General Agreement on Trade in Services: Opportunities for Developing Countries.

• Author: Riddle, Dorothy

One of the most promising areas in trade for developing countries is services, with new negotiations underway from March 2000. This article, based on the ITC publication, Business Guide to the General Agreement on Trade in Services, provides an overview of this emerging, fast-growing area. International trade rules in this area are still relatively new, and the opportunity to shape them exists. The article also highlights niche areas for developing and transition economies.

Until 1995, no multilateral agreement existed for trade in services. This was largely due to a lack of knowledge about services trade itself.

A late start

Economists generally viewed services as not tradeable or -- even worse - as non-productive economic activities unworthy of policy focus. Academic experts concentrated on employment patterns in services or on services as supports to manufacturing, ignoring the direct contributions services industries made to domestic production and foreign exchange earnings. Government export development planners tended to target goods, so government agencies were largely unfamiliar with the activities of their own services exporters. National statistical agencies did not collect detailed trade statistics on services.

Services -- especially transportation, travel and international finance -- have been an important part of the trade environment for a long time. But most trade policy-makers assumed either that the services trade flows were too small to be of importance, that virtually all traded services originated in developed countries, or that focusing on liberalizing the goods trade would automatically result in expanded trade in services.

With no trade agreements to provide clarity about ground rules, services enterprises were left to expand internationally by being adaptable and learning to manage despite unpredictable and often blatantly discriminatory regulatory environments.

Beginning in the late 1970s, private-sector groups in the United Kingdom (British Invisibles) and the United States of America (the Coalition of Service Industries) started lobbying their governments for a more level playing field in accessing foreign markets. Those early initiatives by services firms ultimately resulted in the inclusion of international services transactions in the Uruguay Round.

Recognizing service exporters

A barrier to multilateral discussions was the lack of clarity about how services could be traded. For trade in goods, the concept is relatively straightforward: producers stay in one country and the goods travel across a border to another country.

For services, the situation is more complex: in many cases, the supplier and the customer are in the same location, as is the case for tourism. This means that there are four possibilities for movement: the service moves across the border; the customer moves across the border to receive the service; the producer moves across the border to provide the service through a commercial establishment; or the producer moves across the border only temporarily to provide the service. As a result, the GATS Agreement has defined four "modes of supply" for the services trade (see box).

One of the peculiarities of the services trade is that many service exporters are not aware that they are in fact exporting! This is particularly true for consumption abroad (mode two). Services firms often earn foreign exchange by supplying services to local foreign companies, business persons temporarily in the market or the local offices of international agencies, without considering such activities as exports. Accurate trade statistics are difficult to gather when exporters do not recognize or report their own export activities. Statistical agencies are therefore finding that they must first educate services firms about what constitutes an export.

Trade in services is growing

Services account for at least 20% of recorded world trade as well as the majority of domestic activities in most economies. Some analysts believe that services will reach 50% of world trade by the year 2020. Trade in the category "other services" (which includes all but transportation and tourism) has been growing at over 9% a year since 1995.

The world market for services was valued at more than US$ 3 trillion in 1998, according to the OECD and the WTO.

Interestingly, developing countries have been gaining a growing share of trade in services (see table). These countries' fastest growth has been in exports of "other services", which have increased at an average annual rate of 14.3% (see table). Such exports include professional services and new services supported by information technologies, which were unknown a few years ago, such as web site design, web site management and electronic commerce.

Gains for the business community

As with the General Agreement on Tariffs and Trade (GATT 1994) that covers trade in goods, GATS intends to increase trade in services through increased transparency and predictability. The...