Today, a total of 108 WTO members have made some level of commitment
to facilitate trade in telecommunications services.36
Services and the Doha Development Agenda (DDADoha Round)
Article XIX of the GATS required WTO members to begin a new set of negotiations on services
in 2000 as part of the so-called WTO “built-in agenda” to complete what was unfinished during
the Uruguay Round and to expand the coverage of the GATS to further liberalize trade in
services. However, because no agreement
was reached, the services negotiations were folded—
along with agriculture and non-agriculture
nonagriculture negotiations—into the agenda of the Doha
Development Agenda (DDADoha Round) round that was launched
in December 2001. By most accounts, the DDA negotiations, which are officially in their 12th
year, are at a standstill at best. At the December 2005 biennial WTO Ministerial meeting in Hong
Kong, WTO members expressed widespread disappointment with the offers that membercountries had made in the services negotiation, because they failed to reflect even current levels
of market openness.
WTO leaders and member countries have attempted to re-start momentum in the DDA process in
general and in the services negotiations in particular. Initially, the service negotiations were
conducted in a country-by-country, “request-offer” format, where members would first indicate
what they wanted from the negotiations and then follow-up with concessions on openness they
were willing to offer. At the Hong Kong ministerial, the members agreed to shift tactics and try a
“plurilateral” offer process whereby like-minded members would group in clusters to develop
offers in more than 20 specific sectors. While some offers emerged, the services negotiations,
along with the other elements of the DDA round, have largely been considered of limited success
at best and have been relatively inactive since 2011. in December 2001.37
U.S. priorities in the services negotiations included the following areas:
•
removing unnecessary restrictions on foreign providers establishing a
commercial presence;
•
improving the quality of commitments from what was established originally in
the GATS;
•
regulatory transparency so that foreign services providers are better informed
about host country regulations that may affect them; and
•
expanding market access in financial services, telecommunication services,
express delivery, energy services, environmental services, distribution services,
education and training services, professional services, computer and related
services, and audiovisual and advertising services.
1934
Marchetti, Juan A., Financial Services Liberalization in the WTO and PTAs, in Juan A. Marchetti, Juan A. and
Martin Roy, (eds), Opening Markets for Trade in Services: Countries and Sectors in Bilateral WTO Negotiations,
World Trade Organization, Cambridge University, 2008, p. 323.
2035
Tuthill, L. Lee and Laura B. Sherman, Telecommunications: anCan Trade Agreements Keep Up with Technology?, in
Marchetti, Juan A. and martin Roy, (eds), Opening Markets for Trade in Services: Countries and Sectors in Bilateral
WTO Negotiations, World Trade Organization, Cambridge University, 2008.
36
World Trade Organization, Services: Sector by Sector Telecommunications services, https://www.wto.org/english/
tratop_e/serv_e/telecom_e/telecom_e.htm.
37
For more information, see CRS In Focus IF10002, The World Trade Organization at 20, by Ian F. Fergusson.
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
Several possible reasons can be cited for the lack of progress. One is the division between
Policy Issues
In general, the Doha Round has been characterized by persistent differences among developed
and developing countries on major issues in tariffs and nontariff barriers for goods, services, and
agriculture. With respect to services, despite continued meetings, the Doha Round discussions
appear to have stalled. Several possible reasons can be cited for the slow speed of progress. One
is the division between developed countries that have advanced services sectors employing highly-
skilled labor and
developing countries with less-developed service industries. The former group,
including the
United States and the EU, seeks market opportunities for its services providers and
has been more
willing to open its markets to competition. The latter group, which includes China,
India, and
Malaysia, has been more protective of its domestic services providers.2138
The lack of progress in the agriculture and non-agriculturenonagriculture market access (NAMA) negotiations
in the DDA in
the Doha Round has also affected the services negotiations. Some developing countries asserted that
that they would not improve their offers until the United States and the EU commit to reduce their
agriculture subsidies. In addition, the “single undertaking” principle, under which the members
conducted the DDA round, meantDoha Round, means success in one area of the negotiations, required success in all
areas.
Another reason for the lack ofslow progress could be the complexity of the agenda of the services
negotiations and the number of players involved. The term “services” includes a broad range of
economic activities, many with few characteristics in common except that they are not goods. The
trade barriers that exporters facefaces differ across service sectors, making the formulation of trade
rules a
significant challenge. For example, licensing regulations are especially important to
professional professional
service providers, such as lawyers and medical professionals, while data transfer
regulations are
important to financial services providers. Furthermore, services negotiations
include many
participants. In addition to trade ministers, they include representatives of finance
ministries and
regulatory agencies, many of whom do not consider trade liberalization a primary
part of their
mission. In addition, negotiators have found it difficult to formulate mechanisms that
distinguish distinguish
between government regulations that are purely protectionist and those that have
legitimate purposes.22
Frustration with the DDA negotiations has likely contributed to the proliferation of bilateral and
regional trade agreements that include provisions on services and services-related activities (for
example, foreign direct investment) and for alternative frameworks. legitimate
purposes.39
WTO Doha Round Negotiations on Services: Latest Developments
The latest Ministerial Conference was in 2013 in Bali, Indonesia, during which ministers adopted the “Bali Package.”
As part of the package, the Council for Trade in Services agreed to operationalize the use of the LDC Services
Waiver which was adopted in 2011 to support growth of services trade in least-developed countries (LDCs). At the
latest count, 37 WTO members had notified to the Council for Trade in Services the specific sectors and modes for
which they will provide LDCs with preferential treatment. In September 2015, the United States notified the specific
sectors for which its 15-year waiver would offer preferential treatment, including multiple professional services as
well as telecommunications, higher education and entertainment among other services listed. The waivers only apply
to Modes 1, 2, and 3, of supply and not Mode 4 (the temporary movement of people).40
Frustration with the Doha Round negotiations has likely contributed to the proliferation of
bilateral and regional trade agreements that include provisions on services and services-related
activities (for example, foreign direct investment) and for alternative frameworks.
38
J.Bradford Jensen, Global Trade in Services: Fear, Facts, and Offshoring, Peterson Institute for International
Economics, August 2011, pp. 150-151.
39
Bernard Hoekman, and Aaditya Mattoo, Regulatory Cooperation and the General Agreement on Trade in Services,
Cordell Hull Institute, Trade Policy Roundtable, October 1, 2007, p. 9.
40
World Trade Organization, "Eleven Members Notify Preferential Measures in Support of LDC Services," WTO: 2015
News Item, July 31, 2015.
Bryce Bashchuk, "U.S. Unveils WTO Services Waiver," Bloomberg BNA, September 4, 2015.
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U.S. Trade in Services: Trends and Policy Issues
Services in U.S. FTAs
The United States has made services a priority in each of the 15 FTAs it has negotiated that cover
trade with 20 countries (including the U.S.-Canada FTA, which was overtakensuperseded by the entry into
force of the North American Free Trade Agreement (NAFTA) on January 1, 1994). While the
specific treatment of services differs among the FTAs because of the status of U.S. trade relations
with the partner(s) involved and the evolution of issues involved, the FTAs share some
characteristics that define a framework of U.S.
policy priorities. Some of the major characteristics
are examined below. Some of these aspects
reaffirm adherence to principles embedded in the
GATS, while other go beyond the GATS.
21
J.Bradford Jensen, Global Trade in Services: Fear, Facts, and Offshoring, Peterson Institute for International
Economics, August 2011, pp. 150-151.
