Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS
Part IV of the report was prepared by a team led by Aaditya Mattoo (Senior Economist, DECRG). The team comprised:
Carsten Fink (Research Economist, DECRG): Co-author. Mario A. Marconini (Executive Director, Brazilian Center for International Relations, CEBRI): Main contributor to Chapter 3 and overall advisor. Lia Valls Pereira (Coordenadora de Projetos, Fundação Getulio Vargas) and Galeno Ferraz (Professor, Federal University of Rio de Janeiro): Main contributors to Chapter 4. Helder Ferreira do Vale, Cristina Ileana Neagu, and Randeep Rathindran (World Bank consultants) made significant contributions to different parts of the report; Emmanuel Cocq prepared a study on the impact of the European Union’s audiovisual regime; and Fernando A.F. Lemos (Central Bank of Brazil) provided data for Chapter 2.
Chapter 5 benefited from discussions with Marcelo Olarreaga, David Tarr, and, in particular, Maurice Schiff; Chapter 6 from discussions with Sherry Stephenson (OAS) and Arvind Subramanian (IMF); and Bernard Hoekman provided valuable comments on the whole report.
The report has benefited greatly from the comments of, and discussions with, officials of the Ministry of Finance, Ministry of Foreign Affairs, and Ministry of Development, Industry, and External Trade, especially Sergio Barreiros, Flavio Marega, Sergio Rodrigues Santos, and Felipe Hees.
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Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS
Chapter 1. Introduction
1.1 Brazil is in the process of undertaking significant reform of its services sector policy. Over the past decade, significant advances have been made in reducing the state’s role in the provision of key infrastructure services and opening service industries to domestic and foreign competition. The Government’s priorities over the next few years include broadening the scope of liberalization and strengthening regulatory institutions that are crucial for the success of liberalization programs.
1.2 Brazil is also committed over the next few years to parallel international negotiations on services trade in four different fora: within MERCOSUR, between MERCOSUR and the European Union, the Free Trade Agreement of the Americas (FTAA), and the WTO’s General Agreement on Trade in Services (GATS). To deal with the complexities of one of these negotiations would be difficult. To have to deal with four, and to manage the interplay between them, is a profound challenge. If the pace of liberalization in each sector is identical, then the task is less complex. If the move to more open trading conditions proceeds at different paces in alternative fora, then at any point in time during the transition to full liberalization, certain trading partners may face better market access conditions than others.1 In contrast to trade in goods, the instruments and economic implications of preferential liberalization in services have not been analyzed in depth. We, therefore, do not have a good understanding of the feasibility and desirability of trade preferences in services.
1.3 This report seeks to examine how Brazil can use regional and multilateral negotiations to promote domestic reform and improve access to foreign markets. While recognizing that the main priorities for services reform are domestic, and that much can and should be achieved unilaterally, we argue that international negotiations can help to develop and commit to good services policy. But constructive engagement needs to be based on a clear view of priorities for domestic reform and improved access, as well as an understanding of negotiating options. This clarity is elusive in services where data on trade and policy barriers is scarce, and international agreements are complex. As a first step in remedying some of these difficulties in the Brazilian context, we provide an analysis of current trade patterns in services, the existing policy regime, areas of export interest, the economics of regional and multilateral liberalization, and the lessons from existing trade agreements in services for current negotiations.
1.4 This report does not provide a comprehensive review of the gains from services liberalization or purely domestic reform issues in Brazil—because much work has already been done on these lines at the sectoral level, and the Government did not see additional work as a priority.2 However, to motivate and put the subsequent discussion in perspective, we briefly review recent cross-country evidence on the gains from services liberalization and how it is best accomplished.
1 The GATS (in Article XIX) has stipulated the progressive liberalization of trade barriers through successive rounds of negotiations. The FTAA negotiations are to be concluded by the year 2005 and aim to lay the basis for a free trade area. MERCOSUR Members have agreed to the complete elimination of all restrictions affecting services trade within a ten year period, beginning with the implementation of the Protocol (which has not yet taken effect). 2 For a recent analysis of the comparative economic performance of the service sector in Brazil, Mexico and the United States, see Mulder (2001).
181 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY
THE GAINS FROM SERVICES LIBERALIZATION AND DOMESTIC REFORM
1.5 Removing barriers to trade in services in a particular sector is likely to lead to lower prices, improved quality, and greater variety.3 As in the case of trade in goods, restrictions on trade reduce welfare because they create a wedge between domestic and foreign prices, leading to a loss to consumers that is greater than any benefit to producers and government.4 Empirical studies generally support this contention.5 Since many services are inputs into goods production, the inefficient supply of such services acts as a tax on production, and prevents the realization of significant gains in productivity. Furthermore, as countries reduce tariffs and other barriers to trade, effective rates of protection for manufacturing industries may become negative if they continue to be confronted with input prices that are higher than they would be if services markets were competitive.
1.6 A major benefit of liberalization is likely to be access to a wider variety of services whose production is subject to economies of scale. Consumers derive not only a direct benefit from diversity in services such as health care, restaurants and entertainment, but also an indirect benefit because a wider variety of more specialized producer services, such as telecommunications and finance, can lower the costs of both goods and services production.6
1.7 Estimates of benefits vary for individual countries—from under 1 per cent to over 50 per cent of GDP—depending on the initial levels of protection and the assumed reduction in barriers. Moreover, the gains from liberalizing services may be substantially greater than those from liberalizing trade in goods, because current levels of protection in many countries are higher and because liberalization could create greater spillover benefits. For instance, one model finds that the welfare gains from a 50 per cent cut in services sector protection would be five times larger than those from non-services sector trade liberalization.7
1.8 Dynamic effects may also be significant. Certain service industries clearly possess growth-generating characteristics. A competitive and well-regulated financial sector leads to the efficient transformation of savings to investment, ensuring that resources are deployed wherever they have the highest returns; and facilitates better risk-sharing in the economy. Improved efficiency in telecommunications generates economy-wide benefits, as this service is a vital intermediate input and also crucial to the dissemination and diffusion of knowledge. Business services such as accounting and legal services are important in reducing transaction costs.
1.9 In all such sectors, greater foreign participation and increased competition together imply a larger scale of activity, and hence greater scope for generating the special growth-enhancing effects. Even without scale effects, the import of foreign factors that characterizes services sector liberalization could still have positive effects because they are likely to bring technology with them.8 Econometric evidence confirms that openness in services influences long run growth
3 The review draws upon World Bank (2001), Chapter 3. 4 This is strictly true in static models without market imperfections—such as monopolistic market structures, internal and external economies of scale or other distortions. The presence of imperfections opens up a plethora of possibilities in which the effects of trade policies are typically indeterminate, depending on the prior distortion. 5 See Hoekman and Braga (1997) for a review. 6 See Ethier (1982) and Copeland (2001). 7 Robinson et al. (1999). 8 Coe, Helpman, and Hoffmaister (1999) present empirical evidence demonstrating the impact of technology diffusion—in their case through trade in goods—on total factor productivity growth. In principle, the same should hold true for technology that is diffused through factor flows
182 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS
performance (see Figure 1.1).9 While these estimates indicate that there are substantial gains from liberalizing key services sectors, it would be wrong to infer that these gains can be realized by a mechanical opening up of services markets.
Figure 1.1: Services liberalization and growth
Linear prediction GUY .059 DNK
SWE ISL GBRSLV NORUSA CAN NIC DOM SGP IND ARGPANCHL BEL MYS NLD FRA BRA AUT CRI MOZMLT FIN THA COL ESP URY EGYBOL AUS PER ITA KOR LKA PRT TUN MEX NZL ZAF GRC MAR JAM TUR CYP PHL CHE HNDMWI VEN KEN
ECU IDN Growth rate (controlling for other for other rate (controlling Growth factors)
-.024 AGO
1 Composite services liberalization index 8.5
Source: Mattoo, Rathindran and Subramanian (2001).
1.10 Poorly designed reform programs in services can substantially undercut the benefits of liberalization. For example, if privatization of state monopolies to private owners is conducted without the introduction of competition, the result may be merely transfers of monopoly rents to private (sometimes foreigners) owners. If increased entry into financial sectors is not accompanied by adequate prudential supervision and full competition, the result may be insider lending and poor investment decisions. If policies to ensure universal service are not put in place, liberalization need not improve access to essential services for the poor. If there are no measures to address the costs of adjustment in factor markets, liberalization could create social and political difficulties. Managing reforms of services markets therefore requires complementing trade opening with appropriate regulation.
THE STRUCTURE OF THIS REPORT
1.11 With these considerations providing the backdrop, the report proceeds as follows. Chapter 2 describes the pattern of Brazil’s trade in services, drawing upon balance of payments statistics and data on foreign direct investment inflows. By identifying the extent of foreign participation in Brazil’s services markets and areas of export interest to Brazilian firms, the discussion sets the stage for a more policy-focused discussion.
1.12 Chapter 3 reviews Brazil’s services trade and investment policy in services, examining how liberalization has proceeded across various sectors, the remaining barriers to trade and the extent to which certain nations receive preferential treatment in Brazil. Relatively greater
9 After controlling for other determinants of growth, countries that fully liberalized the financial services sector (in terms of the three dimensions noted above) grew, on average, about 1.0 percentage point faster than other countries. An even greater impetus on growth was found to come from fully liberalizing both the telecommunications and the financial services sectors. Estimates suggest that countries which fully liberalized both sectors grew, on average, about 1.5 percentage points faster than other countries.
