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21 September 1999

"The future of international trade in services"

The Third Debis Services Conference, Berlin

Mr. Chancellor, Excellencies, Ladies and Gentlemen,

I am very glad to have been invited to this Debis conference, first because it is a pleasure and a privilege to be here in Berlin, one of the great capitals of the world, and because it has forced me to focus on one of the defining issues and subjects of our time. I took office as Director-General of the WTO exactly three weeks ago today: to be asked to talk about the future of international trade in services to an audience whose combined experience of this subject totals many 100’s of years, is rather intimidating. (That is why I insisted that there should be no question time.)

Until very recently few politicians, and not many economists, gave much thought to the question of international trade in services. Generations of them had grown up and felt comfortable with the notion that services were essentially non-tradeable, because of the need for face-to-face contact between the service provider and his customer. This perception was always wrong to a considerable extent – financial services and maritime transport are obvious examples of services which have been traded internationally for centuries. Some of the first international treaties of modern times, going back to the 17th century, concerned the transit of shipping. Even so, it is odd that services were neglected by the international trading system for so long, given that they account for more than 70 per cent of employment and production in OECD countries and for a major and growing share in virtually all countries. Even in Korea and Singapore, countries which are famous as centres of merchandise trade, services exports since 1990 have grown faster, by 5 and 2 per cent per annum respectively, than merchandise exports.

Part of the reason is that we think of international trade as cross-border exchanges, and in that context services still account for only some 20 per cent of the total, though that percentage is growing fast. But to look at cross-border trade alone greatly understates the value of international services trade, much of which is done through direct presence of the supplier in the export market. Another huge slice of services trade, travel and tourism - the greatest growth industry, not only for jobs but for peace and understanding, the promotion of local cultures and even for protecting the environment, if managed properly - involves movement of the consumer to the market of the supplier. But we are still surprisingly ignorant about services trade flows. Compare the material published on services trade with the abundance of information available on merchandise trade! It is certainly easier to find data on pork filets in EC intervention stocks, by year and origin (and, possibly, by name of the pig), than on the Community's external trade in computer or accountancy services – and the Community is more advanced than most in developing statistics on services. Reality is always ahead of bureaucracy. On the other hand, services trade maybe increasing because we don’t have Ministers and Ministries of Services.

I have been asked to talk about the future of international trade in services, and I propose to do that on two levels. The first is the easy part – the medium and longer term, on which speculation is easy and being called to account for mistaken predictions is pretty unlikely, especially if both have a term limit of three years, like myself. The second, more difficult and perhaps more interesting level is the near future – the negotiations on further liberalization of services trade which will be launched in December and what we should expect from them.

In the medium term there is no doubt that services trade will continue to expand faster than trade in goods. It will prove to be easier to liberalize because the case for liberalization is so easily made and the protectionist instinct, in many services at least, is less deeply ingrained and not institutionalized.

Why is it easy to make the case for liberalizing services? Because everyone can understand their essential function as the infrastructure for the entire economy. When we negotiated the ground-breaking agreement on telecommunications in the WTO in 1997, we were surprised and pleased by the enthusiastic participation of developing countries, including many very small ones. Still more pleasing is the fact that since the end of that negotiation six more developing countries have come forward with unilateral commitments on basic telecoms: I am told that this is unprecedented – that it is the first time that developing countries have made market opening commitments in this way outside the context of a wider negotiation. The point is they are not doing it to please their trading partners or in response to negotiating pressure: they are doing it because they want competition and foreign investment in their telecoms markets, as a way of modernizing and upgrading the entire business infrastructure. We liberalize for ourselves, and others benefit too. That’s a profound lesson and truth. Both sides win.

The same considerations explain the heavy participation of developing countries in the negotiations to liberalize financial services which also concluded in 1997. You just can't afford inefficient banking and telecoms services; they are a tax and a drag on the whole economy. An inefficient telephone system in the modern age is like an inefficient port or canal in the old days. When I was New Zealand’s Minister of Tourism I did a survey of businesses to ask what impediments stood in the way of expansion and more jobs. The top complaint was telephones, the next airlines.

I remember meeting a wonderful wise old man, fabulously successful and wealthy when as Trade Minister I visited Saudi Arabia. He knew little of New Zealand and, as great men do, he asked simple questions. Most people ask questions to prove how much they know! After enquiring about our political system, he asked about our telephone and communication system. As a new Minister I thought that very strange. Why, I asked?. He said he judged a nation by its telephone system. Later when we invented the "Third Way" as a labour government in the 1980s I realised how wise that question was.

There are also technical reasons for the acceleration of services trade, especially in the area of information technology. In large part, it was the prospect of electronic transmission of services on a big scale which started policy makers thinking that we must have multilateral rules. An ever increasing range of essentially local services was transformed into internationally tradeable products: financial and business services, and education and health services are cases in point.