22
Bernard Hoekman, and Aaditya Mattoo, Regulatory Cooperation and the General Agreement on Trade in Services,
Cordell Hull Institute, Trade Policy Roundtable, October 1, 2007, p. 9.
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
others go beyond the GATS.
Negative List
Each of the U.S. FTAsFTA uses a negative list in determining market access and national treatment
coverage coverage
and commitments from each partner. Therefore,A negative list means that the FTA provisions for market access
access and national treatment apply to all categories and subcategories of services in all modes of
delivery, unless a party to the agreement has listed a service or mode of delivery as an exception.
The negative list also implies that a newly-created or domestically-provided service is
automatically covered under the FTA unless it is specifically listed as an exception in an annex to
the agreement. The negative list approach is widely considered to be more comprehensive and
flexible than the positive list which is used in the GATS and which some other countries use in
their bilateral and regional FTAs.
Rules of Origin
Under FTAs in which the United States is a party, any service provider is eligible irrespective of
ownership nationality as long as that provider is an enterprise organized under the laws of either
the United States or the other party(ies) or is a branch conducting business in the territory of a
party. Such criteria potentially expand the benefits of the FTA to service providers from other
countries that are not direct parties to the FTA. For example, a U.S. subsidiary of a Canadianowned insurance company would be covered by the U.S.-South Korea FTA. The FTAs do allow
one party to deny benefits to a provider located in the territory of another party, if that provider is
owned or controlled by a person from a non-partynonparty country and does not conduct substantial
business in the territory of the other party, or if the party denying the benefits does not otherwise
conduct normal economic relations with the non-partynonparty country.2341
Multiple Chapters on Services
In many of the U.S. FTAs, trade in services spans several chapters indicating their prominence in
U.S. trade policy U.S.
trade policy, the complexity in addressing services trade barriers, and the specificity of U.S. trade
policy negotiating objectives. Each of the FTAsFTA has a
specific chapter on cross-border trade in services—
trade by all modes except commercial
presence (Mode 3). This chapter requires the United States and the FTA partner(s) to accord nondiscriminatory treatment—both MFN treatment and national treatment—to services originating in
each other’s territory. The agreement prohibits the FTA partner-governments from imposing
restrictions on: the number of service providers; the total value of service transactions that can be
provided; the total number of service operations or the total quantity of services output; or the
total number of natural persons that can be employed in a services operation. In addition, the
governments cannot require a service provider from the other FTA-partner to have a presence in
its territory in order to provide services. The FTA partners may exclude categories or subcategory
of services from the agreement, which they designate in annexes.
23
presence (Mode 3). This chapter requires the United States
41
These rules of origin are discussed in the context of the U.S.-Australian FTA in United States International Trade
Commission, U.S.-Australia Free Trade Agreement: Potential Economywide and Selected Sectoral Effects,
Investigation No. TA-2104-11, May 2004, p. 87, and in Centre for International Economics (Australia), Economic
Analysis of the AUSFTA: Impact of the Bilateral Trade Agreement with the United States, April 2004, p. 16. Under the
U.S.-Australian FTA, for example, a relevant provision is contained in Chapter 10 which applies to cross-border
services. An enterprise of a Party is defined as “an enterprise organized or constituted under the laws of a Party; and a
branch located in the territory of a Party and carrying out business activities there .... ” (Article 10.14(2)). The
exceptions are contained in Article 10.11 (Denial of Benefits). Similar provisions are contained in other U.S. FTAs.
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
Policy Issues
and the FTA partner(s) to accord nondiscriminatory treatment—both MFN treatment and national
treatment—to services originating in each other’s territory. The agreement prohibits the FTA
partner-governments from imposing restrictions on the number of service providers, the total
value of service transactions that can be provided, the total number of service operations or the
total quantity of services output, or the total number of natural persons that can be employed in a
services operation. In addition, the governments cannot require a service provider from the other
FTA-partner to have a presence in its territory in order to provide services. The FTA partners may
exclude categories or subcategories of services from the agreement, which they designate in
annexes.
Each U.S. FTA also contains a chapter on foreign direct investment, including service providers
that have a commercial presence (Mode 3) in the territory of aan FTA partner and a chapter on
intellectual property rights (IPR), which is also relevant to services trade.2442 In addition, many of
the U.S. U.S.
FTAs contain separate provisions or chapters on specific service categories which have
been been
priority areas in U.S. trade policy. They include the following:
•
Financial Services: The FTAs define financial services to “include all insurance
and insurance-related services, and all banking and other financial services, as
well as services incidental or auxiliary to a service of a financial nature.” Among
other things, the financial services chapter allows governments to apply
restrictions for prudential reasons and allows financial service providers from an
FTA partner to sell a new financial service without additional legislative
authority, if local service providers are allowed to provide the same service.
•
Telecommunication Services: The United States and trading partners agree that
enterprises from each other’s territory are to have nondiscriminatory access to
public telecommunications services. For example, both countries will ensure that
domestic suppliers of telecommunications services who dominate the market do
not engage in anticompetitive practices. They also ensure that public
telecommunications suppliers provide enterprises based in the territory of the
FTA- partner with interconnection, number portability, dialing parity, and access
to underwater cable systems.
•
e-commerce
e-commerce/Digital Trade: The FTAs include provisions to ensure that
electronically supplied
services are treated no less favorably than services
supplied by other modes of
delivery and that customs duties are not to be applied
to digital products whether
they are conveyed electronically or via a tangible medium such as a disk.
Regulatory Transparency
Many of the U.S. FTAs require the
medium such as a disk. Recent and ongoing trade negotiations seek to ensure
open digital trade by prohibiting “forced” localization or other requirements that
limit cross-border flows.
Regulatory Transparency
Many U.S. FTAs require FTA partners to practice transparency when implementing and
developing domestic regulations that affect services. In particular, the FTAs require the partner
countries to provide notice of impending investigations that might affect service providers from
the other partner(s). The FTAs go beyond the transparency provisions in the GATS by providing
mechanisms for interested parties to comment on proposed regulations and appeal adverse
decisions.
A Recent Case Study: The U.S.-South Korea FTA (KORUS FTA)
On March 15, 2012, the U.S.-South Korean FTA (KORUS FTA) entered into force. It was one of
the three most recent FTAs—along with Colombia and Panama—that Congress approved in
October 2011. Industry representatives have referred to the services-related provisions of the
agreement as “the gold standard” for the treatment of services, particularly financial services, in
FTAs. Examining some of its provisions may provide an indication of trends for U.S. objectives
in trade in services in future agreements.
24
Services are also indirectly covered in U.S. bilateral investment treaties (BITs). For more information on BITS, see
CRS Report R43052, U.S. International Investment Agreements: Issues for Congress, by Shayerah Ilias Akhtar and
Martin A. Weiss
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
For example, for the first time in any trade agreement, the KORUS FTA contains in the financial
services annex a specific reference to data transfer, enabling U.S. companies to freely transfer
customer data into and out of a partner country. The provision is to be fully implemented within
two years after entry into force (2014).25 Data transfer has become a significant U.S. objective in
current trade agreement negotiations as globalization has fragmented business operations across
borders, and multinational firms want to be able to maintain central locations for data storage and
avoid having to locate servers in multiple locations. In doing so, the multinational companies
confront some governments’ privacy concerns and localization requirements. Data transfer is an
issue in the TPP negotiations and will likely be an issue in the negotiations on the TTIP and the
TISA (discussed below).