183 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY emphasis is placed on financial services and the key infrastructure services—telecommunications and transport. For these sectors, we discuss briefly the effect policy reform has had on market structure and sector performance. The discussion also briefly examines the regulatory framework in Brazil, which is a critical determinant of the success of services reforms—as noted above. Finally, we compare Brazil’s commitments under international agreements with actual policy.
1.13 In Chapter 4, we examine Brazil’s export interests. Three services sectors were a priori identified as holding significant export potential: construction, audiovisual and software services. For each of these sectors, we review available evidence on existing export patterns and identify barriers to trade that Brazilian exporters face in foreign markets. A brief discussion of other areas of potential export interest is also provided in this chapter.
1.14 Chapter 5 provides an economic analysis of the choice Brazil faces between regional and multilateral approaches to liberalization of trade in services. We examine whether trade in services is so different from trade in goods that we need to modify the conclusions of the large literature on preferential integration arrangements in goods trade. The first part of the chapter describes efficiency effects related to unilateral policy choices in a particular service market. The second part explores the economics of international cooperation, examining the circumstances in which Brazil is more likely to benefit from cooperation in a regional forum than in a multilateral forum.
1.15 Chapter 6 offers a critical review of the rules of existing international agreements on trade in services that are most relevant to Brazil. While the structure of the GATS, MERCOSUR, NAFTA, and the MERCOSUR-EU agreements has already been determined, future negotiations may lead to improvements in existing rules and bargaining modalities. The design of the envisaged FTAA is still open and the lessons from existing services agreements could help decide on a structure that best serves the interests of all members.
1.16 In the concluding Chapter 7, we seek to synthesize the insights emerging from Chapters 2-6. Three questions are addressed. First, how can international agreements help to deliver reform at home and improved access to markets abroad? Second, what are possible criteria on the basis of which Brazil could make its choices regarding engagement in the regional and multilateral fora? Finally, what form should such engagement take?
1.17 Much of the material presented in this report is the outcome of collaborative work with Brazilian researchers and addresses important questions that have not been previously researched. In particular, some of the trade statistics presented in Chapter 2 and 4 rely on unpublished data from the Brazilian Central Bank. Chapter 3 draws on a large variety of sources to put together a comprehensive picture of Brazil’s policy in different services sectors. The analysis of external barriers faced by Brazilian exporters in Chapter 4 is based in part on face-to-face interviews with industry executives. The discussion of the economic implications of regional and multilateral trade liberalization in Chapter 5 explores new dimensions of the economics of trade preferences that are especially relevant for services. Chapter 6 provides new proposals for the design of international trade agreements in services. The findings presented here should be regarded as preliminary and intended to provoke discussion among economists, policymakers, and trade negotiators. More research is necessary to refine the analysis and conclusions of this report.
184 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS
Chapter 2. The Pattern of Trade in Services
2.1 This chapter describes the pattern of Box 2.1: Statistics on Trade in Services Brazil’s trade in services, drawing mainly upon Trade in services is defined more widely than trade in balance of payments statistics and data on goods, in recognition of the fact that many services require foreign direct investment (FDI). The level of proximity between consumers and suppliers. Services trade encompasses four modes of delivery: detail and quality of data on international • Cross-border supply is analogous to trade in goods. services transactions involving Brazil is in An example is software services produced in one country many respects unsatisfactory—as is the case for and supplied through mail or electronic means to consumers most countries. Given the “invisibility” of in another country. • Consumption abroad occurs when consumers move, most services, international transactions often e.g., to consume tourism or education services in another can only be recorded indirectly, through country. exchange records or by estimates based on • Commercial presence involves foreign direct complementary data. Moreover, the current investment, and includes services supplied through any type of foreign business or professional establishment. An statistical information on services trade only example is an insurance company owned by citizens of one incompletely captures the four modes through country establishing a branch in another country. which services are supplied (see Box 2.1 for a • Presence of natural persons involves the movement of brief review of statistical information available service-supplying nationals of one country to the territory of another. Examples are a doctor of one country supplying on trade in services and its deficiencies). through his physical presence services in another country, or the foreign employees of a foreign bank. 2.2 Notwithstanding these difficulties, the It would have been useful if trade statistics for each service various statistical indicators compiled in this sector were available according to each of the modes of supply. This would enable an assessment both of the chapter reveal certain clear trends: relative importance of different modes of supply in a particular sector and of the impact of measures affecting • While Brazil recorded a negative trade each mode of supply. balance in services throughout the However, the only services trade statistics available on a 1990s, the composition of both imports global basis are the IMF Balance of Payments (BOP) Statistics, which register transactions between residents and and exports changed significantly non-residents. According to BOP conventions, if factors of during that time period. The most production move to another country for a period longer than dynamic component on the credit side one year (sometimes flexibly interpreted), a change in residency has occurred. The output generated by such has been exports of miscellaneous factors that is sold in the host market is not recorded as business, professional, and technical trade in the BOP. Therefore, transactions involving services. On the debit side, imports of commercial presence and stay of natural persons for computer and information services durations of more than one year are not covered by the BOP statistics. have been one of the fastest growing The limitations of the existing statistical domains in components. providing information on trade by different modes of supply are listed in Table 2.1. Brazil has initiated a • Indicators of revealed comparative program of work to improve the quality of statistics, and ensure a closer relationship between the data reported by advantage suggest that the Brazilian the Brazilian Central Bank and the sectoral and modal economy has a comparative advantage classification adopted under the GATS. in goods and, by the same token, a comparative disadvantage in services. However, the fast growth in exports of certain business services reveals that Brazil has in recent years developed a comparative advantage in the category “other business services.”
• In the second half of the 1990s, Brazil saw substantial inflows of FDI, a large proportion of which went into the services sector. The areas that have seen the greatest amount of inward FDI include telecommunications, financial services, and various “other” business services. Foreign investors are mostly of European origin, followed by firms from the United States.
185 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY
Table 2.1: Inadequacies of Statistical Domains with regard to Modes of Supply Mode of Supply Relevant Data Source Inadequacies Cross border supply BOP service statistics - BOP does not distinguish among cross border (categories other than supply, commercial presence (firms) and travel) presence of natural persons (individuals) for less than one year Consumption abroad BOP Statistics (mainly the - Travel also contains goods, and is not travel category) subdivided into the different categories of services consumed by travelers - Some transactions related to this mode of supply are also in other BOP categories Commercial presence FDI and foreign affiliates - FDI statistics do not provide data on output (or trade (FAT) statistics sales); FDI definition does not match the definition of commercial presence - FAT statistics only exist for the United States. Basic concepts and definitions are in the process of being established internationally. Presence of natural BOP Statistics (mostly - BOP do not distinguish between cross border persons (independent) categories other than supply, presence of natural persons (individuals) transport and travel) and commercial presence for less than one year - natural persons who are residents are not covered Presence of natural Employment data from - not yet available persons (employees) FAT statistics
The next section analyzes the data on services trade from Brazil’s balance of payments (BOP). It is followed by an examination of statistical information on inward FDI, and by a comparison of U.S. foreign affiliates trade in services in Brazil and Mexico.
BALANCE OF PAYMENTS STATISTICS ON TRADE IN SERVICES
The services trade balance
2.3 Brazil recorded a negative trade balance in services throughout the 1990s, amounting to $5.7 billion or 45.2 percent of total services imports in the year 2000 (Figure 2.1).10 A negative trade balance is to be found in each of the four main BOP services categories, with transportation services recording the greatest deficit and insurance services exhibiting virtually balanced trade.11
The export side
2.4 Brazil’s cross-border exports of services amounted to $8.7 billion in 2000, representing 13.6 percent of Brazil’s total exports of goods and services. As can be seen in Figure 2.2,
10 Throughout this chapter, we exclude royalties and license fees and “government services n.i.e.” from the reported BOP figures. These two categories measure only partially cross-border trade in services. 11 For selected categories, Figure A1 in the Annex presents services trade balances at more disaggregate levels. Most categories still exhibit a net deficit. The most important exception to this rule is miscellaneous business, professional, and technical services, which recorded a net surplus of $2.3 billion in 2000.
