U.S. Trade in Services: Trends and Policy Issues
February 4, 2016
(R43291)
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Summary
"Services"U.S. Trade in Services:
Trends and Policy Issues
Rachel F. Fefer
Analyst in International Trade and Finance
November 3, 2015
Congressional Research Service
7-5700
www.crs.gov
R43291
U.S. Trade in Services: Trends and Policy Issues
Summary
“Services” refers to a growing range of economic activities, 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. Services have become an important priority in U.S. trade flows and trade
policy and of global trade in 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
negotiatingengaging on three trade agreements that
include services as a significant component.
If negotiations are concludedFor each agreement, Congress
willmay consider
legislation to implement the agreements
.
in the future.
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
at different stages of 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 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.
Congressional Research Service
U.S. Trade in Services: Trends and Policy Issues
Contents
Introduction ..................................................................................................................................... 1
U.S. Trade in Services ..................................................................................................................... 2
Modes of Delivery..................................................................................................................... 2
Overall Trends ........................................................................................................................... 2
Geographical Distribution ......................................................................................................... 4
Trade by Services Type ............................................................................................................. 7
World Trade in Services ............................................................................................................ 9
Global Value Chains and Services .......................................................................................... 10
Barriers to Trade in Services .................................................................................................... 11
The Economic Effects of Barriers to Services Trade .............................................................. 12
Services Trade Agreements and Negotiations ............................................................................... 14
The WTO and GATS ............................................................................................................... 14
The GATS ......................................................................................................................... 14
Services and the Doha Development Agenda (Doha Round) ........................................... 16
Services in U.S. FTAs ............................................................................................................. 18
Negative List ..................................................................................................................... 18
Rules of Origin.................................................................................................................. 18
Multiple Chapters on Services .......................................................................................... 19
Regulatory Transparency .................................................................................................. 20
Regulatory Heterogeneity ................................................................................................. 20
Services in the Current Trade Promotion Authority.......................................................... 21
The Proposed Trade in Services Agreement (TiSA) ......................................................... 22
The Proposed Trans Pacific Partnership (TPP) ................................................................. 26
The Proposed Transatlantic Trade and Investment Partnership (T-TIP) ........................... 26
Outlook .......................................................................................................................................... 28
Issues for Congress ........................................................................................................................ 28
Figures
Figure 1. U.S. Cross-Border Trade in Goods and Services, 1992-2014 .......................................... 3
Figure 2. U.S. Services Cross-Border Exports by Geographic Region, 2014 ................................. 5
Figure 3. U.S. Services Cross-Border Imports by Geographic Region, 2014 ................................. 6
Figure 4. U.S. Services Exports through Affiliates, 2013 ............................................................... 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, 2011-2013 .................................................................................................................... 4
Table 2. Commercial Services Trade: Leading Exporters and Importers, 2013 .............................. 9
Table 3. Commercial Services Trade: Leading Exporters and Importers, 2013 ............................ 10
Congressional Research Service
U.S. Trade in Services: Trends and Policy Issues
Contacts
Author Contact Information .......................................................................................................... 29
Acknowledgments ......................................................................................................................... 30
Congressional Research Service
U.S. Trade in Services: Trends and Policy Issues
Introduction
The term “services” as they relate to services trade.
U.S. Trade in Services: Trends and Policy Issues
Introduction
The term "services" refers to an expanding range of economic activities, 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. Services account for a majority of U.S. economic activity—
68% of U.S. gross domestic product (GDP) and 80% of U.S. civilian employment.
11 Services are
an important element across the U.S. economy, at the national, state, and local levels. They not
only function as end-use products but also act as the
“lifeblood”"lifeblood" of the rest of the economy. 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. international trade and, therefore, an
increasingly important priority of U.S trade policy and of global trade in general. Services
accounted for $711 billion of U.S. exports in 2014.
2
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.
33 The United States continues to
engage in trade negotiations on multilateral, plurilateral, bilateral
, and regional agreements to
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. Congress establishes trade negotiating objectives and
priorities, including through trade promotion authority (TPA) legislation and consultations with
the Administration. More directly, Congress must pass legislation to implement a trade agreement
requiring changes to U.S. law before it can enter into force in the United States.
This report provides background information and analysis on U.S. international trade in services.
It analyzes policy issues before the United States, especially relating to negotiating international
disciplines on trade in services and dealing complexities in measuring trade in services. The
report also examines emerging issues and current negotiations, including the Trade in Services
Agreement (TiSA), the Trans-Pacific Partnership (TPP), and the Transatlantic Trade and
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. Trade in Services: Trends and Policy Issues
U.S. Trade in Services
Modes of Delivery
Investment Partnership (T-TIP).
U.S. Trade in Services
Modes of Delivery
The basic characteristics of services (especially compared to goods) are complex due to their
intangibility and their ability to be conveyed via various formats, including electronically and
direct provider-to-consumer contact. To address this complexity, members of the World Trade
Organization (WTO) have adopted a system of classifying four modes of delivery for services to
measure trade in services and to classify government measures that affect trade in services in
international agreements (see the text box below).
Four Modes of Services
Delivery4
Delivery4
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—
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
MexicoChina 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—China.
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—
Mode 3—Commercial presence: The supply of a service by a firm in one country via its branch, agency, or wholly
owned subsidiary located in another country. Example: A U.S. construction firm establishes a subsidiary in
Mexico to
European to sell services to local clients.