The role of state-owned enterprises (SOEs) in services trade is another U.S. trade policy issue
addressed in the KORUS FTA making it a possible model for other U.S. FTAs.26 U.S. insurance
companies have been concerned that the state-owned Korea Post and the cooperative insurance
providers—the National Agricultural Cooperative Federation and the National Federation of
Fisheries Cooperative—are not regulated by the Korean Financial Supervisory Commission or by
the Financial Supervisory Service, while both private sector foreign and domestic providers are so
regulated. Under the KORUS FTA, South Korea agreed that those entities will be subject to an
independent state regulator as opposed to being self-regulated. In addition, Korea Post will not be
allowed to offer new insurance products.
The United States sought greater reciprocity and market openness in the treatment of professional
services and thereby gain increased access to the South Korean market for U.S. providers. The
United States and South Korea agreed to form a professional services working group to develop
methods to recognize mutual standards and criteria for the licensing of professional service
providers. Under the KORUS FTA, South Korea has allowed U.S. law firms and U.S. licensed
attorneys to provide advisory services on U.S. and international law since the KORUS FTA
entered into force. South Korea will also permit U.S. legal representative offices to establish
cooperative operations with a South Korean firm to handle matters pertaining to domestic and
foreign legal matters, and, no later than five years after the agreement’s entry into force, will
allow U.S. law firms to form joint ventures with South Korean firms. However, South Korea will
still reserve the right to restrict the activities of foreign lawyers.
In telecommunications services, South Korea will reduce government restrictions on foreign
ownership of South Korean telecommunications companies. Two years after the KORUS FTA has
entered into force (2014), U.S. companies will be able to own up to 100% of voting shares in
domestic South Korean telecommunications companies, and those companies will be able to own
up to 100% of a facilities-based licensee. These provisions do not apply to KT Corporation or to
SK Telecom Co. for which a 49% foreign ownership limit remains in place.
The Proposed Trade in Services Agreement (TISA)
Largely because of the lack of progress in the DDA round of negotiations in the WTO, a group of
23 WTO members—the “Really Good Friends of Services” (RGFS)—have been engaging in
25
Office of the United States Trade Representative, Report of the Industry Trade Advisory Committee on Services and
Finance Industries (ITAC 10), April 2007.
26
State-owned enterprises (SOEs) are businesses that are directly or indirectly controlled by the government. U.S.
SOEs include the U.S. postal system.
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
discussions on a possible sector-specific, plurilateral agreement to liberalize trade in services
among them.27 The group accounted for around 70% of world trade in services in 2012.28 The
United States and Australia have been at the forefront of the effort, with other WTO members,
including some developing countries, becoming increasingly active as the discussions progress.
While not directly linked currently to the WTO, TISA participants are taking as their guide the
“Elements of Political Guidance” issued at the end of the 8th WTO ministerial in December 2011.
It stipulated that members could pursue negotiations outside of the single undertaking in order to
accomplish the objectives of the DDA.29
For proponents of services trade liberalization, the plurilateral approach offers some advantages:
•
progress in the services negotiations would no longer be tied to progress in other
negotiations as has been in the case under the “single-undertaking” rule in the
DDA;
•
the RGFS members include those countries that account for a major share of
global services trade;
•
since negotiations are confined to countries willing to negotiate, prospects for a
successful conclusion may be enhanced;
•
the coverage of the agreement can be expanded as countries accede to its
provisions; and
•
the RGFS are likely to be more willing to commit to reducing barriers to trade
and services beyond the limited commitments under the GATS and the offers
made during the DDA round.
However, the approach may have some drawbacks:
•
the RGFS members do not as a group currently include some of the economically
significant emerging economies, such as Brazil, India, and China, which present
the largest potential market opportunities for services but also impose significant
impediments to trade and investment in services;
•
breaking from the single-undertaking framework could undermine the
opportunity for concessions in other areas, including agriculture and
manufactured goods, that result from the “give-and-take” of negotiations; and
•
a plurilateral services pact might diminish the credibility of the multilateral trade
negotiation framework at a time its credibility has already been weakened by the
setback, if not demise, of the DDA.
27
Contrary to the WTO MFN principle, a plurilateral agreement applies only to those countries that have signed it. The
WTO has allowed such exceptions to MFN, such as the WTO Government Procurement Agreement. The RGFS
members are: Australia; Canada; Chile; Taiwan (Chinese Taipei); Colombia; Costa Rica; EU; Hong Kong; Iceland;
Israel; Japan; Korea; Liechtenstein; Mexico; New Zealand; Norway; Pakistan; Panama; Paraguay; Peru; Switzerland;
the United States; and Turkey.
28
Swiss National Center for Competence in Research: A Plurilateral Agenda for Services?: Assessing the Case for a
Trade in Services Agreement, Working Paper No. 2013/29, May 2013, p. 10.
29
European Parliament, Directorate-General for External Policies, Policy Department, The Plurilateral Agreement on
Services: at the Starting Gate.
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
Informal discussions began in early 2012 and continued throughout the year. These discussions
were designed to develop a basic framework and principles under which the negotiations would
be conducted. On January 15, 2013, then-United States Trade Representative (USTR) Ron Kirk
notified congressional leaders that the United States would formally engage in negotiations with
the other RGFS members to reach an agreement trade in services, now dubbed the Trade in
Services Agreement (TISA). In so doing, the Obama Administration adhered to the notification
requirements under trade promotion authority (TPA), even though the latest authority expired on
June 30, 2007.30 The TPA required that the President notify Congress of his intention to enter into
negotiations 90 calendar-days prior to doing so. (For the TISA this was April 15, 2013.)
The RGFS group has agreed to a framework of five basic objectives on which the negotiations are
to be conducted.31 The agreement should:
(1) be compatible with the GATS, that would attract broad participation and that could be
brought within the WTO framework in the future;
(2) be comprehensive in scope, with no exclusions of any sector or mode of supply;
(3) include commitments that correspond as closely as possible to applied practices and
provide opportunities for improved market access;
(4) include new and enhanced disciplines to be developed on the basis of proposals brought
forward by participants during the negotiations; and
(5) be open to new participants who share the objectives of the RGFS but also should take
into account the development objectives of least developed countries (LDCs).
Among other issues that the RGFS countries addressed was whether to schedule trade
liberalization commitments according to a negative list or positive list. Because of disagreements
within the group, its members decided to use a “hybrid” approach—national treatment obligations
would be negotiated under a negative list and market access obligations would be negotiated
under a positive list.32
Another issue was the application of the TISA commitments to non-participants. The RGFS
agreed to conduct the negotiations on a non-MFN basis, that is, the benefits of the commitments
made by the participants in the TISA would apply to only those countries that have signed on to
the agreement thereby avoiding “free-riders.” This exception to the general WTO MFN principle
is consistent with Article V of the GATS which allows WTO members to form preferential
agreements to liberalize trade in services as long as the agreement has substantial service sectoral
coverage and provides for the absence or elimination of substantially all discrimination.
On January 24, 2013, the USTR issued a Federal Register notice inviting stakeholder to submit
comments on a potential TISA and provide testimony for a hearing on March 12, 2013. While
30
TPA is authority that Congress grants the President to negotiate reciprocal trade agreements to liberalize trade for
which the implementing legislation would receive expedited legislative consideration (no amendments, timely
committee consideration, mandatory floor consideration, and time-limited debate).
31
International Trade Daily, February 19, 2013.
32
World Trade Online, January 17, 2013.