The deregulation of telecommunications did much to close the gap between what was technically possible and what was commercially viable – and I take some pride in the fact that in many areas the Government of New Zealand was among the first to recognize the tremendous potential for private activity, now, what used to be government agencies taking tax-payers’ money from health and education, generate tax revenues themselves. These lazy state-owned enterprises have become taxpayers not tax takers.

We have yet to see the real potential of electronic commerce: most of the business done so far has been between and within companies, and consumer shopping on the Internet is still in its infancy. But there will be an explosion and when it comes the supply of services will go international as never before. Virtually everything – in fact I think I would say literally everything – that can be delivered in the form of digital information is a service.

The Internet will have the same impact as the invention of the printing press. It will advance freedom, commerce and information and create problems and opportunities. Governments are going to find it more difficult to run tax systems in the future, and that may be a good thing. It will destroy one of the great tyrannies of the past, the tyranny of location. Your accountant may now live anywhere, and already the WTO is saving you a lot of money by outsourcing translation – thanks to electronic transmission we can use translators working at home in countries all over the world.

While I am on the subject of electronic commerce, let me just say how I see the work programme going on at the WTO. There is no suggestion that the WTO should seek to regulate electronic commerce and still less to regulate the Internet: none of our Member governments wants that. The job of the WTO is not to regulate trade our job is to negotiate and implement the disciplines which governments have voluntarily undertaken to limit their power to interfere with trade. The point is to ensure that the market works. The objective of the work programme is first to state clearly how existing WTO agreements impact on electronic commerce; second to see whether there are weaknesses in the existing law which need to be remedied; and third to decide whether there are any issues on which governments would wish to negotiate new disciplines in the WTO.

Coming now to the near future, the focus of attention must be the new round of services liberalization which will be launched at the Seattle Ministerial Conference 10 weeks from now. Services will be part of a much wider agenda, since Ministers will be looking at the full range of WTO activities, but they are a critically important part. There are only two subjects, services and agriculture on which governments have already undertaken to negotiate further liberalization.

The negotiation of the Services Agreement in the Uruguay Round was a great achievement, but it was really only a starting-point. Its importance lay in creating the architecture of a completely new agreement. The market access commitments which governments undertook in 1995 were important, because they provide security for traders and investors, but they didn't involve much in terms of actual liberalization. Since then we have seen liberalization in the two big negotiations which were concluded in 1997, in basic telecoms and financial services. Basic telecoms was perhaps the most dramatic of these, because it entailed the agreement of wholly new disciplines in the area of competition policy and control of dominant suppliers, but in some ways financial services was even more interesting. There had been extensive negotiations on financial services in the Uruguay Round and again in 1995, so the last negotiation was the third in only five years. Yet each time governments liberalized further. Even the fact that conclusion of the 1997 negotiations coincided with the Asian economic crisis did not de-rail or in anyway diminish the results of that negotiation. And again the governments which participated, particularly those of developing countries, were not liberalizing to please anybody else but to promote investment and competition in their home markets.

At all events, the main objective of the new negotiations will be to take the liberalization process further, by extending national commitments over a broader range of service sectors and by removing limitations from existing commitments. At present, national commitments are heavily unbalanced: it is natural that developed countries have made commitments on a far wider range of services than most of the developing countries, and that the least-developed countries have in many cases made very limited commitments. The GATS provides for that, through the principles of "progressive liberalization" in line with a country's state of development. But it seems to me that some of the language in the GATS is unfortunate in implying that trade liberalization is a luxury that the poorest nations may be unable to afford. The truth is that poor countries cannot afford expensive and inefficient service providers, and that the quickest way to upgrade your services economy may often be to introduce a dose of foreign competition and free government and taxpayers from that burden.

The developed economies will also need to look hard at their domestic services regimes. I have spoken optimistically of services as a sector where the case for liberalization is almost self-evident, and in some sectors I think that is true. But there are plenty of services in which inefficiency and high costs are protected by regulations – not necessarily designed to discriminate against foreign suppliers – which make entry unnecessarily difficult. You can find examples of this among the professional services, in countries at every level of development. This is why WTO Members have been working for the past four years on the domestic regulation of professional services. Of course, many services are highly regulated and so they should be: we can't have unqualified Doctors and fake Accountants. But regulations can be unnecessarily burdensome, they can be discriminatory, even without intention, and they can be appallingly complicated. Since explicit discrimination against foreigners is not particularly common, a great deal of the drive towards liberalization of services will have to be directed towards the rationalization of domestic regulations. I expect this to figure on the negotiating agenda, along with the effort to reduce explicit discrimination.

It is agreed among WTO Members that the negotiations will cover all service sectors, although of course each country will have its own priorities. But there are two interesting sectors on which we already have a firm obligation to negotiate – air transport and maritime transport.