Mode 4—
Mode 4—Temporary presence of natural persons: individual suppliers travel temporarily to another country to
supply services. Example: A U.S. computer programmer travels to
MexicoCanada 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 Mode 1 can be different from issues raised by trade in another
mode.
mode. Therefore, knowing the different modes helps to frame policy issues and solutions.
Overall Trends
Overall Trends
U.S. international trade in services plays an important role in overall U.S. economy and
international trade. Services encompass a range of economic activities including express delivery,
transportation transportation, and other travel services; royalties and licensing fees for the use of intellectual
property rights
; express delivery; e-commerce; education services; banking, insurance, and other
financial services;
and accounting, construction, architectural, engineering, legal, and other
professional services.
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.
5 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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U.S. Trade in Services: Trends and Policy Issues
services 5 The second set of data measures services sold by an affiliate of a company from one country in the territory and to a consumer of
another country (Mode 3).
6
6
For cross-border trade, in 2014, services accounted for 30.0% of the $2,343 billion total U.S.
exports (of goods and services) and 16.7% of the $2,852 billion total U.S. imports.
7 Figure 1
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.
8
8
Figure 1. U.S. Cross-Border Trade in Goods and Services, 1992-2014
(billions of dollars)
$ 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
(billions of dollars)
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 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 2013 (the latest year for which published data are available), U.S. firms sold $1,320.9 billion in
services to foreigners through their majority-owned foreign affiliates. In 2013, foreign firms sold
$878.5 billion in services to U.S. residents through their majority-owned foreign affiliates located
in the United States.
99 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% or more ownership of the voting stock for an incorporated business, or an equivalent interest for an unincorporated business.
7
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.
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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U.S. Trade in Services: Trends and Policy Issues
10 Nevertheless, the 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 1. Services Supplied to Foreign and U.S. Markets through
Cross-Border Trade and Affiliates, 2011-2013
(billions of dollars)
U.S. Exports
U.S. Imports
Cross-Border
Trade
Through U.S.owned Affiliates
Cross-Border
Trade
Through Foreignowned Affiliates
2013
$687.9
$1,320.9
$463.7
$878.5
2012
$656.4
$1,285.9
$452.0
$813.3
2011
$627.8
$1,247.0
$435.8
$781.6
Source:
U.S. Exports
|
U.S. Imports
|
Cross-Border Trade
|
Through U.S.-owned Affiliates
|
Cross-Border Trade
|
Through Foreign-owned Affiliates
|
|
2013
|
$687.9
|
$1,320.9
|
$463.7
|
$878.5
|
|
2012
|
$656.4
|
$1,285.9
|
$452.0
|
$813.3
|
|
2011
|
$627.8
|
$1,247.0
|
$435.8
|
$781.6
|
Source: Department of Commerce, Bureau of Economic Analysis, available 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-
added11added11 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.
1212 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
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 see Figure 2 and Figure 3). 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 2014. Apart from the UK, 29% 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 6% 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 2014.14
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. Due to data
(continued...)
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U.S. Trade in Services: Trends and Policy Issues
both U.S. exports and imports of services in 2014.14
Figure 2. U.S. Services Cross
-Border Exports by Geographic Region, 2014
(Percentage of Total)
Africa
China 2.0%
6.0%
Middle East
3.9%
Other
0.4%
Canada
8.6%
Japan
6.6%
Rest of Europe
28.7%
Rest of Asia Pacific
16.3%
Latin America
18.5%
UK
9.0%
(Percentage of Total)
Source: CRS, based on data from the Department of Commerce, Bureau of Economic Analysis.
(...continued)
limitations, BEA is not able to disaggregate all services trade data to a country or sector level.
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U.S. Trade in Services: Trends and Policy Issues
Figure 3. U.S. Services Cross
- Border Imports by Geographic Region, 2014
(percentage of total)
China
Middle East 3.0%
3.3%
Africa
1.8%
Other
0.3%
Canada
6.3%
Japan
6.5%
Rest of Asia Pacific
16.3%
Latin America
19.9%
Rest of Europe
32.1%
UK
10.4%
(percentage of total)
Source: CRS, based on data from the Department of Commerce, Bureau of Economic Analysis.
Europe’
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 4Error!
Reference source not found.see Figure 4). In 2013 (latest data available), 42% of services supplied by U.S.
MNCs were to foreign persons located in European Union countries, 26% to foreign persons
located in Asian countries, and 10% to foreign persons located in Canada. In 2013, 58% of sales
of services to U.S. persons by U.S. affiliates of foreign-owned MNCs were by MNCs based in
European countries; 26% by MNCs based in Asia, Middle East,
and Africa; and 10% by MNCs based
in Canada.15
15
Ibid.
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U.S. Trade in Services: Trends and Policy Issues
Figure 4. U.S. Services Exports through Affiliates, 2013
(percentage of total)
Middle East
1%
Africa
1%
Rest of
Europe
7%
Canada
10%
Latin America and
Other Western
Hemisphere
13%
European Union
42%
Asia and Pacific
26%
in Canada.15
Figure 4. U.S. Services Exports through Affiliates, 2013
(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:
categories:16Maintenance and repair services;
Transport;
Transport;
Travel (for all purposes including tourism, education);
Insurance services;
Financial services;
Charges for the use of intellectual property (e.g., trademarks, franchise fees);
Telecommunications, computer, and information services;
Other business services (e.g., research and development, accounting,
engineering); and
Government goods and services.