186 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS services exports more than doubled over the past decade, starting from a level of $3.7 Figure 2.1: Services trade balance, 2000 billion in 1990. This dynamism Millions of US dollars primarily reflected the dramatic 0 increase in exports of what are -1,000 categorized as “other services.” -2,000
-3,000 2.5 What activities are hidden behind this residual -4,000 category? A more detailed -5,000 breakdown of activities is -6,000 possible for the years 1995 and -7,000 2000. Figure 2.3 reveals that the Total services Transport Travel services Insurance Other services driving component of the large trade services services expansion of “other services” Source: IMF Balance of Payment Statistics was miscellaneous business, professional, and technical services, expanding to $3.9 Figure 2.2: Services exports (in US$), 1990-2000 12 billion in 2000. In relative Millions of US dollars terms, this category also 10,000 9,000 occupied the largest share (44.6 OTHER SERVICES percent) of services exports in 8,000 INSURANCE SERVICES 2000, followed by travel (20.8 7,000 TRAVEL TRANSPORTATION percent) and transportation 6,000 13 services (14.8). 5,000 4,000 2.6 Additional data obtained 3,000 from the Brazilian Central Bank 2,000 made it possible to further 1,000 disaggregate the category 0 miscellaneous business, 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 professional, and technical Source: IMF Balance of Payments services into its sub- components.14 Figure 2.4 shows that the most dynamic sub-component of this category were architectural, engineering, and other technical services. This subcomponent expanded from $235 million in 1995 to over $1.5 billion in 2000, accounting for 44 percent of miscellaneous business,
12 A comparison of Brazil’s total exports of “other business services”—an aggregate which is dominated by miscellaneous business, professional, and technical services—to bilateral imports of the U.S. and EU in this category suggests that, in 2000, 78.9 percent of Brazil’s exports went to countries other than the U.S. and the EU. This evidence should be regarded as preliminary, however, as different recording methodologies by national statistical agencies may bias the calculated U.S. and EU shares. 13 Interesting insights can be obtained by a further breakdown of individual service categories (see Figure A2 in the Annex). Thus, sea transportation accounts for the overwhelming share (76 percent) of all transport exports; postal services account for virtually all (97 percent) communication services exports; reinsurance services account for virtually all (98 percent) exports of insurance services; and audiovisual services account for 27 percent of personal, cultural and recreational services. 14 The data from the Central Bank of Brazil are consistent with the total value of exports of miscellaneous business, professional, and technical services reported by the IMF, which is the source for the BOP data underlying the other charts presented in this section.
187 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY professional, and technical services and 17 percent of total services exports in 2000. A second dynamic sub-component were “services between affiliated enterprises, not included elsewhere.”
Figure 2.3: Composition of services exports
1995 2000
PERSONAL, CULTURAL, & MISC BUSINESS, PERSONAL, RECREATIONAL P ROF, T ECH SRVS CULTURAL, & SERVICES 19.3% RECREATIONAL 0.7% TRANSPORTATION OPERAT IONAL SERVICES 14.8% LEASING SRVS 0.8% 0.3%
MERCHANTING & OTH TRADE RELATED SRVS 1.3% MISC BUSINESS, COMPUTER & P ROF, T ECH SRVS TRANSPORTATION TRAVEL INFORMATION 44.6% 43.5% 20.8% SERVICES 0.7% COMMUNICATION SERVICES FINANCIAL SERVICES 0.4% 13.8% CONSTRUCTION SERVICES INSURANCE 1.1% SERVICES INSURANCE OPERATIONAL 3.1% SERVICES LE AS ING S RVS MERCHANTING & 3.6% CONSTRUCTION 2.5% COMPUTER & COMMUNICATION OT H T RADE SERVICES TRAVEL INFORMATION SERVICES RELATED SRVS FINANCIAL 0.2% 16.3% SERVICES 0.6% 6.8% SERVICES 0.4% 4.3%
Source: IMF Balance of Payments Statistics
Figure 2.4: Exports of miscellaneous business, professional, and technical services
1995 2000 Adv ertising, Adv ertising, Serv ices Legal Serv ices Legal market market between services between services affiliated research, and research, 1% affiliated 1% public opinion and public enterprises, enterprises, polling opinion polling n.i.e. n.i.e. 4% 2% 25% 22%
Architectural, Architectural, engineering, engineering, and other and other technical technical 20% 44%
Other 26% Other 55%
Source: Balance of Payments, Central Bank of Brazil
2.7 The share of this sub-component in miscellaneous business, professional, and technical services increased only slightly from 22 percent to 25 percent, but the value of exports of these services has more than quadrupled from $260 million in 1995 to $1.12 billion in 2000.15 While more research is necessary to better understand the precise nature of these intra-firm services, it is interesting to observe that their expansion coincided with a significant increase in inward FDI of business services (see below).
2.8 Imports of services increased 1.9 fold from $6.7 billion in 1990 to $12.6 billion in 2000 (Figure 2.5). Changes in the sectoral composition of imports were mainly due to cyclical factors. One exception may be the considerable growth of imports of computer and information services,
15 The measurement of trade between affiliated enterprises may be affected by firms’ transfer pricing practices, particularly in the case of intangible services for which reference prices are not easily available.
188 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS which more than quadrupled their share of total services imports from 1995 to 2000 (Figure 2.6). In 2000, the most important components of services imports included transportation (31.8 percent), travel services (26.9 percent) and other business services (23.7 percent).16
Figure 2.5: Services imports (in US$), 1990-2000
16,000
OTHER SERVICES 14,000 INSURANCE SERVICES 12,000 TRAVEL TRANSPORTATION 10,000
8,000
6,000
4,000
2,000
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Source: IMF Balance of Payments
Figure 2.6: Composition of services imports Figure 2.6: Composition of services imports
1995 2000
PERSONAL, CULTURAL, & PERSONAL, MISC BUSINESS, OPERAT IONAL MISC BUSINESS, PROF, TECH SRVS RECREATIONAL LE AS ING S RVS PROF, TECH SRVS CULTURAL, & SERVICES RECREATIONAL 11% MERCHANTING & OTH 6.4% 6.1% 3% SERVICES TRADE RELATED 2.0% SRVS OPERAT IONAL 0.3% LEASING SRVS 10% TRANSPORTATION COMPUTER & 31% INFORMATION SERVICES 2.0%
FINANCIAL SERVICES MERCHANTING & OTH 7.5% TRANSPORTATION T RA DE RELATE D SRVS 45.9% INSURANCE 3% SERVICES 2.4% COMPUTER & CONSTRUCTION INFORMATION SERVICES SERVICES 0.0% 8%
COMMUNICATION FINANCIAL SERVICES SERVICES 5% 0.4% INSURANCE TRAVEL TRAVEL SERVICES 26.8% 27% 2% COMMUNICATION CONSTRUCTION SERVICES SERVICES 0% 0% Source: IMF Balance of Payments Statistics
16 Again, interesting insights can be obtained by a further breakdown of individual service categories (Figure A3 in the Annex). Thus, sea transportation accounts for the overwhelming share (64 percent) of all transport exports, but is somewhat less important than in the case for transport services exports. Imports of telecommunications services represent the overwhelming share (97 percent) of communication services imports—the inverse picture compared to exports of communications services. Imports of insurance services are made up of “other direct insurance services” (44 percent), freight insurance (34 percent) and reinsurance (21 percent). Finally, audiovisual services make up the largest share (72 percent) of personal, cultural and recreational services—again a different pattern compared to the export side.
189 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY
Revealed comparative advantage
2.9 Does Brazil have a comparative advantage in services? An impressionistic answer to this question can be obtained by computing the so-called indices of revealed comparative advantage (RCA). An RCA index is calculated by taking the share of a particular sector’s exports in total Brazilian exports of goods and services, and dividing this share by the share of all countries’ exports in this sector in aggregate global exports of goods and services. An RCA index value greater than unity indicates a comparative advantage in the sector; a value less than unity indicates a comparative disadvantage. The estimates must be interpreted with caution because the RCA index is in many ways a crude measure of comparative advantage. For example, it does not account for intra-industry trade, nor does it take into consideration the presence of trade barriers. Moreover, since the index is based on BOP data, it does not give any indication of Brazil’s comparative advantage in supplying services through commercial establishment or the movement of individual service suppliers.
2.10 Table 2.2 presents RCA indices for the period 1990 to 2000 for aggregate goods and services exports, as well as four main services categories.17 Four stylized facts emerge from the revealed patterns of comparative advantage. First, the Brazilian economy has a comparative advantage in goods and, by the same token, a comparative disadvantage in services. The comparative disadvantage in services persists throughout the 1990s and for most of the four services sectors shown. Second, Brazil’s comparative disadvantage in transportation services has become more pronounced in the second half of the 1990s, which is, in part, reflected in the reduction of Brazil’s shipping fleet. Third, the economy’s comparative disadvantage in travel services is consistent with the claim that Brazil’s tourism industry is underdeveloped relative to its potential. Fourth, Brazil has in recent years developed a comparative advantage in “other business services”, which is reflected in the rapid increase of exports of miscellaneous business, professional, and technical services, as illustrated above.18
Table 2.2: Revealed comparative advantage of Brazil’s exports, 1990-2000 Exports 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Goods 1.10 1.12 1.12 1.14 1.12 1.09 1.13 1.12 1.09 1.08 1.06 Services 0.56 0.49 0.50 0.44 0.51 0.61 0.45 0.49 0.63 0.65 0.75 Transport services 0.79 0.79 0.93 0.72 0.89 1.03 0.58 0.52 0.71 0.47 0.47 Travel 0.61 0.44 0.36 0.34 0.28 0.28 0.21 0.26 0.36 0.46 0.46 Insurance services 0.80 0.40 0.55 0.69 0.69 0.86 0.01 -0.16 0 0.72 1.33 Other business services 0.51 0.41 0.47 0.29 0.61 0.50 0.62 0.83 1.16 1.36 1.68 Source: Calculated by staff from IMF Balance of Payments statistics.
FOREIGN DIRECT INVESTMENT IN SERVICES
2.11 In the second half of the 1990s, Brazil saw substantial inflows of foreign direct investment (FDI)—driven by the Government’s program of macroeconomic stabilization and
17 Financial services, construction services and computer and information services are excluded, because the underlying data are not consistently reported by all countries, which may bias the world controls used in the calculation of an RCA index. 18 The RCA index values for insurance services should be treated with great caution. Exports of insurance services measure the difference between premiums earned and claims payable, which tend to be volatile over time and may sometimes even show negative values. Moreover, data reporting is not consistent across countries and over time.
