Services Trade and the Uruguay Round: An Issue Overview

Services Trade and the Uruguay Round: An Issue Overview

95-1169 E
December 5, 1995
CRS Report for Congress
Received through the CRS Web
Services Trade and the Uruguay Round:
An Issue Overview1
Arlene Wilson
Specialist in International Trade and Finance
Economics Division
Summary
The General Agreement on Trade in Services (GATS), which went into effect on
January 1, 1995, is a significant achievement, but only a first step on the road to
liberalization of services barriers. For the first time, legally enforceable multilateral rules
and principles for services trade are part of the international trading system. At the same
time, the immediate elimination or reduction of barriers to services transactions was
much less than desired by many. The GATS, however, includes provisions for future
negotiations to liberalize trade. The Congress will have an important consultation role
in these negotiations. If agreements are achieved, legislation may be necessary to
implement them.
Background to Services Negotiations
Services encompass a wide variety of activities that are often characterized as being
“intangible, invisible and unstorable.” In recent years, worldwide trade in services has
been growing faster than merchandise trade, but is still only one-fifth as large as
merchandise trade.
The United States is the largest exporter and importer of services. Travel and
tourism have historically been, and still are, the most heavily traded services. However,
trade in services such as financial, legal, medical, education, accounting, consulting,
engineering, computer data processing, while still relatively small, is growing rapidly.
Over the past ten years, U.S. services exports have been growing faster than services
imports (see figure 1), raising U.S. interest in removing foreign barriers to U.S. services
exports.
1 This report provides an overview of the issues discussed in: U.S. Library of Congress.
Congressional Research Service. Services Trade and the Uruguay Round, by Arlene Wilson.
CRS Report 95-1051. Washington, 1995. 21 p.
Congressional Research Service ˜ The Library of Congress

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Unlike merchandise trade (which is
Figure 1. U.S. Cross-Border Services
generally shipped across the border),
Transactions
services can be delivered in four main
ways: by suppliers traveling abroad,
consumers traveling abroad, mail or
electronic transfer of information, or
establishment of a branch, subsidiary, or
joint venture. Barriers facing foreign
service suppliers often take the form of
domestic regulations and foreign
exchange restrictions, not tariffs, as in the
case of merchandise trade.
The U.S. Government was the main
proponent of liberalizing trade in services.
The developing countries had many reservations, and some at first vigorously opposed the
inclusion of services. After considerable debate and compromise, the Punta del Este
Declaration in September 1986 launched the Uruguay Round, which included negotiations
on services.
Negotiations on services were not easy. The lack of empirical estimates on the extent
and economic impact of trade barriers made it difficult to establish priorities for
liberalization.2 Since tariffs are not relevant to services trade, it was not possible to make
them the centerpiece of negotiations, as occurred with early General Agreement on Tariffs
and Trade (GATT) negotiations on merchandise trade. An important issue was whether
or not a services agreement would apply to all or some modes of delivery. Foreign direct
investment and movement of persons, even if it is only temporary, are sensitive political
issues.
The General Agreement on Trade in Services (GATS)
The GATS is a complex document to read and interpret.3 It can be thought of as
having three main components: a multilateral system of rules and principles, specific
commitments, and further negotiations to liberalize services trade.
In general, the coverage of the GATS is quite broad. It covers all four modes of
delivery (cross-border trade, movement of suppliers abroad, movement of consumers
abroad, and foreign direct investment). The GATS applies to measures taken by central,
regional and local governments except those supplied in the exercise of governmental
authority.
2 Bernard M. Hoekman. Conceptual and Political Economy Issues in Liberalizing
International Transactions in Services. In Analytical and Negotiating Issues in the Global
Trading System. Alan V. Deardorff and Robert M. Stern, eds. Ann Arbor, The University of
Michigan Press. 1994. p. 520.
3 The full text of the GATS can be found in U.S. Congress. House. Uruguay Round Trade
Agreements, Texts of Agreements, Implementing Bill, Statement of Administrative Action, and
Required Supporting Statements. 103rd Cong., 2d Sess., Sept. 27, 1994, House Doc. 103-316,
Vol. 1. pp. 1586-1620.