16
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.
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U.S. Trade in Services: Trends and Policy Issues
Government goods and services.In 2014, U.S. exports covered a diverse range of services (
See 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
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
Note: n.i.e. = not included elsewhere.
Sales of services by MNCs via commercial presence (Mode 3) include a broader range of
industries. In 2013 (latest data available), 26% 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% of the value; sales of professional services, including computer systems
management and design, architectural, engineering, and other professional services for 15%;
information-related services for 14%; and
“"other industries
”" (a category that includes mining,
17
Ibid.
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U.S. Trade in Services: Trends and Policy Issues
utilities, transportation, and other services) for 23%. Manufacturing accounted for the smallest
share at 2%, followed by real estate at 3%.
18
18
The total value of services supplied to U.S. persons by U.S. affiliates of foreign MNCs was
twothirdstwo-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 2013, for sales of
services to U.S. persons by U.S. affiliates of foreign MNCs, wholesale and retail trade accounted
for 22%, and financial services providers for 20%. Another 22% was by providers from
“other
industries.”19
"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)
2020 countries are treated separately, the United States was the
largest single-country exporter (14.
31%) and importer (9.
86%) of global commercial services in
2013 (See 2014 (see Table 2). The United States was the second-largest exporter (18.
75%) and importer
(12.
74%) in
20132014, if the EU is treated as a single entity (
See see Table 3
).
Table 2. Commercial Services Trade: Leading Exporters and Importers, 2014
Rank
|
Exporter
|
Value ($ bn)
|
Share (%)
|
Annual % Change
|
Rank
|
Importer
|
Value ($ bn)
|
Share (%)
|
Annual % Change
|
1
|
United States
|
686
|
14.1
|
3
|
1
|
United States
|
454
|
9.6
|
4
|
2
|
United Kingdom
|
329
|
6.8
|
4
|
2
|
China
|
382
|
8.1
|
16
|
3
|
Germany
|
267
|
5.5
|
5
|
3
|
Germany
|
327
|
6.9
|
1
|
4
|
France
|
263
|
5.4
|
4
|
4
|
France
|
244
|
5.1
|
6
|
5
|
China
|
222
|
4.6
|
8
|
5
|
Japan
|
190
|
4.0
|
12
|
6
|
Japan
|
158
|
3.3
|
19
|
6
|
United Kingdom
|
189
|
4.0
|
-1
|
7
|
Netherlands
|
156
|
3.2
|
11
|
7
|
Netherlands
|
165
|
3.5
|
8
|
8
|
India
|
154
|
3.2
|
4
|
8
|
Ireland
|
142
|
3.0
|
16
|
9
|
Spain
|
135
|
2.8
|
5
|
9
|
Singapore
|
130
|
2.7
|
0
|
10
|
Ireland
|
133
|
2.7
|
9
|
10
|
India
|
124
|
2.6
|
-1
|
Source:).
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.
Congressional Research Service
9
U.S. Trade in Services: Trends and Policy Issues
Table 3. Commercial Services Trade: Leading Exporters and Importers, 2013
Value
($ bn)
Share
(%)
Annual
%
Change
Rank
Importer
Value
($ bn)
Share
(%)
Annual
%
Change
Rank
Exporter
1
Extra-EU(28)
exports
891
25.2
6
1
ExtraEU(28)
exports
668
19.7
4
2
United
States
662
18.7
5
2
United
States
432
12.7
4
3
China
205
5.8
7
3
China
329
9.7
18
4
India
151
4.3
4
4
Japan
162
4.8
-7
5
Japan
145
4.1
2
5
Singapore
128
3.8
4
6
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:2015, p. 28.
Table 3. Commercial Services Trade: Leading Exporters and Importers, 2014
Rank
|
Exporter
|
Value ($ bn)
Share (%)
|
Annual % Change
|
Rank
|
Importer
|
Value ($ bn)
|
Share (%)
|
Annual % Change
|
1
|
Extra-EU(28) exports
|
891
|
25.2
|
6
|
1
|
Extra-EU(28) exports
|
739
|
20.1
|
6
|
2
|
United States
|
662
|
18.7
|
5
|
2
|
United States
|
454
|
12.4
|
4
|
3
|
China
|
205
|
5.8
|
7
|
3
|
China
|
382
|
10.4
|
16
|
4
|
Japan
|
151
|
4.3
|
4
|
4
|
Japan
|
190
|
5.2
|
12
|
5
|
India
|
145
|
4.1
|
2
|
5
|
Singapore
|
130
|
3.5
|
0
|
6
|
Singapore
|
133
|
3.8
|
6
|
6
|
India
|
124
|
3.4
|
-1
|
7
|
Switzerland
|
122
|
3.5
|
4
|
7
|
Russian Federation
|
119
|
3.2
|
-5
|
8
|
Hong Kong, China
|
112
|
3.2
|
1
|
8
|
Korea, Republic of
|
114
|
3.1
|
4
|
9
|
Korea, Republic of
|
93
|
2.6
|
5
|
9
|
Canada
|
106
|
2.9
|
-5
|
10
|
Canada
|
78
|
2.2
|
0
|
10
|
Switzerland
|
83
|
2.5
|
2
|
Source: World Trade Organization, World Trade Report
2014, p. 37.
