Basic Purpose and Concepts

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1.3 Definition of Services Trade and Modes of Supply

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The definition of services trade under the GATS is four-pronged, depending on the territorial presence of the supplier and the consumer at the time of the transaction.  Pursuant to Article I:2, the GATS covers services supplied

  1. from the territory of one Member into the territory of any other Member
    (Mode 1 — Cross border trade);
  2. in the territory of one Member to the service consumer of any other Member
    (Mode 2 — Consumption abroad);
  3. by a service supplier of one Member, through commercial presence, in the territory of any other Member 
    (Mode 3 — Commercial presence);  and
  4. by a service supplier of one Member, through the presence of natural persons of a Member in the territory of any other Member
    (Mode 4 — Presence of natural persons).

Box A gives examples of the four modes of supply.

The above definition is significantly broader than the balance of payments (BOP) concept of services trade. While the BOP focuses on residency rather than nationality — i.e. a service is being exported if it is traded between residents and non-residents — certain transactions falling under the GATS, in particular in the case of mode 3, typically involve only residents of the country concerned.

Commercial linkages may exist among all four modes of supply. For example, a foreign company established under mode 3 in country A may employ nationals from country B (mode 4) to export services cross-border into countries B, C etc.  Similarly, business visits into A (mode 4) may prove necessary to complement cross-border supplies into that country (mode 1) or to upgrade the capacity of a locally established office (mode 3).


Box A: Examples of the four Modes of Supply (from the perspective of an “importing” country A)

Mode 1: Cross-border
A user in country A receives services from abroad through its telecommunications or postal infrastructure.  Such supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings.
Mode 2:  Consumption abroad
Nationals of A have moved abroad as tourists, students, or patients to consume the respective services.
Mode 3:  Commercial presence
The service is provided within A by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and — controlled company (bank, hotel group, construction company, etc.).
Mode 4:  Movement of natural persons
A foreign national provides a service within A as an independent supplier (e.g., consultant, health worker) or employee of a service supplier (e.g. consultancy firm, hospital, construction company).

Click here for a visual presentation of Box A: Mode of Supply (Flash animation, requires free Macromedia Flash plugin).



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