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24 June 1997

Coalition of service industries conference, Geneva

Address by Warren Lavorel, Deputy Director-General, WTO
Attached is the address given today (24 June) by Mr. Warren Lavorel, Deputy Director-General of the World Trade Organization, at the Coalition of Service Industries Conference, Geneva.

The private sector is the main driving force behind today's globalizing world, and few organizations have been more active in this regard than the Coalition of Services Industries. Since your establishment in 1982, you have played a major r˘le in promoting the development of services industries around the world, and in informing public opinion of the growing importance of services in the economy. You helped to harness the energy of the services sector during the Uruguay Round negotiations, and you have been equally active in developing joint positions and initiatives in support of the subsequent services negotiations. From a WTO perspective, you represent one of our main constituencies, and for this reason alone I welcome this opportunity to discuss our common agenda for the future.

But this meeting is important for another reason. The 'globalization' of services is poised to transform the world economy as dramatically as the growth of the services sector has transformed our domestic economies in recent decades. All over the world, governments are moving to open up and deregulate many of their key service sectors. At the same time, technology is radically changing the way in which many services are delivered across borders, breaking down national barriers and creating the reality of a global playing field. And, perhaps most important, the global spread of services - especially in the telecommunications and financial sectors - is transforming the growth and modernization equation in much of the developing world. For all of these reasons, the future success of the world trading system will depend very much on our ability to manage and build upon this process.

To understand the potential impact of services trade, it is worth recalling that services are already by far the largest component of GDP in most countries -and this includes countries in the developing world. In many OECD countries today, services account for more than 70 per cent of GDP; and in many developing countries, this share has increased to around 50 per cent. What's more many of the most dynamic industries of tomorrow - like computer services, financial services, and telecommunications - are in the services sector, as are most of the high-paying jobs. When we talk about the 'new economy' of the 21st century we are largely talking about a services-based economy.

So far this revolution has occurred largely within national borders. Although world trade in commercial services is estimated to have grown by 5 per cent in 1996 - reaching $US 1.2 trillion - the fact remains that services are still traded much less than goods. In fact, if you take only the cross-border trade in services, it is less than a quarter of merchandise trade in terms of value.

But of course, cross border flows are only one part of the story. There are many services in which the physical presence of the consumer is essential - tourism being the obvious example - and there are others that require the physical presence of the supplier, such as consultancy.

That is why the GATS is such a revolutionary instrument because it provides commitments and disciplines across all modes for supplying services and thus reaches into areas of policy and regulation which the GATT never touched. Moreover, it provides a flexible framework, with its various scheduling possibilities, to accommodate the changes in the global economic landscape brought about through technological advances and new ways of delivering services.

Whole sectors of the service economy - from banking, to accountancy, to computer programming - can now be carried out anywhere in the world and delivered to consumers in a matter of seconds. The fast-changing telecommunications industry is an obvious example, but it's not alone. The financial sector is already feeling the effects of the Internet and electronic banking. IBM now recruits programmers from as far afield as India or China via electronic networks, while many other firms are subcontracting services like design, data processing and marketing around the world. And technology now allows all of us to watch movies, plan vacations or purchase other 'electronic' services without ever passing the border.

Thus, technology is creating a borderless economy in services, even more than in manufacturing. But changes in public policy are playing an equally important role. Highly regulated or sheltered service sectors are being transformed by the wave of liberalization, privatization, and deregulation that is sweeping much of the world. Liberalization generates efficiencies and promotes product diversification and innovation. And for many countries, especially in the developing world, open trade in services is an increasingly important way of transferring technologies, expertise, and investments across borders. For all of these reasons, regulators in many countries are adopting more market-oriented regulations and supervisory techniques as they seek to reap the benefits of competition.

The General Agreement on Trade in Services was negotiated precisely on the assumption that these benefits from liberalization could best be realized within a framework of multilateral rules and disciplines. Hence, the GATS covers all services. As I noted, it covers all modes of supply - cross-border, consumption abroad, commercial presence, and the movement of natural persons. And it incorporates strong principles of non-discrimination - most-favoured nation and national treatment - as well as provisions for transparency and disciplines on domestic regulation.

But GATS also implicity recognizes that the liberalization of services trade cannot be achieved overnight. When we began to develop GATS, the policy challenges were new, many services sectors were highly regulated, and national systems differed dramatically. Perhaps most important, technological advances were transforming many of these industries from one day to the next, making it that much more difficult to arrive at clear definitions of products and coverage. Negotiations during the Uruguay Round were long and difficult. And in the end, you will recall, negotiations in a few sectors, including financial services were not completed in time for the final agreement - leaving some to wonder whether this "unfinished business" would ever be brought to a close.

These huge challenges involved in opening up global services trade makes the progress we have made over the past year all the more remarkable. In February, we secured a landmark agreement in basic telecommunications after only two years of negotiations. Sixty-nine countries - accounting for more than 90 percent of telecoms revenue worldwide - made multilateral commitments in a market that is worth well over half a trillion dollars per year. Moreover the value of this initiative cannot be measured in trade figures alone. In a global economy driven by information and ideas, telecommunications is an essential building block for economic growth. Liberalization in this sector will change the nature of economic activity throughout the developing and developed world, dramatically reducing costs for business and consumers, and at the same time stimulating technological change.

Another achievement this year was the adoption on 29 May by the Council for Trade in Services of guidelines for recognition of qualifications in the accountancy sector. These guidelines, while non-binding, will facilitate the conclusion of agreements between countries on the mutual recognition of professional qualifications for accountants. These guidelines will also serve as an effective means of facilitating the movement of accountants across borders, and of avoiding the emergence of new disparities between recognition regimes around the world.