2015, p. 29.
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.
2121 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
services. With U.S. firms supplying many of the world's services, these findings imply that more U.S. services are traded internationally than traditional trade statistics indicate, and that many more service industry jobs in the United States are linked to international trade than traditionally thought. As such, the strategic and potential economic impact of both trade barriers and efforts to liberalize trade in services may be greater than many people realize. The growth of global value chains (GVCs) 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.
Congressional Research Service
10
U.S. Trade in Services: Trends and Policy Issues
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 the following:
22
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;
Aaditya Mattoo, Services Trade and Regulatory Cooperation, E15, July 2015, http://e15initiative.org/.
Congressional Research Service
11
U.S. Trade in Services: Trends and Policy Issues
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.
Congressional Research Service
12
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 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.
According to the OECD Service Trade Restrictiveness Index (STRI),30 the United States has a
relatively open and competitive business environment in comparison to the 40 countries included
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,
pp. 13-14.
28
Ambassador Michael B.G. Froman, 2015 National Trade Estimate Report on Foreign Trade Barriers, Office of the
United States Trade Representative, 2015, 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.
30
OECD, Services Trade Restrictiveness Index, http://www.oecd.org/tad/services-trade/services-trade-restrictiveness(continued...)
Congressional Research Service
13
U.S. Trade in Services: Trends and Policy Issues
in the study. The United States scored as the most open country for sound recording, motion
pictures, and distribution services, as reflected by the highly competitive U.S. industry in these
sectors. On the other hand, the study identifies air transport, maritime transport, and courier
services as the U.S. business sectors with the most restrictions impacting foreign firms seeking to
do business in the country.
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 1986.31 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
(...continued)
index.htm.
31
Geza Feketekuty, International Trade in Services: An Overview and Blueprint for Negotiations, American Enterprise
Institute,. Ballinger Publishers. 1988, p. 194.
Congressional Research Service
14
U.S. Trade in Services: Trends and Policy Issues
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.32
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), nondiscriminatory treatment—
services imported from one member country cannot be treated any less favorably
than the services imported from another member country;33
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 22
Global value chains have expanded and redefined the role that services play in international trade and are one reason for the growth in services. Furthermore, GVCs may also serve as a motivator for countries involved at any point along a global value chain to seek more open and level markets for moving intermediate goods and service imports and exports. According to one study, a domestically manufactured good contains over 20% of foreign value added in many countries, and over 50% in some countries and industries.23 Similarly, imported goods often contain a significant amount of domestic content. For example, a French wine imported into the United States may be transported on a U.S. cargo ship and use a label designed and printed by a U.S. marketing firm, while a gadget assembled domestically and exported by a U.S. firm may not only have components from abroad but also leverage foreign research and engineering skills.
The WTO's "Made in the World" initiative finds that the increase use of GVCs has led industries to demand greater trade liberalization and lower protectionism as these firms depend on other links in the value chain, both domestic and foreign.24
Barriers to Trade in Services
Liberalizing trade for services can be more complex than for goods, as 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 to foreign service providers in a discriminatory and unnecessarily trade restrictive manner 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 the following:
- 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;
- 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 high-level company officials be local nationals or that a certain proportion of a company's directors be local nationals.25
The Economic Effects of Barriers to Services Trade
As the most significant barriers to trade in services are not readily quantifiable, measuring their effects is challenging. 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%.26 Given that four-fifths of the U.S. private sector workforce is in services, a change in the ratio of exporting service businesses could have a significant impact.27 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.28 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%.29
|
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.30
|
An Organization for Economic Co-operation and Development (OECD) study on services trade restrictions analyzed the relationship between services trade restrictions, cross-border trade in services, and trade in downstream manufactured goods.31 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. Financial services saw the greatest impact when restrictions changed; limitations on financial services were mostly in the form of market entry restrictions such as equity limits.
According to the OECD Service Trade Restrictiveness Index (STRI),32 the United States has a relatively open and competitive business environment in comparison to the 40 countries included in the study as foreign providers have access and are allowed to compete equally in most sectors in the United States. The United States scored as the most open country for sound recording, motion pictures, and distribution services, as reflected by the highly competitive U.S. industry in these sectors. On the other hand, the study identifies air transport, maritime transport, and courier services as the U.S. business sectors with the most restrictions impacting foreign firms seeking to do business in the country.
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 40 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 1986.33 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.34
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), nondiscriminatory treatment—services imported from one member country cannot be treated any less favorably than the services imported from another member country;35
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.
32
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.
33
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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U.S. Trade in Services: Trends and Policy Issues
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.
3436 The schedules of market access
commitments are, in essence, the core of the GATS.
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”"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
commitments largely reflected national regimes already in place.
3537 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.
3638 Today, a total of 108 WTO members have made some level of commitment
to facilitate trade in telecommunications services.
37
39
Services and the Doha Development Agenda (Doha 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 nonagriculture negotiations—into the agenda of the Doha
Development Agenda (Doha Round) round that was launched in December 2001.