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directed at consideration of the TISA, the submissions can also be considered the views of their
authors on services trade agreements in general.
Many members of the U.S. business community, especially service providers and related
industries, strongly support the formation of a TISA. This group views a TISA as an opportunity
to strengthen multi-party rules on trade in services beyond what are contained in the GATS—
which are largely considered to be pretty weak.
In their comments, TISA advocates stated their overall goals:33
•
strive for a comprehensive agreement that covers all services sectors and all
modes of delivery;
•
ensure uninhibited cross-border data flows and eschew data storage localization
requirements;
•
use the negative list approach to commitments and strive for flexibility to allow
for coverage of new technologies as they emerge;
•
ensure market access for “suites” of clusters of services that tend to operate in
tandem in an increasingly digitally-based market place, for example—financial,
retail, communications, transportation and computer-related services;
•
provide for accession of new participants;
•
eliminate equity ceilings on foreign investment in service providers;
•
prohibit performance requirements, such as local sourcing and local content
requirements;
•
ensure that state-owned enterprises (SOEs) and state-supported enterprises
(SSEs), such as national postal companies, that provide commercial services, are
not accorded preferential treatment over domestic and foreign privately-owned
and operated service providers in terms of regulations, subsidies, other means;
•
limit prudential carve-outs to those that are necessary to maintain the integrity of
the financial sector and avoid their use as disguised protectionism;
•
allow service providers to choose the legal form (subsidiary, branch, etc.) for
doing business;
•
provide for transparency in development and implementation of regulations;
•
avoid standards that unnecessarily distort trade; and
•
establish a dispute settlement mechanism.
Some opponents of trade in services liberalization, such as labor unions and some civil society
groups, argue that, rather than employing TISA as a means to expand on the GATS, it should be
used to reverse what they consider to be infringements of GATS provisions on the authority of
33
These examples were largely taken from submissions by the National Foreign Trade Council, Inc., February 26,
2013, and the Coalition of Services Industries. For the complete set of submissions, see http://www.regulations.gov/
#!docketBrowser;rpp=25;po=0;dct=PS;D=USTR-2013-0001.
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
national, state, and local governments to regulate services. Therefore, they argue that a proposed
TISA should:34
•
use the positive list approach to scheduling commitments to ensure that sensitive
services, such as those traditionally provided by government-supported entities
(water and energy) are not subject to foreign competition;
•
include a comprehensive “carve-out” for publically-provided services;
•
exclude an “investor-state” dispute settlement mechanism that would undermine
the ability of states to impose and maintain regulations on services;
•
include a stronger prudential measures exception to ensure that governments can
preserve the integrity of domestic financial systems; and
•
exclude Mode4 measures which should remain under federal statutes pertaining
to immigration policies.
During a July 2013 House Ways and Means Committee hearing on U.S. trade policy, USTR
Ambassador Michael Froman stated that the United States would seek to conclude a “high
standard services agreement” that would allow already competitive U.S. service suppliers to
compete “on a more level playing field.”
The TISA participants completed the sixth round of negotiations (April 28-May 2, 2014) in
Geneva. By the end of the sixth round, all of the participants, except Paraguay and Pakistan, had
submitted their initial market access offers. These offers apparently had spanned the gambit of
types of services and issues. The participants reportedly will begin the process of indicating what
each participant expects the others to offer during the next round of negotiations which is
expected to begin in late June.35
Another issue that has emerged concerns China’s expressed interest in joining the TISA. While
the issue is still pending, it has generated differences among the participants. Reportedly, the
United States has expressed concerns about China’s readiness to undertake the commitments that
TISA would require, while the European Union has argued for China’s participation.36
TPP and TTIP
The TISA is arguably a significant focal point of trade policy on services for the United States
and other major trade powers. If successful, it could form the basis of multilateral rules on trade
in services for the 21st century. However, the United States is engaged in two other sets of
negotiations—the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment
Partnership (TTIP)—in which trade in services is playing an important role and where U.S.
objectives could overlap into U.S. objectives in the TISA.
The TPP partners—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand,
Peru, Singapore, the United States, and Vietnam—envision the TPP to be a comprehensive, highstandard agreement. The agreement is to include not only standard provisions to reduce or
34
These points were taken largely from submissions by Public Citizens, Inc. and the AFL-CIO.
International Trade Daily, May 7, 2014.
36
Ibid.
35
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
eliminate barriers to trade in investment but also provisions to address cross-cutting issues that
are coming to define the 21st Century trade agenda—regulatory coherence, supply chains, digital
trade, state-owned enterprises, and the role of small- and medium-sized enterprises.37
Because the negotiations are ongoing and classified, draft texts of agreement are unavailable
publicly. However, the negotiating partners announced a framework for the agreement at the
sidelines of the Asia-Pacific Economic Cooperation (APEC) Ministerial in Honolulu, Hawaii,
November 8-13, 2011. The proposed structure of the TPP regarding services reflects the template
the United States has used in is previous FTAs: separate sections on cross-border services,
financial services, telecommunications trade and foreign investment. The TPP would also use the
full negative list approach for both market access and national treatment. Eight of the 12 TPP
partners—Australia, Canada, Chile, Japan, Mexico, New Zealand, Peru, and the United States—
are also negotiating the TISA.
Given the importance of services in U.S. and EU negotiations, as noted in the earlier discussion
of U.S. foreign trade flows in services, the TTIP will likely include provisions to address barriers
in bilateral trade in services. Some of the issues that have been present in U.S.-EU economic
relations for some time and that would likely be part of the TTIP negotiations include; crossborder data flows; data privacy; and the coordination of financial regulations.38 The United States
is currently opposed to discussing financial regulation. The TTIP negotiations are in their early
stages and are still evolving.39
Outlook
To date, the record on liberalization of trade in services through reciprocal trade agreements is
mixed. The 159 members of the WTO negotiated and have maintained a basic set of multilateral
rules in the form of the GATS. However, the GATS is largely viewed as limited in scope and in
need of expansion, if it is to be an effective instrument of trade liberalization. The efforts of the
WTO members to expand on these rules have floundered with little prospect of success at least in
the foreseeable future.
The United States and other countries have pursued other avenues to reduce barriers to trade in
services either as alternatives to the GATS or as catalysts to encourage progress in the GATS
negotiations. The United States has made services an important component of the FTAs it has
negotiated over the past two decades. While these agreements have gone beyond the GATS in
terms of coverage, they apply to a limited number of countries accounting for small shares of
U.S. trade in services. As a possible remedy, the United States is pursuing the proposed
plurilateral TISA which includes the 28-member EU and Japan—two of the most important U.S.
trade partners—and 20 other participating countries. Services will likely be important issue in the
TPP and TTIP negotiations as well.
37
For more information on the TPP, see CRS Report R42694, The Trans-Pacific Partnership (TPP) Negotiations and
Issues for Congress, coordinated by Ian F. Fergusson.
38
For more information on the TTIP negotiations, see CRS Report R43158, Proposed Transatlantic Trade and
Investment Partnership (TTIP): In Brief, by Shayerah Ilias Akhtar and Vivian C. Jones.
39
For more information on TTIP, see CRS Report R43158, Proposed Transatlantic Trade and Investment Partnership
(TTIP): In Brief, by Shayerah Ilias Akhtar and Vivian C. Jones.