190 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS
structural reform, including the elimination of restrictions on foreign ownership. Moreover, the privatization of state-owned service providers and the introduction of competition in key service sectors altered the sectoral distribution of FDI considerably from its historical pattern, with a recent predominance of inflows into the service sector (Table 2.3).
Table 2.3: Sectoral composition of FDI inflows Sector 1995 1996-2000 2000 Stock % Flow % Stock % Agriculture 689 1.6 1,781 1.7 2,470 1.7 Industry 23,402 55.0 18,63318.0 42,03528.7 Of which: Chemicals 4,748 11.2 3,335 3.2 8,082 5.5 Steel 2,566 6.0 5060.5 3,073 2.1 Machinery and equipment 2,072 4.9 1,227 1.2 3,299 2.3 Automotive 2,851 6.7 4,360 4.2 7,212 4.9 Services 18,439 43.4 83,274 80.3 101,713 69.6 Of which: Electricity and gas 0 0.0 13,324 12.9 13,324 9.1 Water 2 0.0 1640.2 1660.1 Constructions 203 0.5 5300.5 7330.5 Distribution 3,220 7.6 8,422 8.1 11,642 8.0 Transport 122 0.3 4030.4 5250.4 Travel 71 0.2 900.1 1610.1 Telecommunications and Post 195 0.5 22,701 21.9 22,896 15.7 Insurance 149 0.4 4630.4 6120.4 Financial services 1,372 3.2 17,061 16.5 18,433 12.6 Computer services 115 0.3 1,685 1.6 1,800 1.2 Education 1 0.0 00.0 10.0 Health and social services 18 0.0 0 0.0 18 0.0 Recr., cultural and sporting services 15 0.0 317 0.3 331 0.2 Other business services 12,957 30.5 18,103 17.5 31,060 21.2 Total 42,530 100.0 103,688 100.0 146,218 100.0 Source: Banco Central do Brasil.
2.12 Interestingly, the category “other business services” accounted for the largest share (21.2 percent) of inward FDI in services in 2000, followed by telecommunications (15.7 percent) and financial services (12.6 percent). As pointed out above, the large inflows of FDI in other business services coincided with a substantial expansion of exports of services between affiliated enterprises. More research is necessary to better understand possible causal linkages between these two trends.19 Finally, as we shall see in Chapter 3, sectoral FDI patterns partially reflect different extents of liberalization, with transportation services (which remain relatively closed to foreigners) registering little inward FDI, for example.
2.13 Who are the foreign investors in Brazil? The regional breakdown of the total FDI inward stock—of which services take a more than two-thirds share—reveals that European countries are the dominant source of FDI in Brazil (Figure 2.7).20 They account for more than half of the total inward FDI stock, whereas the United States accounts for just under a quarter of this stock. The strong presence of European companies (especially from Portugal, Spain and Italy) can be attributed to historical and social links, which also imply the relatively greater familiarity of European investors with the Brazilian market.
19 Another link, between FDI inflows in services and the repatriation of profits by foreign investors, is also worth examining. However, the BOP category investment income does not distinguish between income derived from investment in goods or services. 20 Unfortunately, the regional composition of inward FDI stock is only available for the total FDI aggregate. Country- specific inward FDI data by sectors (and sub-sectors) are available for 1995, but would not reflect the pattern of foreign participation in 2000, as most FDI in services only occurred in the second half of the 1990s.
191 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY
Figure 2.7: Regional composition of inward FDI, 2000
Other US 22.8% 24.2%
MERCOSUR (without Paraguay) 1.5%
Europe 51.5%
Source: Banco Central do Brasil
2.14 Interestingly, Argentina and Uruguay (the two most important MERCOSUR partners) only account for 1.5 percent of inward FDI. The “other” category includes various Caribbean islands that are used by multinational companies as bases for foreign investment. The nationality of the ultimate beneficial owning company is unclear in these cases.
2.15 Finally, does Brazil’s inward FDI differ significantly Figure 2.8: Stock of US outward FDI in services, 2000 Millions of US dollars from other countries? A partial 18,000 answer to this question can be 16,000 Other industries obtained by analyzing the U.S. 14,000 Business and 12,000 outward stock of FDI for other professional services
10,000 Finance, insurance countries in the Western and real estate Hemisphere (Figure 2.8). It 8,000 Depository institutions can be seen that Brazil and 6,000 Wholesale trade
Mexico, which have 4,000 approximately the same 2,000 economic size (as measured by 0 GDP in current U.S. dollars), Argentina Brazil Chile Mexico Source: U.S. Bureau of Economic Analysis also record similar patterns of Note: "Business and professional services" include hotels, advertising, equipment rental, computer and data processing services, automotive rental and leasing, motion pictures, health services, engineering and architectural services, and management services. "Other industries" include mining; agriculture fishery and forestry; construction; communications; transportation; eletric, gas and sanitary U.S. inward FDI—both in services; and retail trade. terms of its overall magnitude, as well as in terms of its sectoral distribution.
SALES OF SERVICES OF U.S. FOREIGN AFFILIATES
2.16 Emerging sources of information on trade in services are statistics on the sales of services of foreign affiliates. So far, only the United States publishes such data on a comprehensive basis. Total sales of services by affiliates of U.S. companies in Brazil amounted to $4.5 billion in 1998. Figure 2.9 presents the services sales figures broken down by sector for Brazil and, for purposes of comparison, also for Mexico. Resembling the pattern of inward FDI discussed above, sales of services are similar in the two countries in most services sectors. Exceptions are insurance and computer and data processing, for which Brazil records significantly higher sales, and
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transportation, for which Mexico records significantly higher sales. In insurance, the restrictions that Brazil maintains on cross-border trade could have induced U.S. providers to invest locally (Chapter 3). In transport, Brazil’s restrictive investment regime and greater distance from the United States may explain the lower levels of U.S. affiliate sales.
Figure 2.9: U.S. Foreign Affiliates Sales of Services, 1998 Millions of US dollars
1600
1400 Brazil Mexico 1200
1000
800
600
400
200
0 Wholesale Finance Insurance Hotels and Advertising Equipment Computer and Other business Motion Management Transportation trade (except other lodging rental (except data services pictures, and public depository places automotive and processing including relations institutions) computers) services television tape services and film Source: U.S. Bureau of Economic Analysis
Chapter 3. Brazil’s Services Trade Policy Regime
3.1 The wave of liberalization and modernization that swept through the Brazilian economy in the 1990s encompassed a large number of service industries. As we saw in Chapter 2, the Government’s reform program led, among other things, to a sharp increase in Brazil’s inward foreign direct investment (FDI). While policy changed in many dimensions, we focus in this chapter on the liberalization of trade in services (see Box 3.1). Specifically, we examine how liberalization has proceeded across the various industries, what the remaining barriers to trade are and to what extent certain nations receive preferential treatment in Brazil.
3.2 The chapter is divided into two parts. The first part seeks to assess the degree of openness of services trade policy by identifying remaining explicit barriers to trade. These explicit barriers include quantitative limitations on the provision of services by foreigners, measures which require specific types of legal entity through which a foreign service provider may supply a service, and limitations on the participation of foreign capital and foreign nationals in Brazilian service supplying firms. Aside from describing explicit barriers in actual policy, the discussion also takes stock of Brazil’s services commitments under GATS and MERCOSUR. Where relevant, it identifies gaps between actual policy and international commitment, as well as differences in the commitments made by Brazil in the two trade fora. Relatively greater emphasis is placed on financial services and the key infrastructure services—telecommunications and transport. For these industries, we also discuss briefly the effect policy reforms had on market structure and sector performance, although it is beyond the scope of this report to provide a comprehensive exploration of this effect.
3.3 The second part analyzes the regulatory context, in which firms or individuals provide services in Brazil. For most service industries, ranging from telecommunications, finance, and transport to professional services, regulation is needed to address market failures and to promote universal access. Regulatory instruments need to be included in an assessment of services trade
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Box 3.1 What does liberalizing trade in policy because regulation is needed to ensure that services mean? foreign entrants have access to essential facilities— Services trade liberalization implies the elimination of such as telecom networks or port infrastructure. In barriers to foreign provision of services through any of the four modes described in Box 2.1 (of Chapter 2), addition, regulatory instruments—such as i.e., cross-border supply, consumption abroad, qualification and licensing requirements for commercial presence or the presence of natural professional services—may themselves become a persons. Thus, services trade liberalization is much wider in scope than goods trade liberalization. barrier to trade and may, in fact, be a particularly Barriers to trade in services are more complex and less attractive means of protecting domestic suppliers visible than tariffs. They include, first, a variety of from foreign competition. quantitative restrictions, ranging from cargo sharing in transport services, limits on the number of suppliers in telecommunications and banking, to restrictions on the 3.4 The main findings of this chapter are the movement of service-providing personnel that affect following: trade in all services. Sometimes these quantitative restrictions prevent entry by new domestic suppliers as well as foreign suppliers, e.g., where a public • Sectoral policy regimes observed in Brazil monopoly exists. Then there are numerous forms of fall broadly into four different categories: the explicit discrimination against foreign providers, through taxes and subsidies as well as by allowing less frontrunners, where few explicit barriers favorable access to essential facilities such as ports, exist, encompassing telecommunications and airports or telecommunications networks. And finally, there is a subtle class of measures that are neither distribution services; sectors that are de facto quotas nor explicitly discriminatory but nevertheless quite liberal, but policy is uncertain, such as have a profound effect on services trade, i.e., domestic financial services; sectors where explicit regulations, such as qualification and licensing requirements, that may implicitly discriminate against barrier are pervasive, including transport, foreign providers. audiovisual, construction and professional It is also useful to be clear that trade liberalization does services; and closed services sectors, not necessarily mean deregulation. In fact, in many confined to postal and reinsurance services. cases successful liberalization will require strengthened regulation, ranging from prudential regulation in financial and professional services, to pro-competitive • Trade preferences vis-à-vis certain trading regulation in telecommunications and transport partners in Brazil’s current policy regime services, as is explained in more detail in this chapter. pertain mostly to transport services, due to the sector’s nature and history, and professional services. In addition, there is scope for preferential treatment in other sectors in the form of rules requiring reciprocal treatment of Brazilian service suppliers in foreign markets. These requirements can be found in financial and audiovisual services. In most cases, however, reciprocity rules do not translate into preferences in actual policy.