38
U.S. priorities in the services negotiations included the following areas:
34
More information on GATS schedules can be found at https://www.wto.org/english/tratop_e/serv_e/guide1_e.htm.
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.
36
Tuthill, L. Lee and Laura B. Sherman, Telecommunications: Can 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.
37
World Trade Organization, Services: Sector by Sector Telecommunications services, https://www.wto.org/english/
tratop_e/serv_e/telecom_e/telecom_e.htm.
38
For more information, see CRS In Focus IF10002, The World Trade Organization at 20, by Ian F. Fergusson.
35
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U.S. Trade in Services: Trends and Policy Issues
40
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.
In general, the Doha Round
hasnegotiations have 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.39
The lack of progress in the agriculture and nonagriculture market access (NAMA) negotiations in
the Doha Round has also affected the services negotiations. Some developing countries asserted
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 Doha Round, means success in one area of the negotiations, required success in all
areas.
Another reason for the slow 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 exporters faces differ across service sectors, making the formulation of trade rules a
significant challenge. For example, licensing regulations are especially important to 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
between government regulations that are purely protectionist and those that have legitimate
purposes.40
39
J.Bradford Jensen, Global Trade in Services: Fear, Facts, and Offshoring, Peterson Institute for International
Economics, August 2011, pp. 150-151.
40
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. Trade in Services: Trends and Policy Issues
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).41
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.
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 superseded 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 others go beyond the GATS.
Negative List
Each U.S. FTA uses a negative list in determining market access and national treatment coverage
and commitments from each partner. A negative list means that the FTA provisions for market
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
41
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
owned or controlled by a person from a nonparty 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 nonparty country.42
Multiple Chapters on Services
In many U.S. FTAs, trade in services spans several chapters indicating their prominence in U.S.
trade policy, the complexity in addressing services trade barriers, and the specificity of U.S. trade
policy negotiating objectives. Each FTA 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 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 an FTA partner and a chapter on
intellectual property rights (IPR), which is also relevant to services trade.43 In addition, many U.S.
FTAs contain separate provisions or chapters on specific service categories which have 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
42
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 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.
43
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
FTA partner with interconnection, number portability, dialing parity, and access
to underwater cable systems.
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. 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.
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.44 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.45 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)46
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
44
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.
46
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
45
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U.S. Trade in Services: Trends and Policy Issues
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.47 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
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, 2015,48 contained
agriculture. For example, developing countries (including emerging economic powerhouses such as China, Brazil, and India) have sought the reduction of agriculture tariffs and subsidies among developed countries, nonreciprocal market access for manufacturing sectors, and protection for their services industries. In contrast, the United States, the EU, and other developed countries have sought reciprocal trade liberalization, especially commercially meaningful access to advanced developing countries' industrial and services sectors, while attempting to retain some measure of protection for their agricultural sectors. The developed countries also seek to incorporate new issues that impact services, such as digital trade (data flows, cybertheft, and trade secrets) and global value chains.
The complexity of the services agenda and the number of players involved may have contributed to the lack of progress in the Doha Round negotiations. 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 exporters face differ across service sectors, making the formulation of trade rules a significant challenge. For example, licensing regulations are especially important to 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 between government regulations that are purely protectionist and those that have legitimate purposes.41
After 14 years, the divisions in the Doha Round have called into question the viability of the "single undertaking" (one package to address all trade issues together) type of negotiation and the need for institutional reform. After the WTO's 2015 Ministerial was held in Nairobi, Kenya, the Ministerial Declaration acknowledged the division over the future of the Doha Round, and failed to reaffirm its continuation. Despite the disagreements, there was some progress in certain issues, such as the LDC Services Waiver to provide preferential treatment to least-developed countries (LDCs) for specific service sectors and modes.42
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.
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 superseded 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 others go beyond the GATS.
Negative List
Each U.S. FTA uses a negative list in determining market access and national treatment coverage and commitments from each partner. A negative list means that the FTA provisions for market 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 Canadian-owned 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 nonparty 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 nonparty country.43
Multiple Chapters on Services
In many U.S. FTAs, trade in services spans several chapters, indicating its prominence in U.S. trade policy, the complexity in addressing services trade barriers, and the specificity of U.S. trade policy negotiating objectives. Each FTA 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 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 an FTA partner and a chapter on intellectual property rights (IPR), which is also relevant to services trade.44 In addition, many U.S. FTAs contain separate provisions or chapters on specific service categories which have 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/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. 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.
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.45 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.46 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)47
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.48 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 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 29, 2015,49 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.
47
State-owned enterprises (SOEs) are businesses that are directly or indirectly controlled by the government. U.S.
SOEs include the U.S. postal system.
48
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.
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U.S. Trade in Services: Trends and Policy Issues
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—
areis engaged in discussions on a possible
sector-specific, plurilateral agreement to liberalize trade in services among them.
4950 The group
accounts for around 70% of world trade in services.
5051 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.
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
8th8th 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.
51
52
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
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
49
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.
50
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.
51
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.
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U.S. Trade in Services: Trends and Policy Issues
" of broader negotiations; and
a plurilateral services pact might diminish the credibility of the multilateral trade
negotiation framework at a time
when 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.
5253 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
(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” "hybrid" approach: market access obligations are being negotiated under a positive list, while
national treatment obligations are being negotiated under a negative list.
53
54
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.
54
55
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.