The priority over the coming months is undeniably the ongoing financial services negotiations. I say this recognizing that there are other negotiating deadlines this year, such as in accountancy, that we must meet. But the stakes in financial services are great. For it is the global financial system which underpins the day-to-day transactions of our global economy. Capital flows and trade flows are now two sides of the same coin - a seamless web of global economic activity that will only intensify with the rapid globalization of financial markets, the advent of 24-hour trading, and innovations in financial technology.

A couple of examples will illustrate the importance of financial services to our economies. Foreign exchange transactions amount to US$1.5 trillion per day, without which no trade in goods or services could take place and foreign investment flows to developing countries now amount to more than $250 billion a year, contributing to the growth of some of the fastest developing areas of the world today.

Like telecommunications, financial services cannot be viewed through the outdated paradigm of importers or exporters, north and south. The financial sector is part of the basic infrastructure of advanced economies and the essential means by which global trade is carried on. Developing countries need a competitive financial infrastructure both to encourage much needed investment and to compete in the globalized financial markets of the future. At the same time, developed economies have a clear interest in an agreement which will open the fastest growing markets of the world to one of their fastest growing industries. And all sides in this negotiation have an interest in building a strong global financial system to support a strong global economy. It is this convergence of economic interests which makes this negotiation so critical and its success so clearly within our reach.

These realities lie behind the signs of renewed momentum we have seen since the resumption of negotiations in April. Some ninety-six WTO Members have already made commitments in the area of financial services, more than in any other sector except tourism. And over fifteen developing countries - with little or no previous commitments in this sector - have now shown an interest in submitting offers. Recent autonomous liberalization in many countries, both developed and developing, suggest that even translating the progress already achieved into offers would result in a substantial improvement of the existing package of liberalization commitments.

This is a rare opportunity for countries to liberalize financial services on a multilateral basis and over a short span of time. It would be a major setback if this "window of opportunity" were lost, and not just because we risk jeopardizing the important commitments we already have on the table. We have made a collective undertaking to return to services negotiations in the year 2000. And we have to begin preparing for this next round as soon as possible. A set back in financial services this year would not only cast a dark cloud over these preparations, but could well mean that we would not see substantive progress in financial services for another decade.

Recently some have expressed concerns about the negative effects of liberalization on financial markets. It has been argued that liberalization has all too often moved forward without putting into place an adequate regulatory framework and without establishing a stable macroeconomic environment. Some have questioned why a country should continue liberalizing when there have been so many serious financial disruptions around the world.

Such concerns are understandable and worthy of attention; but they are not arguments for trying to turn back globalization or for slowing down the pace of liberalization. On the contrary, it could be argued that liberalization within a comprehensive framework of multilateral rules is a prerequisite to stability, predictability and coherence in an increasingly globalized financial system.

No amount of regulation can substitute for a lack of competition. Competition promotes transparency, it fosters a culture of accountability, and it rewards economic resilience. Without competition, firms easily accumulate inefficiencies and shift the costs onto consumers. There are a number of recent cases where liberalization in developing countries - and the participation of foreign banks - helped accelerate the required restructuring of financial institutions. There are also cases where allowing domestic banks to diversify abroad would improve their competitiveness at home. Through liberalization and competition, financial institutions almost invariably become more resilient and more efficient. And even those countries experiencing financial problems, will need to look abroad for the capital and expertise necessary to revitalize their financial systems.

Moreover, it is consumers - firms as well as individuals - who gain the most from the efficient supply of reasonably priced financial services. I was very heartened by a recent remark by Mr. Gabriel Singson, Governor of the Central Bank of the Philippines, reported in the Financial Times, that "contrary to the fears raised by some protectionist and inward-looking sectors of our society, the foreign banks have in fact brought in foreign capital that went to finance the expansion of key local industries that in turn helped sustain the record of Philippine growth."

To be sure, in order to avoid destabilizing the financial system, liberalization needs to be accompanied by sound macroeconomic policies, improved financial market supervision and structural reforms for necessary adjustment. The GATS permits this by allowing measures taken for prudential reasons, such as measures to protect investors and to maintain the integrity and stability of the financial system. Measures to protect public morals or to maintain public order as well as to achieve other legitimate public policy objectives are exempted from the liberalization principles of the GATS. There is nothing in the GATS that would put the financial stability of a country at risk.

A healthy and competitive financial system is the foundation of a healthy and competitive economy. A financial services agreement will not only accelerate liberalization in a key economic sector - bringing the benefits that I have mentioned. It also will reconfirm the GATS as global regulatory framework for the financial services industry, and maintain the increasingly effective WTO dispute settlement system in this highly integrated and competitive global industry. By succeeding in these negotiations, the multilateral system will further reinforce its relevance to the economy of the 21st century.

These are not the only challenges that lie ahead. I have concentrated my comments on services, but services, as crucial as they are, form only part of the WTO Work Agenda. There is a broad work programme flowing from the various Uruguay Round Agreements and the Singapore meeting, including new work on investment and competition policy. There is the critical issue of bringing the 30 accession candidates including economic and political giants like China and Russia into the global trading order. There is also the pressing question of how to combat marginalization in the global economy - a question to which we will be looking for concrete answers at the high-level conference on the least-developed countries in October. This last issue underscores a broader challenge. How to achieve real global coherence in policy-making to manage the economic, social and political realities of globalization?

But if there is a single theme running through all of these challenges it is that the multilateral trading system is rapidly becoming a central pillar of the new global economic order; a key link between North and South - developed and developing - an indispensable foundation for our ever more interdependent world. Let me conclude by expressing my belief that our success in the pivotal services negotiations this year will mark another important milestone in this evolution. But to reach this goal we will need your full support - now more than ever before.