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U.S. Foreign Trade in Services: Trends and U.S. Policy Challenges
The outlook for these negotiations remains uncertain. In each case, the participants have difficult
issues to overcome. Perhaps one of the most difficult issues is whether the pursuit of regional and
plurilateral agreements will support or undermine the pursuit of more extensive multilateral rules
in the GATS. A related issue is whether participants in regional and plurilateral agreements
can/should encourage other countries, such as the emerging economies—Brazil, China, and
India—to join. (China has expressed interest in joining.)
Other potential policy issues for Congress and negotiators to address include the following:
•
How should policymakers balance the responsibility of sovereign governments to
regulate services to ensure the safety and privacy of their citizens against the
objective of expanding markets in order to increase economic efficiency?
•
Available data measure only a portion of foreign trade in services. To the degree
that data help to determine policies, should Congress consider requiring the
executive branch to collect more complete data where possible?
•
Advancements in information technology expand the number and types of
services that can be traded help to create new types of services. Is it possible to
develop a trade arrangement that is clear enough to be effective and flexible
enough to take into account rapid changes in the services sector?
•
The United States has negotiated a number of FTAs with substantial services
components. Can/should these FTAs be a template for U.S. positions in the TISA
and other future agreements on services?
•
What role might renewed trade promotion authority, including the establishment
of trade negotiating objectives, play in the pursuit of U.S. interests in trade in
services?
FTAs to which the United States is not a member, including a number in Asia, have emerged or
are being negotiated. What affect might they have on U.S. trade and trade policy regarding
services?
Author Contact Information
William H. Cooper
Specialist in International Trade and Finance
wcooper@crs.loc.gov, 7-7749
Congressional Research Service
Rebecca M. Nelson
Specialist in International Trade and Finance
rnelson@crs.loc.gov, 7-6819
25
42
Services are also indirectly covered in U.S. bilateral investment treaties (BITs). For more information on BITs, see
CRS Report R43052, U.S. International Investment Agreements: Issues for Congress, by Shayerah Ilias Akhtar and
Martin A. Weiss.
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U.S. Trade in Services: Trends and Policy Issues
mechanisms for interested parties to comment on proposed regulations and appeal adverse
decisions.
Regulatory Heterogeneity
In addition to market access restrictions, firms operating in multiple countries or having a global
supply chain may be subject to an array of local regulations that vary in each market, and impact
the services that firms can access or sell. This regulatory heterogeneity, while neither
discriminatory nor anti-competitive, may increase operational costs and thereby limit a firm’s
ability to do business in a foreign market. Regulatory cooperation, such as when countries or
regions harmonize to common standards or establish mutual recognition, can help minimize the
impact of the differing regulatory regimes.43 Regulatory cooperation to ease trade in services may
occur outside or within the context of trade agreement negotiations. Regulatory cooperation in
financial services under the Basel Committee on Banking Supervision that drafted BASEL III is
one example of international regulatory cooperation happening outside of FTA negotiations.44 The
U.S.-South Korea FTA is one example of using FTA negotiations to address differing regulatory
regimes for services.
A Recent Case Study: The U.S.-South Korea FTA (KORUS FTA)45
On March 15, 2012, the U.S.-South Korean FTA (KORUS FTA) entered into force. Industry representatives referred
to the services-related provisions of the agreement as “the gold standard” for the treatment of services in FTAs.
However, concerns have been raised regarding implementation and the effectiveness of the agreement’s provisions.
Examining some of the KORUS provisions may provide an indication of trends for U.S. objectives and issues in trade
in services in current services trade negotiations.
The United States sought transparency provisions to ensure transparency into the South Korean trading and
regulatory systems. Under KORUS, each side agreed to: publish relevant regulations and administrative decisions as
well as proposed regulations; allow persons from the other party to make comments and ask questions regarding
proposed regulations; notify such persons of administrative proceedings and allow them to make presentations before
final administrative action is taken; and allow such persons to request review and appeal of administrative decisions.
For the first time in any trade agreement, KORUS contains in the financial services annex a specific reference to data
transfer, enabling U.S. companies to freely transfer customer data into and out of a partner country. Data transfer has
become a significant U.S. objective in current trade agreement negotiations as globalization has fragmented business
operations across borders and multinational firms want to be able to maintain central locations for data storage and
avoid having to locate servers in multiple locations. In doing so, the multinational companies confront some
governments’ privacy concerns and localization requirements.
The role of state-owned enterprises (SOEs) in services trade is another U.S. trade policy issue addressed in KORUS,
making it a possible model for other U.S. FTAs.46 Under KORUS, South Korea agreed that those entities will be
subject to an independent state regulator as opposed to being self-regulated.
In telecommunications services, South Korea agreed to reduce government restrictions on foreign ownership of
South Korean telecommunications companies.
The United States sought greater reciprocity and market openness in the treatment of professional services. The
United States and South Korea agreed to form a professional services working group to develop methods to
43
Aaditya Mattoo, Services Trade and Regulatory Cooperation, E15, July 2015, http://e15initiative.org/.
For more information, See CRS In Focus IF10035, Introduction to Financial Services: Banking, by Raj Gnanarajah.
45
For more information, see CRS Report RL34330, The U.S.-South Korea Free Trade Agreement (KORUS FTA):
Provisions and Implementation, coordinated by Brock R. Williams
46
State-owned enterprises (SOEs) are businesses that are directly or indirectly controlled by the government. U.S.
SOEs include the U.S. postal system.
44
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U.S. Trade in Services: Trends and Policy Issues
recognize mutual standards and criteria for the licensing of professional service providers.
Legal services represent one area where there have been implementation challenges. While specific commitments
were made to open up the legal services market, U.S. firms have voiced concern about recent pending legislation that
could limit the benefits expected under KORUS. In addition to its KORUS commitments, Korea has also committed
to opening up its legal services market to foreign law firms in its free trade agreements with the EU, the UK,
Australia, and Canada.
Services in the Current Trade Promotion Authority
The Trade Promotion Authority (TPA) legislation signed into law on June 29th, 2015,47 contained
specific provisions establishing U.S. trade negotiating objectives on services trade (P.L. 114-26).
The text broadly states that “[t]he principal negotiating objective of the United States regarding
trade in services is to expand competitive market opportunities for the United States.” Congress
also specifically pointed to the utilization of global value chains and supported pursuing the
objectives of reducing or eliminating trade barriers through “all means, including through a
plurilateral agreement” with partners able to meet high standards.
Congress provided objectives specific to “digital trade in goods and services and cross-border
data flows,” instructing the President to ensure that cross-border data flows and electronically
delivered goods and services have the same level of coverage and protection as those in physical
form, and are not impeded by regulation, excepting for legitimate objectives. Congress
recognized the challenges presented by localization regulations, and sought to ensure that trade
agreements eliminate and prevent measures requiring the locating of “facilities, intellectual
property, or other assets in a country.”
Ongoing services negotiations in TiSA, TPP, and T-TIP (discussed below) are taking place under
the current TPA. If these agreements are concluded, Congress may review each against the
negotiation objectives set in TPA if and when it considers legislation necessary to implement the
agreements.
The Proposed Trade in Services Agreement (TiSA)
Largely because of the slow progress in the Doha Round of negotiations in the WTO, a group of
23 WTO members—including the United States—are engaged in discussions on a possible
sector-specific, plurilateral agreement to liberalize trade in services among them. 48 The group
accounts for around 70% of world trade in services.49 Negotiations on a proposed Trade in
Services Agreement (TiSA) were launched in April 2013. The United States and Australia have
been at the forefront of the TiSA negotiations, with other WTO members, including some
developing countries, becoming increasingly active as the discussions progress.