52
Daniel Pruzin, “EU Commission to Seek Negotiating Mandate,” International Trade Daily, February 19, 2013.
Inside U.S. Trade, “USTR Says It Will Seek To Cover New Services In Plurilateral Agreement,”, January 17, 2013.
54
Inside U.S. Trade, “Leaked TISA Core Text Shows ‘MFN Forward’ Fight Still Dragging On,” July 9, 2015.
53
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U.S. Trade in Services: Trends and Policy Issues
In their comments, TiSA advocates stated their overall goals:55
in the GATS—which are largely considered to be weak.
In their comments, TiSA advocates stated their overall goals:56
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”"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
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:
56
57use 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;
55
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.
56
These points were taken largely from submissions by Public Citizens, Inc. and the AFL-CIO.
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U.S. Trade in Services: Trends and Policy Issues
defense;
exclude an
“"investor-state
”" dispute settlement
mechanism57mechanism58 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 October 2015, 14 Since negotiations were launched in April 2013, 16 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, and more are planned for 2016. 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.
5859 The United
States reportedly advocates applying some of the disciplines, such as localization and
crossbordercross-border data flows, to the entire agreement by placing these in the core text, not solely in the
ecommerce annex.
e-commerce 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’ China's participation sooner.
5960 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”60 memberlarge emerging market has explicitly expressed interest in joining
TiSA. However, the agreement overall is reportedly being structured so that it can be
“multilateralized”"multi-lateralized" in the future and incorporated into the GATS and made applicable to all WTO
members.
6161 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.21st century.62 However, the United States is engaged
inwith two other sets of
negotiations—the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment
57
Through investor-state dispute settlement, an investor can submit an investment dispute with the host country’s
government to binding, impartial international arbitration.
58
Inside U.S. Trade, “Despite ‘TISA-Plus’ Aims, EU’s E-Commerce Proposal For T-TIP Falls Short”, August 13,
2015.
59
Ibid.
60
BRICS refers to the five major emerging national economies: Brazil, Russia, India, China and South Africa.
61
Inside U.S. Trade, “Leaked TISA Core Text Shows ‘MFN Forward’ Fight Still Dragging On,” July 9, 2015.
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U.S. Trade in Services: Trends and Policy Issues
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 trade dialogues—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 Trans Pacific Partnership (TPP) Agreement
The TPP is a proposed FTA among 12 Asia-Pacific countries that would reduce and eliminate tariff and non-tariff barriers on goods, services, and agriculture, and establish trade rules and disciplines that expand on existing WTO commitments and address new issues. The countries—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore, the United States, and Vietnam—
envisionview the proposed TPP
to be a
as 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.62 Although the
negotiations are concluded, the final texts of the agreement are still 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
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.63 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
billion in services in 2013. TPP trade ministers concluded the agreement on October 5, 2015, and signed it on February 4, 2016.63 Each country will go through its own domestic process to ratify the agreement.
Due to the complexity of services trade barriers, TPP commitments in several chapters may impact services trade. Chapters with a focus on services-related commitments, discussed in more detail below, include Cross Border Trade in Services, Financial Services, Temporary Entry, Telecommunications, and Electronic Commerce.
Unlike TiSA, the TPP employs the "negative list approach" for liberalization of cross-border trade in services so that the provisions are to apply to all types of services unless specifically excluded by a partner country in the chapter annexes on non-conforming measures (NCMs). The negative list approach implies that any new type of service that is developed after the agreement enters into force is automatically covered unless it is specifically excluded.
Stakeholders generally have reacted positively to the TPP provisions relating to U.S. trade in services, with some key exceptions. Business groups note that for the five countries without existing U.S. FTAs, the provisions in TPP would provide meaningful additional market access.64 Major advances in TPP from the perspective of the business community include ensuring electronic payment card services and electronic signatures as well as addressing mobile telecommunications carriers and international roaming rates. Supporters highlight new provisions in TPP, particularly those related to data flows and digital trade, as advancing U.S. service firms' interests. Provisions on data flows also impact non-services firms, such as manufacturers who rely on global supply chains and transmitting data across borders.65
Critics have noted that financial services are not covered by the overall e-commerce chapter and have a separate provision covering cross-border data flows that is based on KORUS and does not include the e-commerce chapter prohibitions on data localization requirements. In TPP, USTR negotiated for the position advocated by the U.S. Treasury Department and sought flexibility for financial regulators to impose localization requirements. While localization requirements are not currently in place in TPP countries, observers note that Malaysia and Vietnam are considering imposing such regulations. In addition, some stakeholders note concern about potential future TPP parties, including Indonesia, South Korea, Brazil, and India, who have or are considering localization requirements.
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 ). The United States is said to prefer handling
62
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.
63
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.
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U.S. Trade in Services: Trends and Policy Issues
regulatory cooperation through ongoing bilateral dialogues with the EU or through multilateral
fora such as the G-20.
64
66
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
”).65").67 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
,”66."68 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
whichthat went
into effect in 2010, which may lead T-TIP negotiators to adopt a hybrid approach similar to that
being employed in TiSA negotiations.
67
With the 10th69
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.
6870 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,
and 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.
6971 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,
”70"72 conforming to the limitations included in its original mandate to
negotiate the T-TIP passed by the European Commission.