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Multilateral Rules and Principles. As in the GATT, the most-favored-nation
(MFN) obligation is the cornerstone of the GATS. With unconditional MFN, each country
is obligated not to discriminate among countries. A service or service supplier from one
country must be treated no less favorably than any service or service supplier from another
country.
Unlike the GATT, however, the MFN provision in the GATS allowed countries to
temporarily avoid this obligation with respect to particular sectors (see box on page 4).
Stated another way, the MFN provision in the GATS applies generally, except where a
country listed an exemption. This was permitted because some industries in countries with
relatively open markets were concerned that similar industries in countries with restrictive
markets would get a “free ride.” That is, service firms in countries with closed markets
would continue to get access to countries with open markets, while those in countries with
open markets would not gain access to the closed markets. MFN exemptions provided
a way to force sectoral reciprocity.
In addition, the provisions on domestic regulation and transfer of international
payments apply only to sectors in which countries have scheduled commitments (see next
section). Domestic regulations and restrictions on international payments have, at times,
been serious barriers to services trade.
Multilateral Rules and Principles
Most Favored-Nation (MFN) Treatment. Each country agrees to treat services and
service providers from one member country in a mannner no less favorable than it
treats services and service providers from any other member country. One-time
exceptions to MFN treatment can be taken.
Transparency. Domestic measures that affect services trade shall be published promptly.
Regulations. Domestic rules and regulations shall be administered in an objective and
impartial manner in sectors where specific commitments are made.
Recognition. A country recognizing the education, experience, licenses or certifications
of professionals in a particular country shall provide an opportunity for the same
criteria in other countries to be recognized.
Transfer of International Payments. Countries shall not restrict transfer of international
payments relating to its specific commitments, except for balance-of-payments
purposes.
General Exceptions. Members can adopt or enforce any measures to protect public
morals; maintain public order; protect human, animal or plant life; ensure safety;
prevent fraud; or protect privacy as long as the measures do not discriminate among
countries or are not disguised barriers to trade.

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Developing Countries. Liberalization of services trade would be more flexible for
developing countries and technical assistance will be provided to strengthen their
service sectors.
Monopolies and Exclusive Service Providers. Members shall ensure that the behavior of
any firms they designate as sole providers in a particular services market is consistent
with the MFN rule and their government’s commitments under the GATS.
Regional Trade Agreements. Members may participate in a regional trade agreement
liberalizing services trade as long as the agreement has substantial sectoral coverage
and does not increase barriers against nonmembers of the regional trade agreement.
Nevertheless, agreement on a system of legally enforceable multilateral rules and
principles was a significant achievement. Rules such as the one on transparency (domestic
measures that affect services trade shall be published promptly) encourage services trade.
Specific Commitments. Importantly, national treatment and market access are not
included in the multilateral rules and principles of the GATS, but instead only apply if a
country commits to providing national treatment and/or market access in its schedules of
commitments.4
The schedules of specific commitments are what is known as a “positive list”
approach. Each country decided which service sectors will be subject to the GATS market
access and/or national treatment provisions. The commitments, like tariff negotiations in
goods, resulted from bilateral “request and offer” negotiations. If a country did not submit
a schedule for a sector, market access and national treatment automatically do not apply
to that sector. Commitments were bound (no new restrictions may be applied without
compensating other WTO members who are affected), unless otherwise noted in the
country’s schedule.
For those sectors in which a commitment was made, each country then decided what
measures that violate market access or national treatment would be kept in place for that
sector. These restrictions were scheduled by mode of delivery. This part is, in effect, a
negative list. The schedules of specific country commitments (and the exceptions) were
annexed to, and are an integral part of, the GATS.
The design of the specific commitments resulted in a lack of transparency. By using
a positive list combined with specified exceptions, it is difficult to determine exactly what
liberalization took place. Additionally, information on sectors which did not schedule
commitments is not available. Service barriers may be especially prevalent in sectors or
in modes of supply in which no commitments were scheduled. A negative list in which
schedules are submitted only where trade barriers are retained (as in the North American
Free Trade Agreement) is much more transparent.
4 National treatment is the obligation to treat foreign services and service suppliers no less
favorably than like domestic services and service suppliers.