47
For more information on TPA, see CRS In Focus IF10038, Trade Promotion Authority (TPA), by Ian F. Fergusson
and CRS Report RL33743, Trade Promotion Authority (TPA) and the Role of Congress in Trade Policy, by Ian F.
Fergusson.
48
The participating members are: Australia; Canada; Chile; Taiwan (Chinese Taipei); Colombia; Costa Rica; the EU;
Hong Kong; Iceland; Israel; Japan; Korea; Liechtenstein; Mauritius, Mexico; New Zealand; Norway; Pakistan;
Panama; Peru; Switzerland; the United States; and Turkey. Uruguay and Paraguay had been participants but recently
withdrew from negotiations. Contrary to the WTO MFN principle, a plurilateral agreement applies only to those
countries that have signed it. The WTO has allowed such exceptions to MFN, such as the WTO Government
Procurement Agreement.
49
Swiss National Center for Competence in Research: A Plurilateral Agenda for Services?: Assessing the Case for a
Trade in Services Agreement, Working Paper No. 2013/29, May 2013, p. 10.
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U.S. Trade in Services: Trends and Policy Issues
While not directly linked currently to the WTO, TiSA participants are taking as their guide the
“Elements of Political Guidance” issued at the end of the 8th WTO ministerial in December 2011.
It stipulated that members could pursue negotiations outside of the single undertaking in order to
accomplish the objectives of the Doha Round.50
For proponents of services trade liberalization, the plurilateral approach offers some advantages:
progress in the services negotiations would no longer be tied to progress in other
negotiations as has been in the case under the “single-undertaking” rule in the
Doha Round;
participating members include those countries that account for the majority of
global services trade;
since negotiations are confined to countries willing to negotiate, prospects for a
successful conclusion may be enhanced;
coverage of the agreement can be expanded as countries accede to its provisions;
and
negotiating members are likely to be more willing to commit to reducing barriers
to trade and services beyond the limited commitments under the GATS and the
offers made during the Doha Round.
However, critics highlight possible drawbacks to the approach:
TiSA participants do not as a group currently include some of the economically
significant emerging economies, such as Brazil, India, and China, which present
larger potential market opportunities for services but also impose significant
impediments to trade and investment in services;
breaking from the single-undertaking framework could undermine the
opportunity for concessions in other areas, including agriculture and
manufactured goods, that result from the “give-and-take” of broader negotiations;
and
a plurilateral services pact might diminish the credibility of the multilateral trade
negotiation framework at a time its credibility has already been weakened by the
stalled Doha Round.
The participants agreed to a framework of five basic objectives on which the negotiations are to
be conducted.51 The agreement should:
(1) be compatible with the GATS to attract broad participation and possibly be brought within
the WTO framework in the future;
(2) be comprehensive in scope, with no exclusions of any sector or mode of supply;
(3) include commitments that correspond as closely as possible to applied practices and
provide opportunities for improved market access;
(4) include new and enhanced disciplines to be developed on the basis of proposals brought
forward by participants during the negotiations; and
50
Directorate-General for External Policies, Policy Briefing The Plurilateral Agreement on Services: at the starting
gate, European Parliament, DG EXPO/B/PolDep/Note/2013_57 , February 2013.
51
Daniel Pruzin, "EU Commission to Seek Negotiating Mandate," International Trade Daily, February 19, 2013.
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(5) be open to new participants who share the objectives but also should take into account the
development objectives of least developed countries (LDCs).
Participants needed to decide whether to schedule trade liberalization commitments according to
a negative list or a positive list. As noted earlier, under a negative list, the FTA provisions apply to
all categories and subcategories of services in all modes of delivery, unless a party to the
agreement has listed a service or mode of delivery as an exception. In contrast, under a positive
list, each party must specifically opt in for a service to be covered. The United States typically
prefers the more comprehensive and flexible negative list approach. Because of disagreements
within the group, and to be compatible with GATS, TiSA negotiating parties decided to use a
“hybrid” approach: market access obligations are being negotiated under a positive list, while
national treatment obligations are being negotiated under a negative list.52
Another issue was the application of the TiSA commitments to nonparticipants. The participants
agreed to conduct the negotiations on a non-MFN basis, that is, the benefits of the commitments
made by the participants in the TiSA would apply to only those countries that have signed on to
the agreement, thereby avoiding “free-riders.” This exception to the general WTO MFN principle
is consistent with Article V of the GATS, which allows WTO members to form preferential
agreements to liberalize trade in services as long as the agreement has substantial service sectoral
coverage and provides for the absence or elimination of substantially all discrimination between
or among the parties.
Also being debated is whether or not each TiSA participant would be required to automatically
extend to all TiSA participants the same benefits that it grants to other countries in future bilateral
or regional free trade deals it enters. The United States supports this “MFN-forward” approach
for future trade agreements while others, including the EU, oppose it.53
Many members of the U.S. business community, especially service providers and related
industries, strongly support the formation of TiSA. They view the agreement as an opportunity to
strengthen rules and achieve greater market access on trade in services beyond what are contained
in the GATS—which are largely considered to be weak.
In their comments, TiSA advocates stated their overall goals:54
strive for a comprehensive agreement that covers all services sectors and all
modes of delivery;
ensure uninhibited cross-border data flows and eschew data storage localization
requirements;
use the negative list approach to commitments and strive for flexibility to allow
for coverage of new technologies as they emerge;
ensure market access for “suites” of clusters of services that tend to operate in
tandem in an increasingly digitally-based market place, for example financial,
retail, communications, transportation, and computer-related services;
provide for accession of new participants;
eliminate equity ceilings on foreign investment in service providers;
52
Inside U.S. Trade, “USTR Says It Will Seek To Cover New Services In Plurilateral Agreement,”, January 17, 2013.
Inside U.S. Trade, "Leaked TISA Core Text Shows 'MFN Forward' Fight Still Dragging On," July 9, 2015.
54
These examples were largely taken from submissions by the National Foreign Trade Council, Inc., February 26,
2013, and the Coalition of Services Industries. For the complete set of submissions, see http://www.regulations.gov/
#!docketBrowser;rpp=25;po=0;dct=PS;D=USTR-2013-0001.
53
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prohibit performance requirements, such as local sourcing and local content
requirements;
ensure that state-owned enterprises (SOEs) and state-supported enterprises
(SSEs), such as national postal companies, that provide commercial services, are
not accorded preferential treatment over domestic and foreign privately-owned
and operated service providers in terms of regulations, subsidies, and other
means;
limit prudential carve-outs to those that are necessary to maintain the integrity of
the financial sector and avoid their use as disguised protectionism;
allow service providers to choose the legal form (subsidiary, branch, etc.) for
doing business;
provide for transparency in development and implementation of regulations;
avoid standards that unnecessarily distort trade; and
establish a dispute settlement mechanism.
Some opponents of trade in services liberalization, such as labor unions and some civil society
groups, argue that, rather than employing TiSA as a means to expand on the GATS, it should be
used to reverse what they consider to be infringements of GATS provisions on the authority of
national, state, and local governments to regulate services. Therefore, they argue that a proposed
TiSA should:55
use the positive list approach to scheduling commitments to ensure that sensitive
services, such as those traditionally provided by government-supported entities
(water and energy), are not subject to foreign competition;
include a comprehensive “carve-out” for publically-provided services such as
defense;
exclude an “investor-state” dispute settlement mechanism56 that would
undermine the ability of states to impose and maintain regulations on services;
include a stronger prudential measures exception to ensure that governments can
preserve the integrity of domestic financial systems; and
exclude Mode 4 measures, which should remain under federal statutes pertaining
to immigration policies.