71
73
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
amongstamong 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
64
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
65
Inside U.S. Trade, U.S., EU Negotiators Say Services Offers Are ‘TISA-Plus,’ Light On Details, July 16, 2015.
66
See USTR website: https://ustr.gov/trade-agreements/free-trade-agreements/transatlantic-trade-and-investmentpartnership-t-tip/t-tip-4.
67
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.
68
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.
69
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.
70
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.
71
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.
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U.S. Trade in Services: Trends and Policy Issues
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.
7274 The absence of these sensitive areas from the EU proposal has disappointed
some in the U.S. business community.
7375 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.
7476 The recently
- completed
US-EU “Umbrella Agreement” could help
EU-U.S. Privacy Shield 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.75
Outlook
will facilitate cross-border data flows between the United States and EU.77
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 predatingpre-dating 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?
72
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.
73
Inside U.S. Trade, Despite ‘TISA-Plus’ Aims, EU’s E-Commerce Proposal For T-TIP Falls Short, August 13, 2015.
74
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.
75
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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U.S. Trade in Services: Trends and Policy Issues
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)?
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 makerspolicymakers 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
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U.S. Trade in Services: Trends and Policy Issues
Acknowledgments
This report was originally written by William H. Cooper, CRS Specialist in International Trade and
Finance.
Congressional Research Service
30
Author Contact Information
[author name scrubbed], Analyst in International Trade and Finance
([email address scrubbed], [phone number scrubbed])
Acknowledgments
This report was originally written by [author name scrubbed], CRS Specialist in International Trade and Finance.
Footnotes
| 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.
|
| 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.
|
| 6.
|
Affiliates are enterprises that are directly or indirectly owned or controlled by an entity in another country to the extent of 10% or more ownership of the voting stock for an incorporated business, or an equivalent interest for an unincorporated business.
|
| 7.
|
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.
|
| 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.
|
| 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. Due to data limitations, BEA is not able to disaggregate all services trade data to a country or sector level.
|
| 15.
|
Ibid.
|
| 16.
|
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.
|
| 17.
|
Ibid.
|
| 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.
|
| 21.
|
OECD, Interconnected Economies: Benefitting from Global Value Chains – Synthesis Report, 2013.
|
22.
|
Aaditya Mattoo, Services Trade and Regulatory Cooperation, E15, July 2015, http://e15initiative.org/.
| 23.
|
Emily J. Blanchard, Chad P. Bown, and Robert C. Johnson, "Global Supply Chains and Trade Policy [Preliminary]," October 16, 2015, http://www.tuck.dartmouth.edu/faculty/faculty-directory/emily-j-blanchard.
|
| 24.
|
Yildirim Aydin, Value added trade, global value chains, and trade policy: renewed push for trade liberalization., University of Antwerp (Centre for Institutions and Multilevel Politics), WTO Made in the World discussion forum, September 1, 2015.https://www.wto.org/english/res_e/statis_e/miwi_e/paper_january15_e.htm.
|
| 25.
|
OECD, Working Party of the Trade Committee Assessing Barriers to Trade in Services—Revised Consolidated List of Cross-Sectoral Barrier, Paris, February 28, 2001.
|
| 26.
|
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.
|
27.
|
U.S. Chamber of Commerce, Trade in Services Agreement, Issue Brief, April 16, 2015, https://www.uschamber.com/.
| 28.
|
For more on data vulnerabilities and cybersecurity, see CRS Report R43317, Cybersecurity: Legislation, Hearings, and Executive Branch Documents, by [author name scrubbed].
|
| 29.
|
United States International Trade Commission, Digital Trade in the U.S. and Global Economies, Part 2, 2014, pp. 13-14.
|
| 30.
|
Ambassador Michael B.G. Froman, 2015 National Trade Estimate Report on Foreign Trade Barriers, Office of the United States Trade Representative, 2015, p. 150.
Paul Mozur, "China Tries to Extract Pledge of Compliance From U.S. Tech Firms," New York Times, September 16, 2015.
|
| 31.
|
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.
|
| 32.
|
OECD, Services Trade Restrictiveness Index, http://www.oecd.org/tad/services-trade/services-trade-restrictiveness-index.htm.
|
| 33.
|
Geza Feketekuty, International Trade in Services: An Overview and Blueprint for Negotiations, American Enterprise Institute,. Ballinger Publishers. 1988, p. 194.
|
| 34.
|
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.
|
| 35.
|
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.
|
| 36.
|
More information on GATS schedules can be found at https://www.wto.org/english/tratop_e/serv_e/guide1_e.htm.
|
| 37.
|
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.
|
| 38.
|
Tuthill, L. Lee and Laura B. Sherman, Telecommunications: Can 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.
|
| 39.
|
World Trade Organization, Services: Sector by Sector Telecommunications services, https://www.wto.org/english/tratop_e/serv_e/telecom_e/telecom_e.htm.
|
| 40.
|
For more information, see CRS In Focus IF10002, The World Trade Organization, by [author name scrubbed] and [author name scrubbed].
|
| 41.
|
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.
|
42.
|
For more on WTO, See CRS Insight IN10422, The WTO Nairobi Ministerial, by [author name scrubbed], and CRS In Focus IF10002, The World Trade Organization, by [author name scrubbed] and [author name scrubbed]. 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.
| 43.