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Developing countries submitted schedules for about one-fifth of their services sector,
while industrialized countries’ schedules accounted for about two-thirds of their services.5
In general, the amount of liberalization was small. Almost all the commitments reflect a
standstill, or ceiling, on existing measures, not a reduction of barriers.6 By providing more
secure market access, the obligation not to impose new restrictions can be important to
foreign firms. Nevertheless, more reductions in existing barriers would have been
preferable.
The commitments, which varied considerably by sector, were probably the most
extensive for business and professional services. For example, 65 of the 95 national
schedules included commitments on business and professional services.7 On the other
hand, only 13 countries made commitments in audiovisual services.8
Future Liberalization. The GATS provides that, no later than five years after the
date of entry into force of the WTO, and periodically thereafter, members will enter into
successive rounds of negotiations. The goal of such negotiations is to liberalize trade
further by increasing the level of specific commitments already undertaken. In addition,
negotiations are required on specific issues within certain deadlines (see box below).
Future Negotiations on Specific Issues
Government procurement in services within two years from the date of entry into force of
the WTO.
Emergency safeguard measures, with the results to enter into effect no later than three
years from the date of entry into force of the WTO.
Subsidies, with no deadline specified.
Movement of natural persons, with negotiations to be concluded six months after entry
into force of the WTO.
Financial services, with negotiations to be concluded six months after entry into force of
the WTO.
Maritime transport services, with negotiations to be concluded by June 1996.
5 Pierre Sauve. Assessing the General Agreement on Trade in Services: Half-Full or Half-
Empty? Journal of World Trade. Vol. 29, Aug. 1995. p. 143.
6 Jeffrey J. Schott. The Uruguay Round: An Assessment. Washington, D.C., Institute for
International Economics. November 1994. p. 100.
7 Liberalization of Trade in Professional Services. OECD Documents. Paris. Organization
for Economic Co-operation and Development. 1995. p. 48.
8 Norman S. Fieleke. The Uruguay Round of Trade Negotiations: An Overview. New
England Economic Review. Federal Reserve Bank of Boston. May/June 1995. pp. 8-9.

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Basic telecommunications, with negotiations to be concluded by 30 April 1996.
Negotiations on financial services, maritime transport services and basic
telecommunications require further explanation. As the GATS negotiations came to a
close, it became clear that the United States and perhaps other countries with relatively
open markets might take an MFN exemption in these areas. The United States claimed
that other countries, with fairly closed markets, were not making adequate commitments
to liberalize markets and would have no incentive to liberalize after the agreement took
effect. With an MFN exemption, the United States would have leverage to gain access to
foreign markets that were closed. In order to forestall MFN exemptions, it was decided
to continue negotiations in all three areas, with deadlines as noted in the box.
The fairly broad set of multilateral rules bodes well for future trade liberalization.
The framework is in place to facilitate further trade negotiations, even though MFN and
national treatment do not apply across-the-board. However, the positive list approach of
the specific commitments tends to inhibit future trade liberalization. As new services are
traded, barriers will automatically stay in place in those sectors. In contrast, in a negative
list approach, any new sectors that emerge would automatically enjoy the agreement’s
benefits.
The several provisions in the GATS requiring further negotiations may provide
momentum for trade liberalization. In the final analysis, though, future liberalization
depends on the political will of the WTO members.

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