As of July 2015, 13 rounds of TiSA negotiations and intercessional meetings have taken place in
an effort to make further progress. The next round of TiSA negotiations is set for October 2015.
The agreement, while still under negotiation, would likely include a core text as well as sections
on transparency, movement of natural persons, domestic regulation, and government
procurement. The current text is said to contain sectoral annexes for air transport, competitive
delivery, e-commerce, maritime transport, telecommunications, and financial services. As many
of these topics and sectors may be sensitive or controversial among and within some of the
negotiating parties, the final structure of and sectors included in TiSA are not yet decided.
The e-commerce annex reportedly covers cross-border data flows, consumer online protection,
interoperability, and international regulatory cooperation, among other provisions.57 The United
55
These points were taken largely from submissions by Public Citizens, Inc. and the AFL-CIO.
Through investor-state dispute settlement, an investor can submit an investment dispute with the host country’s
government to binding, impartial international arbitration.
56
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States reportedly advocates applying some of the disciplines, such as localization and crossborder data flows, to the entire agreement by placing these in the core text, not solely in the ecommerce annex.
For professional services, current negotiations do not include explicit mutual recognition
agreements but rather discussion aims to facilitate interested parties in recognizing foreign
professionals and expediting their licensing.
One issue that has emerged is China’s interest in joining the TiSA negotiations. While the issue is
still pending, it has generated differences among the participants. Reportedly, the United States
has expressed concerns about China’s readiness to undertake the commitments that TiSA would
require, given China’s limited implementation of other agreements to date; the EU has argued for
China’s participation sooner.58 The United States and a subset of the other participants are
currently reviewing China’s level of compliance with and implementation of other trade
agreements. To date, no other “BRICS”59 member has explicitly expressed interest in joining
TiSA. However, the agreement overall is reportedly being structured so that it can be “multilateralized” in the future and incorporated into the GATS and made applicable to all WTO
members.60 The chances or timeline of such an event are uncertain as the TiSA itself remains
under negotiation.
TiSA is arguably a significant focal point of trade policy on services for the United States and
other major trade powers. If successful, it could form the basis of multilateral rules on trade in
services for the 21st century. However, the United States is engaged in two other sets of
negotiations—the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment
Partnership (T-TIP)—in which trade in services is playing an important role and where U.S.
objectives could complement as well as overlap with U.S. objectives in the TiSA.
The Proposed Trans Pacific Partnership (TPP)
The negotiating countries—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore, the United States, and Vietnam—envision the proposed TPP to be a
comprehensive, high-standard agreement. U.S. trade with TPP countries was more than $273
billion in services in 2013.
The agreement is said to be structured similarly to KORUS and would include not only standard
provisions to reduce or eliminate barriers to trade and investment, but also would include
provisions to address cross-cutting issues that are coming to define the 21st century trade
agenda—regulatory coherence, supply chains, e-commerce/digital trade, competition and stateowned enterprises, and the role of small- and medium-sized enterprises.61 Because the
negotiations are ongoing and classified, draft texts of the agreement are unavailable publicly.
However, the negotiating partners announced a framework for the agreement at the sidelines of
the Asia-Pacific Economic Cooperation Ministerial in Honolulu, in November 8-13, 2011. The
proposed structure of the TPP regarding services is similar to the template the United States has
(...continued)
57
Inside U.S. Trade, “Despite 'TISA-Plus' Aims, EU's E-Commerce Proposal For T-TIP Falls Short”, August 13, 2015.
58
Ibid.
59
BRICS refers to the five major emerging national economies: Brazil, Russia, India, China and South Africa.
60
Inside U.S. Trade, "Leaked TISA Core Text Shows 'MFN Forward' Fight Still Dragging On," July 9, 2015.
61
For more information on the TPP, see CRS Report R42694, The Trans-Pacific Partnership (TPP) Negotiations and
Issues for Congress, coordinated by Ian F. Fergusson.
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used in its previous FTAs: separate sections on cross-border services, financial services,
telecommunications, e-commerce, and foreign investment, as well as temporary entry for
business persons.62 TPP would also use the full negative list approach for both market access and
national treatment. Despite the use of a negative list, some groups have expressed concern that
TPP parties may include extensive lists of nonconforming (i.e., exceptions) measures as policy or
sector carve-outs.
Provisions on electronic transactions relating to financial services are said to be included in the
financial services chapter rather than the e-commerce chapter of the agreement. This could be
significant as some industry representatives have suggested the proposed provisions on cross
border data flows in the financial services chapter may be less robust than those included in the ecommerce chapter. Eight of the 12 TPP partners—Australia, Canada, Chile, Japan, Mexico, New
Zealand, Peru, and the United States—are also negotiating TiSA.
The Proposed Transatlantic Trade and Investment Partnership (T-TIP)
Given the importance of services in the U.S. and EU economic relationship, the proposed T-TIP
is expected include provisions to address barriers in transatlantic trade in services. The general
structure of the T-TIP agreement, including its services component, remains unclear at this
relatively early stage in the negotiations. One source of debate in the T-TIP negotiations is the
treatment of financial services. The United States has advocated including market access for
financial services in T-TIP. However, the United States is currently opposed to discussing
financial regulation, unlike the EU which seeks to include both financial services market access
and regulatory cooperation in T-TIP, viewing the two as connected. According to some observers,
U.S. opposition is due to concern over the potential impact to ongoing implementation of
financial services regulation under the Wall Street Reform and Consumer Protection Act
(frequently referred to as Dodd-Frank, P.L. 111-203). The United States is said to prefer handling
regulatory cooperation through ongoing bilateral dialogues with the EU or through multilateral
fora such as the G-20.63
Both U.S. and EU negotiators have stated that their services offers under T-TIP go beyond the
commitments being discussed in TiSA (“TiSA-plus”).64 Though the U.S. proposal is not public,
the services provisions in KORUS are a likely starting point (see text box on KORUS FTA).
According to the U.S. Trade Representative, the United States seeks to “obtain improved market
access in the EU on a comprehensive basis” and also “reinforce transparency, impartiality, and
due process,”65 While the United States used a negative list approach in its FTA with South
Korea, the EU used a positive list approach with the FTA it signed with South Korea which went
into effect in 2010, which may lead T-TIP negotiators to adopt a hybrid approach similar to that
being employed in TiSA negotiations.66
62
A letter published from USTR to Mr. James Love under the Freedom of Information Act (FOIA) contained the list of
chapter names of the TPP as of September 10, 2015.
63
For more information on T-TIP, see CRS Report R43387, Transatlantic Trade and Investment Partnership (T-TIP)
Negotiations, by Shayerah Ilias Akhtar, Vivian C. Jones, and Renée Johnson, and CRS In Focus IF10120, Transatlantic
Trade and Investment Partnership (T-TIP), by Shayerah Ilias Akhtar and Vivian C. Jones
64
Inside U.S. Trade, U.S., EU Negotiators Say Services Offers Are 'TISA-Plus,' Light On Details, July 16, 2015.
65
See USTR website: https://ustr.gov/trade-agreements/free-trade-agreements/transatlantic-trade-and-investmentpartnership-t-tip/t-tip-4.
66
For more information on KOREU, see CRS Report R41534, The EU-South Korea Free Trade Agreement and Its
Implications for the United States, by William H. Cooper et al.