|
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 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.
|
| 44.
|
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 [author name scrubbed] and [author name scrubbed].
|
45.
|
Aaditya Mattoo, Services Trade and Regulatory Cooperation, E15, July 2015, http://e15initiative.org/.
| 46.
|
For more information, See CRS In Focus IF10035, Introduction to Financial Services: Banking, by [author name scrubbed].
|
| 47.
|
For more information, see CRS Report RL34330, The U.S.-South Korea Free Trade Agreement (KORUS FTA): Provisions and Implementation, coordinated by [author name scrubbed].
|
| 48.
|
State-owned enterprises (SOEs) are businesses that are directly or indirectly controlled by the government. U.S. SOEs include the U.S. postal system.
|
| 49.
|
For more information on TPA, see CRS In Focus IF10038, Trade Promotion Authority (TPA), by [author name scrubbed], and CRS Report RL33743, Trade Promotion Authority (TPA) and the Role of Congress in Trade Policy, by [author name scrubbed].
|
| 50.
|
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.
|
| 51.
|
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.
|
| 52.
|
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.
|
| 53.
|
Daniel Pruzin, "EU Commission to Seek Negotiating Mandate," International Trade Daily, February 19, 2013.
|
| 54.
|
Inside U.S. Trade, "USTR Says It Will Seek To Cover New Services In Plurilateral Agreement,", January 17, 2013.
|
| 55.
|
Inside U.S. Trade, "Leaked TISA Core Text Shows 'MFN Forward' Fight Still Dragging On," July 9, 2015.
|
| 56.
|
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.
|
| 57.
|
These points were taken largely from submissions by Public Citizens, Inc. and the AFL-CIO.
|
| 58.
|
Through investor-state dispute settlement, an investor can submit an investment dispute with the host country's government to binding, impartial international arbitration.
|
| 59.
|
Inside U.S. Trade, "Despite 'TISA-Plus' Aims, EU's E-Commerce Proposal For T-TIP Falls Short", August 13, 2015.
|
| 60.
|
Ibid.
|
| 61.
|
Inside U.S. Trade, "Leaked TISA Core Text Shows 'MFN Forward' Fight Still Dragging On," July 9, 2015.
|
| 62.
|
For more information on TiSA, see CRS Report R44354, Trade in Services Agreement (TiSA) Negotiations: Overview and Issues for Congress, by [author name scrubbed].
|
| 63.
|
The text of the final TPP agreement can be found at https://ustr.gov/tpp/.
|
| 64.
|
Ambassador Peter Allgeier, Testimony before the International Trade Commission, Coalition of Services Industries, January 14, 2016, p. 11, https://servicescoalition.org/images/CSI_Public_Documents/ITC_Hearing_on_Economic_Impact_of_TPP_on_Services.pdf.
|
65.
|
For more information on the TPP, see CRS In Focus IF10000, The Trans-Pacific Partnership (TPP) Agreement, by [author name scrubbed] and [author name scrubbed], CRS Report R44278, The Trans-Pacific Partnership (TPP): In Brief, by [author name scrubbed], [author name scrubbed], and [author name scrubbed] , and CRS Report R42694, The Trans-Pacific Partnership (TPP) Negotiations and Issues for Congress, coordinated by [author name scrubbed].
| 66.
|
For more information on T-TIP, see CRS Report R43387, Transatlantic Trade and Investment Partnership (T-TIP) Negotiations, by [author name scrubbed], [author name scrubbed], and [author name scrubbed] and CRS In Focus IF10120, Transatlantic Trade and Investment Partnership (T-TIP), by [author name scrubbed] and [author name scrubbed].
|
| 67.
|
Inside U.S. Trade, U.S., EU Negotiators Say Services Offers Are 'TISA-Plus,' Light On Details, July 16, 2015.
|
| 68.
|
See USTR website: https://ustr.gov/trade-agreements/free-trade-agreements/transatlantic-trade-and-investment-partnership-t-tip/t-tip-4.
|
| 69.
|
For more information on KOREU, see CRS Report R41534, The EU-South Korea Free Trade Agreement and Its Implications for the United States, by [author name scrubbed] et al.
|
| 70.
|
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.
|
| 71.
|
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.
|
| 72.
|
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.
|
| 73.
|
For more information on T-TIP negotiations see CRS Report R43387, Transatlantic Trade and Investment Partnership (T-TIP) Negotiations, by [author name scrubbed], [author name scrubbed], and [author name scrubbed].
|
| 74.
|
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.
|
| 75.
|
Inside U.S. Trade, Despite 'TISA-Plus' Aims, EU's E-Commerce Proposal For T-TIP Falls Short, August 13, 2015.
|
| 76.
|
For more information on T-TIP, see CRS Report R43387, Transatlantic Trade and Investment Partnership (T-TIP) Negotiations, by [author name scrubbed], [author name scrubbed], and [author name scrubbed].
|
| 77.
|
Department of Commerce, EU-U.S. Privacy Shield Fact Sheet, February 2, 2016, https://www.commerce.gov/news/fact-sheets/2016/02/eu-us-privacy-shield.
For more on Safe Harbor, see CRS Report R44257, The EU-U.S. Safe Harbor Agreement on Personal Data Privacy: In Brief, by [author name scrubbed] and [author name scrubbed].
|