• Brazil’s commitments in international agreements do not always reflect actual policy. This is evidently the case where no commitments were made or certain modes were scheduled as unbound (for example, in GATS and MERCOSUR on transport, certain business services, audiovisual services); in other cases, actual policy has become more liberal since commitments were made (for example, in MERCOSUR on telecommunications). International trade commitments in financial services are of limited value, as they merely reflect discretionary policy. MERCOSUR commitments are more liberal than GATS commitments only in certain professional and business services and insofar as there are commitments today on basic telecommunications under MERCOSUR, but not under GATS.
• Brazil’s regulations to remedy market failures and promote universal service broadly track international trends. Inadequacies exist in the area of professional services, where outdated regulations and the lack of specific provisions dealing with the supply of services by foreigners represent a barrier to trade and undermine regulatory objectives.
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3.5 For easy reference, Table 3.1 presents an illustrative overview of explicit barriers and existing commitments in the various service industries. The Annex to this chapter provides a more comprehensive description of the main explicit barriers and regulatory measures affecting services trade. It also lists the sources of information on which the discussion of this chapter is based. While attention was given to identifying the key policies in each sector, the information provided should not be considered as comprehensive.
Table 3.1: Overview of explicit barriers and existing commitments Sector Explicit barriers GATS Commitments GATS MFN exemptions Telecommunications Mostly liberal. Provision of long No GATS commitment, Reciprocity condition distance services requires meeting currently. MERCOSUR on telecom services build-out obligations in local commitment partially supplied for distribution services. liberal, but retaining of radio or television discretion and surpassed programs directly to by actual policy. consumers. Distribution services No explicit barriers on foreign Commitments mirror None suppliers. policy Banking, De facto liberal, but policy Reflect executive None Insurance, environment is not certain, due to discretion. Express mail and lack of a clear legislative framework courier services on foreign entry. Greenfield entry in banking not allowed. Maritime Transport Commercial presence: restrictive, No GATS commitment. Bilateral agreements with foreign equity limit. concerning cargo Cross-border trade: international sharing, cargo maritime transport quite liberal, but reservation and no cabotage rights for foreigners reciprocity on access to cargo. International Road Commercial presence: restrictions in Commitment on Agreement on Transport the form of foreign equity commercial presence International Land limitations. reflects policy Transport providing Cross-border trade: International national treatment for road transport subject to quantitative authorized suppliers of limitations. No cabotage rights for signatories. foreigners. International Air Commercial presence: (Not applicable) (Not applicable) Transport discriminatory restriction on foreign equity ownership and non- discriminatory restriction on number of airlines. Cross-border trade: Quite restrictive as determined through bilateral air service agreements. Audio visual Restrictive, with local content rules No commitments. Co-production services and foreign ownership restrictions. agreements certain nations. Construction Somewhat restrictive, with Commitments reflects None services requirements on the form of foreign actual policy entry. Professional No major restrictions other than GATS commitments do None services residency requirement not cover all professions. MERCOSUR commitments are wider. Re-insurance, Closed to domestic and foreign Commitments reaffirm None Postal services entry. monopoly in re-insurance, no commitment on postal services.
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THE EXPLICIT BARRIERS TO SERVICES TRADE
3.6 The policy regime for services in Brazil varies widely across sectors, both in content as well as in depth and detail. There are few common trends that apply to all sectors. An exception is the participation of foreign capital, which the Sixth Constitutional Amendment of 1995 freed from restrictions for the great majority of economic sectors. Another important horizontal rule established by the same constitutional amendment was the removal of discriminatory treatment of firms established in Brazil, irrespective on whether ownership and control were of Brazilian or foreign origin.
3.7 Therefore, existing limitations to foreign participation in Brazil’s services trade are overwhelmingly of a sectoral nature. In what follows, we group Brazil’s service industries into four categories. First, service industries that have seen substantial liberalization and today face no explicit barriers to trade or where remaining barriers are being phased out. Secondly, industries that are de facto quite liberal but trade policy is uncertain. Thirdly, partially liberalized industries where some market opening and foreign entry have occurred, but explicit barriers are still pervasive. And finally, industries that have experienced little reform and remain largely closed to foreigners.
The frontrunners
3.8 The sector that has experienced the most dramatic reform in Brazil in the 1990s is telecommunications. As in other countries in Latin American and other parts of the world, telecommunications reform was driven by technological progress that undermined the natural monopoly justification for public provision of services, as well as the desire of the Brazilian Government to foster the country’s entry into the “information age.”
3.9 The liberalization process gained momentum in 1997 with the approval of the General Telecommunications Law. The Government privatized the regional subsidiaries of the Telebras system and admitted an additional competitor in each of the fixed-line market segments: local services in three different regional districts, inter-regional long distance, and international services. While the Government still holds an equity stake in some of the formerly state-owned operators, the new entrants are fully privately owned and foreign entrants currently do not face any limitations on equity ownership. An important caveat to this policy is the discretionary option for the Executive Branch to establish limits on foreign ownership of telecom service providers, “taking into consideration Brazilian interests in the context of its relations with other countries.” The actual foreign investors are predominantly of European origin in the case of local services. The American company MCI holds a stake in Embratel, the formerly state-owned long distance service provider.
3.10 In November 2001, the Government announced the further opening of the fixed-line market segment, foreseeing a fully liberalized market by 2006. New entrants can request authorization to offer new services starting in 2002, although regional operators are not allowed to offer domestic long distance services without also offering local services. The provision of local services, in turn, is tied to detailed network-buildout requirements that are to be gradually phased out by the end of 2005. The gradual market opening foreseen in the new policy reflects a compromise between strengthening competition in the sector and advancing network buildout and universal service goals.
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3.11 In mobile telephony, Brazil has Box 3.2: The structure of the services agreement granted four licenses in each of 10 regional under the WTO districts, except the States of Amazonas, The WTO’s General Agreement on Trade in Services (GATS), Roraima, Amapá and Maranhâo, where only which emerged as part of the Uruguay Round, covers all services two licenses have been awarded. As in the except hard rights in air transport. The GATS is wide in scope and applies to all government measures affecting trade, defined case of fixed-line services, Brazil does not to include not only cross-border delivery, but also delivery maintain any limitations on foreign equity through the movement of consumers, labor, and capital. Thus, holdings for mobile services. Actual foreign regardless of whether foreign providers are located abroad or established locally, any measure affecting their ability to supply a investors are again overwhelmingly of domestic consumer falls within the scope of the Agreement. European origin. Value-added The broad reach of the GATS contrasts with the gentleness of telecommunications services—encompassing its rules. These can be divided into two sets: the rules that apply across-the-board, and those that apply only if a Member makes a private leased line services, data services and sector-specific commitment. The most important of the general Internet services—do not face any explicit rules are transparency and the most-favored-nation (MFN) limitations on the number of operators, nor on principle. The former requires that all measures of general application affecting trade in services be published by a Member, the participation of foreign equity. and that other Members be informed of significant changes in trade policy. The latter prevents Members from discriminating 3.12 As illustrated in Table 2.3 (of Chapter between their trading partners, but allows for certain exemptions, notably for preferential agreements. 2), the industry experienced more than $22 The liberalizing content of the GATS depends on the extent billion of inward FDI between 1996 and 2000, and nature of a Member’s sector-specific commitments relating accounting for about 22 percent of all FDI to market access and national treatment. These provisions apply only to sectors and modes included by a Member in its schedule inflows during that time period. The number of commitments (also referred to as bindings) and there too are of fixed telephone lines more than doubled subject to the limitations that a Member inscribes. The market between 1997 and 2001, improving the access provision primarily prohibits quantitative restrictions (e.g., on number of suppliers, value of services transaction, foreign country’s teledensity from 11.7 main lines per ownership) unless they have been stated by a Member in its 100 inhabitants in 1997 to an estimated 23.9 schedule. National treatment prohibits discrimination against foreign services and suppliers, but again a Member may specify in 2001. The number of mobile users surged limitations (e.g., discriminatory taxes, subsidies) in its schedule. from around 6 million users in 1997 to more Granting unrestricted market access with full national treatment than 16 million in March 2000. Calling prices would be equivalent to establishing free trade, and the flexible structure of rules reflects the desire of most governments to adopt have also come down significantly. For a gradual and conditioned approach to opening up their markets. example, according to data published by the But it is worth emphasizing, that GATS commitments are ITU, the average price of a one-minute call to guarantees that trade policy will not be made more restrictive, and the absence of such guarantees need not mean that access to the United States was $1.56 in 1997, whereas a particular market is denied. the Embratel pricing plan of September 2001 As will be further explained in Chapter 6, MERCOSUR has offered a minute rate of less than $0.30. The adopted a similar structure for its services agreement. subscription charges for Internet services are also in line with, if not below, international competitive benchmarks. For example, AOL Brazil’s 34.95 Real (approx. $15) monthly rate for unlimited dial up service compares to a monthly rate of $19.95 offered by AOL in the United States. Notwithstanding these achievements, the sector faces substantial challenges, provoked by an increasing number of insolvency cases among low- income customers and the global downturn of the industry due to over-investments in the late 1990s.