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With the 10th round of T-TIP negotiation, held in July 2015, the EU published its initial textual
proposal on services, investment, and e-commerce.67 The proposal is based on a positive list of
commitments so that sectors not specified would not be covered by the agreement; the EU offer
did cover computer and telecommunications services, international maritime and air transport,
postal and courier services, as well as business and professional services. Given the disagreement
on including financial services regulatory cooperation, the EU proposal currently excludes
financial services completely, with the EU reserving the right to put forward an offer at a later
time in the negotiation process.68 In addition to “carving out” public services, such as public
health, education, social services, and water, the EU’s proposal excludes audiovisual services
under a “cultural exception,”69 conforming to the limitations included in its original mandate to
negotiate the T-TIP passed by the European Commission.70
Unlike in TiSA, the EU proposal addresses worker mobility with a draft framework for mutual
recognition of professional qualifications. Just as a mutual recognition agreement would cover the
licensing requirements of all 50 states, it would cover those of all EU member states regardless of
diversity amongst the member states’ own regulations.
While electronic commerce is included in the EU proposal, it specifically excludes data flows and
online consumer protection. U.S.-EU cross-border data flows are the highest in the world and, in
2012, U.S. exports of digitally deliverable services to the EU were $140.6 billion while imports
were $86.3 billion.71 The absence of these sensitive areas from the EU proposal has disappointed
some in the U.S. business community.72 The EU’s current efforts to update its own Data
Protection Directive, passed in 1995, while not specifically tied to T-TIP, have raised concerns
among some U.S. technologies companies and would likely impact what the EU would be willing
to agree to under T-TIP.73 The recently-completed US-EU “Umbrella Agreement” could help
facilitate further discussions in T-TIP on data protection; the agreement creates a high-level data
protection framework for U.S.-EU law enforcement cooperation.74
67
According to the European Commission, textual proposals are the EU’s “initial proposals for legal texts on topics in
T-TIP. They are tabled for discussion with the US in negotiating rounds. The actual text in the final agreement will be a
result of negotiations between the EU and US.” See http://trade.ec.europa.eu/doclib/press/index.cfm?id=1230.
68
EU, Transatlantic Trade and Investment Partnership Trade in Services, Investment and E-commerce, and Reading
guide Publication of the EU proposal on services, investment and e-commerce for the Transatlantic Trade and
Investment Partnership, July 31, 2015.
69
The exemption of audio-visual services is in accordance with the UNESCO Convention on the Protection and
Promotion of the Diversity of Cultural Expressions. Paris, 20 October 2005. EU Member States as well as many
developed and developing countries with whom the United States is currently negotiating trade agreements are
members of the Convention; the United States is not a member.
70
For more information on T-TIP negotiations see CRS Report R43387, Transatlantic Trade and Investment
Partnership (T-TIP) Negotiations, by Shayerah Ilias Akhtar, Vivian C. Jones, and Renée Johnson.
71
Joshua P. Meltzer, The Importance of the Internet and Transatlantic Data Flows for the U.S. and EU Trade and
Investment, Brookings, 2014, p.1.
72
Inside U.S. Trade, Despite 'TISA-Plus' Aims, EU's E-Commerce Proposal For T-TIP Falls Short, August 13, 2015.
73
For more information on T-TIP, see CRS Report R43387, Transatlantic Trade and Investment Partnership (T-TIP)
Negotiations, by Shayerah Ilias Akhtar, Vivian C. Jones, and Renée Johnson.
74
European Commission, "Questions and Answers on the EU-US data protection "Umbrella," press release, September
8, 2015, http://insidetrade.com/sites/insidetrade.com/files/documents/sep2015/wto2015_2656a.pdf.
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Outlook
To date, the record on liberalization of trade in services through reciprocal trade agreements is
mixed. The 161 members of the WTO negotiated and have maintained a basic set of multilateral
rules in the form of the GATS. However, the GATS is largely viewed as limited in scope, and predating significant technological developments over the past two decades, and in need of
expansion if it is to be an effective instrument of trade liberalization. The efforts of the WTO
members to expand on these rules have stalled, with little prospect of success at least in the
foreseeable future. The lack of progress in the WTO Doha Round negotiations due to the
complexity of the issues and parties involved has led to the rise of sector-specific plurilateral
agreements as an alternative path forward. In negotiating TiSA, the United States is pursuing a
services-specific plurilateral agreement that includes the 28-member EU and Japan—two of the
most important U.S. trade partners—plus other participating countries.
The United States has made services trade liberalization and rules-setting an important
component of the FTAs it has negotiated over the past two decades. While these agreements have
gone beyond the GATS in terms of coverage, they apply to a limited number of countries,
accounting for small shares of U.S. trade in services.
Issues for Congress
The outlook for the ongoing negotiations remains uncertain, as participants in each negotiation
deal with difficult and complex issues. Potential policy issues for Congress and negotiators to
address include the following:
Could the pursuit of regional and plurilateral agreements undermine the pursuit
of broader multilateral rules in the GATS or will it encourage future multilateral
action? Will the United States be able to set common rules across sufficient
bilateral and plurilateral agreements to cover services trade across its major
partners without major discrepancies? Is it likely that TiSA would be completed
and incorporated into the GATS, and could help revive talks under the Doha
Round?
To what extent are current U.S. negotiations on trade in services through TiSA,
TPP, and T-TIP consistent with U.S. trade negotiating objectives on services as
defined in the TPA legislation? What are the prospects for concluding each of
these trade agreements with comprehensive and high-standard commitments on
services? How could the conclusion of one agreement impact negotiations in the
others? What impact would these proposed agreements have on the U.S.
economy and various stakeholders?
Should participants in regional and plurilateral agreements encourage other
countries, such as the emerging economies with large, fast-growing services
markets and industries—Brazil, China, and India—to join? Would their presence
dilute the negotiations’ current level of ambition? Would separate bilateral
agreements with distinct commitments better meet U.S. interests? Should the
United States consider joining ongoing negotiations of other regional or free
trade agreements to which the United States is not a member (e.g., the Regional
Comprehensive Economic Partnership [RCEP] being negotiated between the
members of Association of Southeast Asian Nations [ASEAN] and its free trade
agreement partners, including China)?
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Advancements in information technology expand the number and types of
services that can be traded and help to create new types of services. Is it possible
to develop a trade arrangement that is clear enough to be effective and flexible
enough to take into account rapid changes in the services sector?
The United States has negotiated a number of FTAs with substantial services
components. Can, or should, Congress direct USTR to use these FTAs to build a
model services agreement that identifies U.S. interests across services?
How should policymakers balance the responsibility of sovereign governments to
regulate services to ensure the safety and privacy of their citizens against the
objective of expanding markets in order to increase economic efficiency?
Available data measure only a limited set of sectors and countries across the
various modes of international trade in services. To the degree that data help to
determine policies, should Congress consider requiring the executive branch to
collect more complete data where possible?
Should Congress consider directing the executive branch to pursue regulatory
cooperation efforts in specific service sectors to lessen the burdens created by
varied regulatory regimes and requirements across different markets? Given the
role of state regulators, how should federal policy makers involve them in
ongoing and future trade negotiations or regulatory cooperation efforts?
Author Contact Information
Rachel F. Fefer
Analyst in International Trade and Finance
rfefer@crs.loc.gov, 7-1804
Acknowledgments
This report was originally written by William H. Cooper, CRS Specialist in International Trade and
Finance.
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