The General Agreement on Trade in Services (GATS): objectives, coverage and disciplines
Everything you wanted to know about the General Agreement on Trade in Services, but were afraid to ask ...
ON THIS PAGE:
- 1. What is the main purpose of the GATS?
- 2. Who participates?
- 3. What services are covered?
- 4. Is it true that the GATS not only applies to cross-border flows of services, but additional modes of supply?
- 5. Why was it necessary to introduce, apart from the traditional concept of cross-border trade, three additional modes of supply?
- 6. Does the GATS affect a member's ability to pursue national policy objectives and priorities?
- 7. What are the basic obligations under the GATS?
- 8. What information is contained in services “schedules”?
- 9. When did members' specific commitments enter into force?
- 10. Can commitments be introduced or improved outside the context of multilateral negotiations?
- 11. Can specific commitments be withdrawn or modified?
- 12. Are there any specific exemptions in the GATS to cater for important national policy interests?
- 13. Are there special provisions for developing countries?
- 14. Are the results of the extended sectoral negotiations in telecommunications and financial services legally different from other sector-specific commitments?
The creation of the GATS was one of the landmark achievements of the Uruguay Round, whose results entered into force in January 1995. The GATS was inspired by essentially the same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs and Trade (GATT): creating a credible and reliable system of international trade rules; ensuring fair and equitable treatment of all participants (principle of non-discrimination); stimulating economic activity through guaranteed policy bindings; and promoting trade and development through progressive liberalization.
While services currently account for over two-thirds of global production and employment, they represent no more than 25 per cent of total trade, when measured on a balance-of-payments basis. This — seemingly modest — share should not be underestimated, however. Indeed, balance-of-payments statistics do not capture one of the modes of service supply defined in the GATS, which is the supply through commercial presence in another country (mode 3). Furthermore, even though services are increasingly traded in their own right, they also serve as crucial inputs into the production of goods and, consequently, when assessed in value-added terms, services account for about 50 per cent of world trade.
All WTO members are at the same time members of the GATS and, to varying degrees, have assumed commitments in individual service sectors.
The GATS applies in principle to all service sectors, with two exceptions.
Article I (3) of the GATS excludes “services supplied in the exercise of governmental authority”. These are services that are supplied neither on a commercial basis nor in competition with other suppliers. Cases in point are social security schemes and any other public service, such as health or education, that is provided at non-market conditions.
Furthermore, the Annex on Air Transport Services exempts from coverage measures affecting air traffic rights and services directly related to the exercise of such rights.
4. Is it true that the GATS not only applies to cross-border flows of services, but additional modes of supply?
The GATS distinguishes between four modes of supplying services: cross-border trade, consumption abroad, commercial presence, and presence of natural persons.
Cross-border supply is defined to cover services flows from the territory of one member into the territory of another member (e.g. banking or architectural services transmitted via telecommunications or mail);
Consumption abroad refers to situations where a service consumer (e.g. tourist or patient) moves into another member's territory to obtain a service;
Commercial presence implies that a service supplier of one member establishes a territorial presence, including through ownership or lease of premises, in another member's territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or hotel chains); and
Presence of natural persons consists of persons of one member entering the territory of another member to supply a service (e.g. accountants, doctors or teachers). The Annex on Movement of Natural Persons specifies, however, that members remain free to operate measures regarding citizenship, residence or access to the employment market on a permanent basis.
5. Why was it necessary to introduce, apart from the traditional concept of cross-border trade, three additional modes of supply?
The supply of many services often involves the simultaneous physical presence of both producer and consumer. There are thus many instances in which, in order to be commercially meaningful, trade commitments must extend to cross-border movements of the consumer, the establishment of a commercial presence within a market, or the temporary movement of the service provider.
The GATS expressly recognizes the right of members to regulate the supply of services in pursuit of their own policy objectives. However, the Agreement contains provisions ensuring that services regulations are administered in a reasonable, objective and impartial manner.
Obligations contained in the GATS may be categorized into two broad groups: general obligations that apply to all members and services sectors, as well as obligations that apply only to the sectors inscribed in a member's schedule of commitments. Such commitments are laid down in individual schedules whose scope may vary widely between members. The relevant terms and concepts are similar, but not necessarily identical to those used in the GATT; for example, national treatment is a general obligation in goods trade and not negotiable as under the GATS.
(a) General obligations
MFN treatment: Under Article II of the GATS, members are held to extend immediately and unconditionally to services or services suppliers of all other members “treatment no less favourable than that accorded to like services and services suppliers of any other country”. This amounts to a prohibition, in principle, of preferential arrangements among groups of members in individual sectors or of reciprocity provisions which confine access benefits to trading partners granting similar treatment.