3.13 While Brazil currently has no commitments on basic telecommunications under the GATS, its MERCOSUR commitments reflected the state of actual policy in early 2001 (see Box 3.2 for a brief introduction into the structure of the GATS and MERCOSUR agreements). It inscribed the duopoly in fixed line telecommunications services described above and pre- committed that “other licenses may be granted” after December 31st 2001. The new policy issued in November 2001 is not yet taken into account in the schedule. Moreover, the discretionary option for the Executive Branch to establish limits on foreign ownership is also mentioned in the schedule.
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3.14 The second major service industry that experienced substantial liberalization is distribution services. There are no explicit barriers facing foreign entrants into wholesale trade, retail trade and franchising services. Fostered by the Real plan and the ensuing fall in inflation, the sector’s commercial attractiveness increased in the second half of the 1990s, which led to a large number of acquisitions of Brazilian supermarkets by foreign service providers. As can be seen in Table 2.3 (of Chapter 2), inward FDI in distribution services totaled $8.4 billion between 1996-2000, accounting for 8 percent of all FDI inflows. Major international supermarket chains with a presence in Brazil include Carrefour, Sonae, Wal-Mart, Royal Ahold, and Jeronimo Martins. Under both GATS, Brazil has committed to unrestricted commercial presence, whereas the other modes of services supply remain unbound.21
3.15 Finally, for a large number of business services, foreign providers face little, if any, explicit barriers to trade. These include several dynamic industries such as management consulting, advertising, as well as software, database and data-processing services. Table 2.3 (of Chapter 2) indicates that the category “other business services” already accounted for a large share of inward FDI stock in 1995 and, additionally, saw substantial inward FDI in the second half of the 1990s.22
3.16 Brazil scheduled commitments under the GATS only in selected business services sectors, such as, market research and public opinion polling, management consulting, translation and interpretation services. In all of these cases, commercial presence is unrestricted, whereas the other modes of service supply remain unbound. In advertising services, commercial presence is limited to 49 percent foreign ownership and firm leadership must remain with Brazilian partners. Additional restrictions apply to the cross-border supply of advertising services. In important business service industries, such as computer and related services or research and development services, Brazil did not schedule any commitments. Brazil’s commitments under MERCOSUR go further than those in the GATS schedule for a large number of business services. Fully liberal commitments across modes of services supply have been made for computer and related services, market research and public opinion polling, management consulting and others.
Service industries that are de facto liberal but trade policy is uncertain
3.17 Banking services represent an industry that has seen substantial restructuring, including through entry by foreign service providers, but policy in this sector remains largely discretionary. Article 192 of the 1988 Constitution prohibits, in principle, participation by foreign financial institutions and stipulates that a complementary law will govern the national financial system. However, the reform of the financial system implicit in Article 192 has not yet been undertaken. Improved access to foreign providers has, nevertheless, been granted on the basis of an exception specified in the Constitution. Article 52 of the Constitution states that the prohibition on foreign participation does not apply to authorizations resulting from international agreements, on the basis of reciprocity, or otherwise justified by national interest, thus enabling the authorization of foreign entry through specific Presidential Decrees.
3.18 In practice, generous market access has been granted to foreign financial institutions in the last few years. According to Exposition of Motives (“Exposição de Motivos”) No. 311 of 1995 by the Minister of Finance, banking institutions interested in establishing themselves in the Brazilian market should present a proposal to the Central Bank which, in turn, will submit it to
21 Commitments on distribution services under MERCOSUR are unavailable. 22 Environmental services and “alternative” health care services also seem free of explicit restrictions.
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the National Monetary Council (CMN), before then submitting it for a final decision to the nation’s President. There are no stated limitations on foreign equity ownership. The current policy regime only permits foreign financial institutions to enter by acquiring existing national banks, but does not permit greenfield investment by foreign banks. Moreover, the authorization for foreign suppliers to conduct business has often been accompanied by ad hoc conditions and limitations, including restrictions on branching.
3.19 Once foreign investors have established themselves in Brazil, they face virtually no restrictions. Limitations on national treatment were eliminated in 1994. Perhaps the only major exception, to the extent that it may be considered a post-establishment measure, is the a priori restriction on branching that has occasionally been imposed by the Central Bank on foreign suppliers. Banks may, however, apply for new branching licenses. Citibank and BankBoston, for example, were allowed to open new branches in 1998, upon request and based on market assessments made by the Central Bank.23
3.20 Sales of national banks to foreigners were undertaken in the context of avoiding systemic crises and speeding up the recovery of otherwise insolvent institutions. In the late 1990s, foreign entry was no longer related to the rescue of ailing domestic banks. Thus, in July 1998, ABN Amro acquired Banco Real, a financially healthy, and one of the largest, financial institutions in Brazil. The sale was motivated by succession problems within the controlling family. Shortly thereafter, ABN Amro acquired Brazil’s Bandepe, further expanding its presence in Brazil. Foreign investors are primarily of European origin (like Santander, BBVA, and ABN), but also include investors from the United States (such as Citigroup, Bank Boston) and banks from East Asia (such as HSBC and Korea’s Keb bank). Foreign banks account for about 20 percent of the total loans in the Brazilian market. This figure is low, compared to other Latin economies such as Argentina, Chile, Peru and Mexico, where foreign banks account, on average, for 40-50 percent of the loan business.24
3.21 It is believed that foreign bank entry contributed to the stability of the Brazilian financial system, but it is not clear whether foreign bank entry also improved the efficiency of the sector. The study by Carvalho (2001) concludes that “the expansion of foreign banks’ activities in the domestic market has not resulted in any major improvement [in efficiency].” While the average overhead costs (as a proportion of assets) of banks in Brazil declined from 0.14 to .07, it is hard to disentangle how much of this decline is attributable to foreign bank entry and how much to exogenous improvements in the performance of domestic banks.
3.22 One issue is the degree of concentration in Brazilian banking, and how it has been affected by liberalization in the 1990s. The study by Nakane (2000) explicitly tests for market power in Brazilian banking and concludes “the banking industry is highly competitive, although the perfect competition hypothesis is rejected.” A similar conclusion is reached by Sampaio Rocha (2000), who finds that concentration in the Brazilian banking sector increased since 1994, but the sector can still not be deemed excessively concentrated by generally accepted parameters.25 If one takes the three-bank concentration ratio as the benchmark for measuring
23 Another limitation which may be relevant in the context of post-establishment for foreign financial services suppliers concerns the possibility for institutions comprising a conglomerate controlled by foreign capital to become multiple, commercial and/or investment banks. National Monetary Council Resolution 2,212 stipulates that this possibility is limited to only one of the member institutions at a time. 24 See Salomon Smith Barney, “Update on Foreign Financial Institutions in Latin America,” Dec. 2000. 25 Discussions with Brazilian officials suggested that even though the market for loan services may not be concentrated, concentration may be greater in non-loan banking services. Further research is needed in this area.
199 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY concentration, Brazil’s banking sector was highly concentrated in 1991, with the three largest banks accounting for about 94 percent of the total assets of the banking sector. This concentration ratio continuously declined over the 1990s, and by 1997, the share of the three largest banks was only about 41 percent of total banking sector assets. Over the same period, the share of foreign bank assets in the total assets of the banking system increased from below 0.01 percent in 1992 to about 9 percent in 1997. While in 1992, only about 7 percent of Brazil’s banks were foreign banks, the share of foreign banks in the total number of banks in 1997, was about 22 percent.
3.23 Greater clarity and security in market access conditions for foreign financial institutions is likely to improve the contestability of Brazilian banking. A new congressional initiative in the beginning of 2001 resulted in a report that favored the adoption of a series of supplementary laws and regulations in lieu of a unified piece of legislation for the whole of the system. It seems unlikely that the comprehensive reform of the financial system foreseen in the Constitution will take place before the elections in 2002. As will be further discussed in Chapter 7, a dedicated legislative framework in this important sector may also influence Brazil’s ability to make a binding liberal commitment in a regional or multilateral trade agreement.
3.24 Brazil’s commitments in banking services under the GATS largely reflect its actual policy, referring to the case-by-case, discretionary executive authorization to conduct business via commercial presence. Brazil did not make any commitment with regard to the other modes of service supply. The MERCOSUR schedule in banking services mirrors the GATS commitments.