Air transport is the only exception from the principle that the GATS covers all service sectors. The entire industry, but for three relatively minor services, was deliberately excluded from the coverage of the Agreement because most Governments preferred to maintain the existing regime of bilateral agreements. However, they did agree to review the position after five years, with a view to deciding whether additional aviation services should be added to the scope of the GATS. This is certain to be an important issue in the new Round, if only because there is a growing demand for cheaper services among business users of air transport, particularly the shippers of air cargo, and there will be pressure from that quarter for more competition. It is easy to understand why. It has been estimated that in Europe only 6 per cent of the Continent's routes are serviced by more than two airlines. All the rest are still controlled by pairs of national airlines. This is why many transatlantic flights are so much cheaper than flights within Europe, and it imposes heavy costs on business and families. I hope that Governments will look very seriously at this opportunity to free up the tightly controlled world of civil aviation, so that people can more cheaply visit their family members and business can be more productive.

The situation is also unsatisfactory in the maritime sector, essentially because in the Uruguay Round neither the EU nor the US made any commitments in it, although over 30 other countries did. Another attempt was made to negotiate maritime transport in 1996, but it failed. It was agreed to resume the negotiations in the context of the new Round. We need progress here too. Even though the maritime sector is a good deal more liberal than aviation, it is hard to insist on comprehensive commitments by others so long as a major sector like this is excluded by the great powers, who should show more leadership. When they say it is too hard, think of the terrible burden of debt some countries have who pay up to nine times more in debt servicing than they spend on health, according to an UNCTAD paper, and what we ask of them.

In some respects, as you know, the Services Agreement was left incomplete in the Uruguay Round. It has no disciplines on subsidies or on government procurement of services, and no provision for emergency safeguard measures. Negotiations on all three subjects have been going on for some time, without making any real progress. It seems to me that this work too will only become serious in the context of the larger Round. On government procurement, I hope we shall be able deliver early progress towards greater transparency, because from this everyone wins.

Over the next two months we have to agree on the declaration which Ministers will adopt in Seattle, and which will then become the agenda for the new Round. At the moment it seems that finding the necessary language for services will be not be insurmountable: there is a striking degree of common ground among Members about the guidelines and procedures for negotiations on services. This is interesting in itself, if you remember, as I do, the struggle to get services onto the Uruguay Round agenda. At that time the subject was so controversial that it could easily have sunk the Uruguay Round and crippled the GATT. Now it is taken for granted - nobody has questioned the GATS or the need to move forward with liberalization. The system, and our understanding of markets, have come a long way since 1986.

Of course, the services negotiations will be only one part of the larger Round, and their success will depend on progress in other areas. Services will not be everybody's priority. It will be perfectly natural for developing countries to insist that their export interests – in agriculture, in textiles and where ever else - must be given the same impetus as your interest in services (even though they need services as well). We are all very conscious of our own domestic political problems: it is easy to forget that the vested interests preventing liberalization of telecoms or financial services in an African country may be just as strong as the interests opposing liberalization of agriculture, coal or textiles in Europe or the USA. It is simply not credible to preach the pure water of liberalization in services while you go on drinking subsidized wine (or maybe milk) at home. Too many least-developed countries think of the WTO as a rich white man's club, and that's not true. But would it really hurt the powerful if we said that all rather than most merchandise trade products of LDCs would face no barriers? That represents only 0.5% of world trade.

The arguments for liberalization in services are essentially the same as for goods but we have to remember that trade negotiations are not conducted for their own sake or even for the sake of those who produce and trade in goods and services. Their value is to be judged in terms of human welfare, meaning improved living standards. In those terms the WTO, and the GATT before it, have made an enormous contribution. We have to insist on the central point that trade liberalization has fostered economic growth and has therefore brought huge benefits to the people of the world, especially to the poor. To suggest that poor people and poor countries would be better off if there were less trade and less foreign investment is a wicked deception. The case for a multilateral trading system based on rules is not seriously questioned – at least among economists and policy makers. The long list of countries negotiating accession to the WTO is one confirmation of this. Why does everyone want to join this WTO club, that is the subject of so much misinformed abuse if it is not in their interests?

The argument has not been won on the level of popular understanding and support. In fact, for the first time since the inception of the GATT, the value of multilateral trade rules and of trade liberalization is being called into question. We are told to expect large demonstrations of scepticism and hostility at the Ministerial Conference in Seattle. Even though much of this opposition is based on a complete misunderstanding of what the WTO is and what it does, we cannot ignore the fact that there are real concerns about the impact of globalization, concerns felt by many good and sincere people. Not all our critics are wrong. And where they are wrong, the WTO alone cannot make the case for the economic and trading system which has enriched the world to a degree that was unimaginable fifty years ago. Governments and businesses which believe in the system must get out there and defend it.