Derogations are possible in the form of so-called Article II-exemptions. Members were allowed to seek such exemptions before the Agreement entered into force. New exemptions can only be granted to new members at the time of accession or, in the case of current members, by way of a waiver under Article IX:3 of the WTO Agreement. All exemptions are subject to review; they should in principle not last longer than 10 years. Furthermore, the GATS allows groups of members to enter into economic integration agreements or to mutually recognize regulatory standards, certificates and the like if certain conditions are met.
Transparency: GATS members are required, among other things, to publish all measures of general application and establish national enquiry points mandated to respond to other members' information requests.
Other generally applicable obligations include the establishment of administrative review and appeals procedures and disciplines on the operation of monopolies and exclusive suppliers.
(b) Specific commitments
Market access: Market access is a negotiated commitment in specified sectors. It may be made subject to various types of limitations that are enumerated in Article XVI(2). For example, limitations may be imposed on the number of services suppliers, service operations or employees in the sector; the value of transactions; the legal form of the service supplier; or the participation of foreign capital.
National treatment: A commitment to national treatment implies that the member concerned does not operate discriminatory measures benefiting domestic services or service suppliers. The key requirement is not to modify, in law or in fact, the conditions of competition in favour of the member's own service industry. Again, the extension of national treatment in any particular sector may be made subject to conditions and qualifications.
Members are free to tailor the sector coverage and substantive content of such commitments as they see fit. The commitments thus tend to reflect national policy objectives and constraints, overall and in individual sectors. While some members have scheduled less than a handful of services, others have assumed market access and national treatment disciplines in over 120 out of a total of 160-odd services.
The existence of specific commitments triggers further obligations concerning, among other things, the notification of new measures that have a significant impact on trade and the avoidance of restrictions on international payments and transfers.
Each WTO member is required to have a Schedule of Specific Commitments which identifies the services for which the member guarantees market access and national treatment and any limitations that may be attached. The Schedule may also be used to assume additional commitments regarding, for example, the implementation of specified standards or regulatory principles. Commitments are undertaken with respect to each of the four different modes of service supply.
Most schedules consist of both sectoral and horizontal sections. The “Horizontal Section” contains entries that apply across all sectors subsequently listed in the schedule. Horizontal limitations often refer to a particular mode of supply, notably commercial presence and the presence of natural persons. The “Sector-Specific Sections” contain entries that apply only to the particular service.
All schedules are available on the WTO website.
The majority of current commitments entered into force on 1 January 1995, i.e. the date of entry into force of the WTO. New commitments have since been scheduled by participants in extended negotiations (see below) and by new members that have joined the WTO.
Yes, any member is free to expand or upgrade its existing commitments at any time
Pursuant to Article XXI, specific commitments may be modified subject to certain procedures. Countries which may be affected by such modifications can request the modifying member to negotiate compensatory adjustments; these are to be granted on an MFN basis.
The GATS permits members in specified circumstances to introduce or maintain measures in contravention of their obligations under the Agreement, including the MFN requirement or specific commitments. The relevant article provides cover, among other things, for measures necessary to:
- protect public morals or maintain public order;
- protect human, animal or plant life or health; or
- secure compliance with laws or regulations not inconsistent with the Agreement including, among other things, measures necessary to prevent deceptive or fraudulent practices.
Moreover, the Annex on Financial Services entitles members, regardless of other provisions of the GATS, to take measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system.
Finally, in the event of serious balance-of-payments difficulties members are allowed to temporarily restrict trade, on a non-discriminatory basis, despite the existence of specific commitments.
Developing country interests have inspired both the general structure of the Agreement as well as individual articles. In particular, the objective of facilitating the increasing participation of developing countries in services trade has been enshrined in the Preamble to the Agreement and underlies the provisions of Article IV. This Article requires members, among other things, to negotiate specific commitments relating to the strengthening of developing countries' domestic services capacity; the improvement of developing countries' access to distribution channels and information networks; and the liberalization of market access in areas of export interest to these countries.
While the notion of progressive liberalization is one of the basic tenets of the GATS, Article XIX provides that liberalization takes place with due respect for national policy objectives and members' development levels, both overall and in individual sectors. Developing countries are thus given flexibility for opening fewer sectors, liberalizing fewer types of transactions, and progressively extending market access in line with their development situation. Other provisions ensure that developing countries have more flexibility in pursuing economic integration policies, maintaining restrictions on balance of payments grounds, and determining access to and use of their telecommunications transport networks and services. In addition, developing countries are entitled to receive technical assistance from the WTO Secretariat.
14. Are the results of the extended sectoral negotiations in telecommunications and financial services legally different from other sector-specific commitments?
No. The results of sectoral negotiations are new specific commitments and/or MFN exemptions related to the sector concerned. Thus, they are neither legally independent from other sector-specific commitments nor constitute agreements different from the GATS. The new commitments and MFN exemptions have been incorporated into the existing Schedules and Exemption Lists by way of separate protocols to the GATS.