3.25 Compared to banking, the policy regime for retail insurance services is less discretionary, though not necessarily clearer. The “Act of the Transitional Constitutional Provisions” interprets insurance services as services other than financial services, thus eliminating the need to obtain a Presidential decree to authorize foreign entry, as is the case for banking services. Moreover, a 1998 resolution by the sector regulator eliminated the existing limitations on the participation of foreign capital. However, as in the case of banking, uncertainty is generated by the absence of a dedicated legislative framework for foreign entry. In addition, the sector regulator has the legal obligation to apply to companies whose capital is not entirely Brazilian restrictions equivalent to those imposed by the home countries of these companies. It is unclear whether this reciprocity rule was ever applied in imposing limitations on foreign ownership.
3.26 Commercial establishment of foreign insurers still requires incorporation under Brazilian law, implying that foreigners cannot offer services in Brazil through branches or representative offices. Some 30 foreign firms are reported to have a significant presence in Brazil, predominantly of European and U.S. origin. In 1990, life insurance penetration (measured by life insurance premiums as a proportion of GDP) was about 0.18 percent, and this increased to 0.36 percent in 1996. Over the corresponding period, life insurance density (measured by the ratio of premiums to total population), which gives an indication of the expenditure per-capita on life insurance services, increased from 9.35 to 20.34.
3.27 Insurance brokerage is restricted to Brazilian nationals or permanent residents in Brazil in the case of natural persons and to firms organized in accordance with Brazilian laws and headquartered in Brazil. In the latter case, directors, managers, and administrators must be Brazilian nationals or permanent residents in Brazil. Finally, the contracting of insurance from abroad on a cross-border basis is limited to risks that do not find alternative coverage in Brazil or
200 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS
that are not “convenient for national interests.” Attempts to open the contracting of insurance in foreign currency for certain risks have, so far, been unsuccessful.
3.28 In contrast to the interpretation of the “Act of the Transitional Constitutional Provisions” outlined above, the Brazilian Government reiterated the need to obtain a Presidential Decree for the commercial establishment of foreign insurers in its commitment to the WTO. It would therefore seem that the liberal actual policy regime is not reflected in the GATS commitment, which retains discretionary decision-making. For cross-border supply of insurance, Brazil is unbound except for some limited commitments with regard to insurance on freight and body, machinery, and civil liability insurance. The remaining two modes of service supply are unbound. The MERCOSUR schedule in banking services mirrors the GATS commitment.
3.29 A situation of de facto liberal market access and actual entry by foreigners, but an uncertain legislative framework also exists with regard to express mail and courier services. The 1978 law on postal services defines the scope of the postal monopoly to include letters and postcards, telegrams, and certain other postal related services. The law does not make any reference to third party provision of courier and express mail services and the constitution only obliges the government to guarantee postal services and the national airmail. Foreign entry in courier and express mail services has thus occurred in the absence of a dedicated legislative framework for the industry. In fact, a proposed new law for postal services has provoked criticism from major express mail carriers, as it would allegedly submit these carriers to increased bureaucracy and higher fees. Brazil committed to unrestricted commercial presence and cross border trade in its GATS commitment on courier services. The other two modes of services supply remain unbound.26
Partially liberalized service industries with remaining explicit barriers
3.30 Transport services are a prominent example from the set of industries where some liberalization has occurred, but foreign providers continue to face explicit barriers in supplying services in the Brazilian market. Due to the nature and history of the international transport industry—market access is generally determined by bilateral or regional agreements between trading partners—this sector of the economy also sees the most significant trade preferences in Brazil’s existing services trade policy.
3.31 International maritime transport is traditionally the most liberal of the cross-border transport industries. Starting in the 1980s, Brazil gradually liberalized its maritime policy, phasing out cargo reservation and cargo sharing schemes. As of 1995, the share of Brazilian ocean-borne trade subject to selected bilateral cargo agreements (with Algeria, Angola, Argentina, Chile, Peru, Romania and Uruguay) was about 8.5 percent. Today, the role of cargo reservation is believed to have further declined.27 However, foreign vessels are restricted in their ability to offer cabotage services between Brazilian ports. The 1996 cabotage law limits foreign participation in cabotage to countries that have reciprocal agreements with Brazil.28 Between
26 Commitments on express mail and courier services under MERCOSUR are unavailable. 27 The current legislation, dating back to 1997, does not make any reference to cargo reservations or other discrimination in favor of the national flag. Law No. 9,432 of 8 January 1997 makes reference to a previous legislation (Decree-Law n. 666 of 2 July 1969) to clarify that there may be cargo reservation and other measures applied where the countries at the other end of a particular bilateral route discriminate in favor of nationally-generated cargo. Even in that case, however, the 1997 law provides for the possibility of recourse to foreign-flag carriers in cases of unavailability of national providers. 28 An additional, relatively minor discriminatory measure is that foreign shipping operators are required to pay a lighthouse fee, from which Brazilian-owned ships are exempted.
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1986 and 1995, both cabotage and international long distance shipping tonnage increased by 88 percent and 53 percent, respectively. Freight revenues generated from Brazilian trade in 1996 were more than double the 1993 level of $2.45 million. Of the 1996 freight revenue of about $5.058 million, foreign ships accounted for about 78 percent, increasing their share from 60 percent in 1986.
3.32 Due to a marked reduction in the national fleet following the implementation of more liberal policies, the government adopted a new law in 1997. A new registry was set up, only available for vessels entitled to fly the Brazilian flag, which grants registered ships tax benefits that discriminate against foreign operators. The 1997 law also allows for coastal and inland shipping when foreign vessels are chartered by Brazilian shipping companies. In addition, Brazilian maritime operators benefit from certain government procurement preferences.
3.33 Brazil’s international road transport regime seems to be more restricted. The Agreement on Terrestrial Transport between Argentina, Bolivia, Brazil, Chile, Paraguay, Peru and Uruguay of 1990 details the conditions of market access for service providers from these nations. Carriers are free to provide international road transport services, provided they have obtained an original license (from their home authorities) and a complementary license (from the authorities of the trading partner). The Agreement establishes that cargo and passengers will be allocated pursuant to bilateral agreements and on the basis of reciprocity. Brazil applies bilateral quotas in accordance with the 1990 Agreement. As is the case for maritime transport services, foreign transport service providers are not permitted to offer local transport services; that is, they have no cabotage rights. This restriction may limit operators’ ability to exploit economies of scope in designing service networks.
3.34 An important aspect of the 1990 Agreement is a rule of origin, according to which carriers must have more than half of their voting shares in the hands of nationals of the country that issues the original license. In the case of Brazil, as explained before, the constitution does not differentiate between Brazilian firms of national and foreign capital. Accordingly, a normative instruction by the Road Transport Department of the Land Transport Secretariat clarifies that in the case of Brazil what really applies is the need to be legally constituted in accordance with the legislation in force. Hence, all transport firms established in Brazil, irrespective of ownership and control conditions, qualify for application of the provisions of the 1990 Agreement on Terrestrial Transport.
3.35 International air transport services are governed by Brazil’s bilateral air service agreements (ASAs) with 63 countries. Most ASAs are quite restrictive in the sense that they heavily regulate capacity, tariffs, and the airlines that are allowed to fly on bilateral routes. In 1996, Brazil, Argentina, Bolivia, Chile, Paraguay and Uruguay signed a Sub-Regional Air Services Agreement, known as the Fortaleza Agreement. The Agreement, ratified in 1998, provides for flexibility in reciprocity provisions and the expansion of regular sub-regional air services to routes other than those provided for in bilateral agreements.
3.36 Brazil’s foreign investment regime in the transport sector can also be characterized as partially liberalized, with important remaining explicit barriers. In maritime transport, foreign equity in carriers is limited to 40 percent. Moreover, to carry the Brazilian national flag, shipping enterprises must be nationally incorporated and managed, and two-thirds of the crewmembers must be Brazilian nationals. The provision of cargo terminal and other port services saw substantial liberalization in the 1990s, in the form of concessions of terminal operations to the private sector. Foreign firms are allowed to bid for terminal concessions, provided they have a
202 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS legal representation in Brazil, facing no limitations on foreign ownership. Investment policy is substantially more restrictive in road and air transport. In the former, foreign companies must be organized as a joint stock company and are not allowed to own more than 20 percent of the capital stock. In the latter, foreign investment may be approved by the Department of Defense on a case-by-case basis, but is always limited to 20 percent of voting and 25 percent of non-voting shares. Moreover, all airports are publicly operated, with no private sector participation. The relatively closed foreign investment regime in the transport sector is likely to be a key factor in explaining the small amount of inward FDI the sector has seen in the 1990s (see Table 2.3).
3.37 Transport services are a sector where little has been achieved in the context of international trade agreements. Brazil’s commitment under the GATS in road freight transport bound its actual policy of limiting foreign ownership to 20 percent, but all other modes of service supply remain unbound. There are no commitments for maritime and air transport services. No commitments on maritime, road, and air transports have been made under the MERCOSUR Agreement.
3.38 A second major group of services beset with explicit trade barriers—although not allocated on a preferential basis—are audiovisual services. A 1993 law grants tax benefits to Brazilian audiovisual works, which are, however, also extended to foreign-owned firms that are established in Brazil. The law thus discriminates against the cross-border provision of audiovisual services. The law also requires that the production and adaptation of foreign audiovisual works be undertaken under contract with a Brazilian firm and that at least one third of artists and technical personnel be Brazilians. Quantitative limitations apply to video distribution services, where firms are required to have a minimum percentage of Brazilian titles in their stock. The copying and reproduction of original cinematographic works must be done in facilities located in Brazil. Moreover, movie theaters must feature Brazilian films for a certain minimum number of days per year.
3.39 In the area of radio and television transmission services, the provision of sound and image broadcasting services is confined to firms that are owned and controlled by Brazilian citizens. Broadcasting companies can only employ technicians who are Brazilian citizens or foreigners who have exclusive residence in Brazil, and reserve management posts to Brazilian professionals. The legislative framework also establishes a best endeavor provision, according to which sound and image broadcasting firms shall reserve up to 20 percent of their programs for independently produced Brazilian audiovisual works. Cable TV services are subject to the granting of concessions, following the general rules detailed in the legislation on telecommunications. In order to qualify for the bidding process, at least 51 percent of the voting stock of a firm must be in the hands of Brazilian citizens or the seat of the firm must be in Brazil with control under Brazilian citizens. In addition, cable TV operators must make available at least one channel exclusively devoted to the broadcasting of independently produced Brazilian cinematographic and audiovisual works.
3.40 There is the possibility of preferential treatment in obtaining access to telecommunications services necessary for the provision of radio and TV programs. The General Telecommunications Law of 1997 foresees that the granting of access to telecom services necessary for the provision of radio and TV programs is based on reciprocal treatment of Brazilian firms in partner countries.
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3.41 Brazil has not scheduled any commitment for audiovisual services under the GATS Agreement.29
3.42 Explicit restrictions to services trade can also be found in construction services. Foreign entry can take the form of commercial establishment in Brazil, in which case the supplying firm must have a “responsible engineer” or architect who is a permanent resident of Brazil. Alternatively, foreign providers can form a consortium with a Brazilian partner, in which case they are required to transfer technology to the Brazilian partner during the duration of the services contracted. Notwithstanding these requirements, Brazil is committed to unrestricted foreign commercial presence under the GATS Agreement, whereas the other modes of service supply remain unbound.30
3.43 Finally, the provision of professional services by foreign natural persons in Brazil is constrained by the requirement that firms supplying professional services must maintain a ratio of at least two Brazilian nationals to three employees. This rule does not apply to service professionals from MERCOSUR countries in certain professions. Besides this rule, there are no explicit restrictions to the provision of professional services by foreigners. As we shall see in the second part of the chapter, however, the foreign supply of professional services is greatly affected by regulatory measures. Under the WTO, Brazil only made partial commitments with regard to the commercial establishment of professional services firms. Commitments that are more far- reaching exist under MERCOSUR, where additional professional services are scheduled, and, in some cases, national treatment is fully liberalized across modes.
The laggards
3.44 Finally, relatively few services sectors are explicitly shut to foreign participation. In fact, these are sectors, where domestic reform has not yet taken off and public monopolies persist. The two most prominent sectors in this regard are reinsurance services, which are exclusively provided by Brasil Resseguros (IRB), and postal services, which are solely provided by the Brazilian Enterprise of Post and Telegraphs (ECT). Attempts to privatize these state-owned monopolies and open service markets to domestic and foreign entrants have been delayed and the prospect of change before the 2002 election appears remote.
3.45 Brazil’s reaffirmed the monopoly of IRB in its GATS schedule, but promised to undertake commitments regarding commercial presence after the establishment of a domestic legislative framework for foreign entry in reinsurance. No commitments were made in the case of postal services. The MERCOSUR commitment mirrors the GATS commitment.
THE REGULATORY CONTEXT
3.46 Due to the nature of many service industries, the regulatory regime has a profound impact on market access by foreign providers. In this second part, we take a closer look at the principle regulatory measures, in order to assess how these measures may dilute or promote the degree of openness of Brazil’s service industries. We briefly review the institutions and instruments in place to address market failures and promote universal service—although it is beyond the scope of this study to provide a comprehensive evaluation of the adequacy of existing regulatory instruments to achieve certain economic or social objectives. It is important to point out that
29 Commitments on audiovisual services under MERCOSUR are unavailable. 30 Commitments on construction services under MERCOSUR are unavailable.
204 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS virtually all regulatory measures described in this section to do not explicitly discriminate against foreigners—they apply equally to firms or individuals of Brazilian or foreign national origin.
Promotion of competition in intermediate or final service markets
3.47 One key area of regulation is the promotion of competition in service industries where certain firms own essential facilities or where, due to technical or physical limitations, the number of service providers is small. Access to essential facilities—defined as facilities that are exclusively provided by a single or limited number of operators and that cannot feasibly be substituted in order to provide a service—at competitive terms is of special relevance to foreign entrants, who, for example, need to rely on already established networks in telecommunications or on existing roads, sea and airports in providing transport services.
3.48 Regulatory intervention typically takes the form of guaranteed access rights as well as the regulation of prices or rates-of-return of monopolistic service providers. As part of its comprehensive reform program in the area of telecommunications, Brazil created an independent regulatory agency (ANATEL), which is responsible for establishing interconnection prices among fixed and mobile operators, as well as the regulation of retail tariffs. It also establishes and enforces network quality standards, which assure consumers of minimum level of service guarantees in cases where the choice of telecommunications operators is limited.
3.49 In transport, the regulatory promotion of competition is most critical in the area of seaport services, especially in ports, where only a few terminal concessions were granted—either because of limited space or insufficient traffic volumes. Regulatory functions are exercised mainly by the dock companies (owned by the federal states), but also by the port council (which is made up of representatives from the federal and state governments, port employers, port employees and port users). Port tariffs, which are determined on a terminal-by-terminal basis, are set by the dock companies, but must be approved by the port council. Industry observers have pointed out that overlapping regulatory responsibilities impede the attainment of greater efficiency in the sector.
Protection of consumers where there are informational problems
3.50 The second important area of regulatory market intervention stems from the existence of asymmetries of information between buyers and sellers of services. In the area of banking services, market participants cannot easily assess the soundness of banks and insurance companies, giving rise to prudential supervision and other regulatory interventions designed to ensure the stability of the banking system. In Brazil, all regulatory and supervisory functions are exercised by the Central Bank, which has adopted procedures that must be followed by financial institutions that operate in the national market. Prudential measures and licensing requirements are in line broadly with international trends, emphasizing transparency, capital adequacy, and efficiency in the administrative process. Similarly, prudential regulations in the insurance sector, exercised by the National Council for Private Insurance (CNSP) and the Superintendence for Private Insurance (SUSEP), broadly track international practices.
3.51 Asymmetries of information also provide the main rationale for the regulation of professional services: consumers of legal, medical, accounting, architectural and other professional services may not be in a position to judge whether the service supplying firm or individual is adequately qualified or trained. In Brazil, the main regulators of professional services are the Regional and Federal Councils. The functions of these two Councils are complementary. While the Federal Councils put forward directives and coordinate the activities
205 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY of each of the professions, the Regional Councils are responsible for the administration, registering, supervision and other activities related to the coordination of the profession and of professionals in their own geographical jurisdictions.
3.52 Practicing a particular profession typically requires registration with the councils, which, in turn, is linked to certain educational achievements or the passing of professional proficiency exams. For selected professions, special regulations exist for foreigners. Thus, professionals seeking to provide international legal services must pass a law examination, provide proof of good conduct in the home country, endorsement by three Brazilian lawyers, and the guarantee that the country of origin of the foreign lawyer provides equal treatment to Brazilian nationals. For other professional services, such as medical services, registration by foreigners requires proof of proficiency in Portuguese.
3.53 Industry observers have pointed out, however, that the overall regulatory regime for professional services in Brazil is outdated and, in most cases, lacks specific provisions for the supply of services by foreign natural or juridical persons, which typically exhibit different attributes in terms of training and experience. These inadequacies lead to an unpredictable policy environment. Regulatory objectives may also be undermined, because the provision of services by foreign providers could escape monitoring by the Federal and Regional Councils and, in some cases, clandestine practices reportedly occur.
3.54 Safety standards in transportation are also motivated by asymmetric information: air travelers are not in a position to judge the technical safety of an aircraft. The establishment and enforcement of transport safety regulations in Brazil rests with the respective ministerial agency, which oversees a particular mode of transport.
Externalities
3.55 The problem of externalities arises when market prices do not fully capture the costs and benefits of the associated transactions. Thus, safety standards in transport services can also be justified by externalities: unsafe vehicles endanger others. Another example of a negative externality is the use of the radio frequency spectrum by private parties. Simultaneous use of one radio frequency by several parties creates congestion, providing the rationale for ANATEL’s management authority over the radio spectrum. Environmental regulation in transportation, tourism, and construction is also justified by the existence of negative externalities.
Universal service
3.56 Aside from addressing market failures, regulatory intervention may also be designed to achieve certain non-economic objectives. In particular, the promotion of universal service has been established as a desirable goal in a variety of service sectors. The objective is to make essential services such as telecommunications, public transportation, finance, and others available at affordable prices to low income segments of the population as well as to rural areas of the country. In telecommunications, universal service is advanced through detailed network buildout obligations specified in service licenses. Moreover, a universal service fund—financed mainly by a one percent tax on the gross revenues of operators—was established by ANATEL in 2000, which subsidizes the installation of public telephones as well as the provision of telecommunications and Internet services in schools and libraries.
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Chapter 4. Case Studies on Brazil’s Services Exports
4.1 The analysis of Chapter 2 revealed that Brazil exhibits an overall comparative disadvantage in cross-border trade in services. Yet, in selected industries, Brazil has emerged as an important exporter of services and is looking to expand exports to existing or new trading partners. In this chapter, we take a closer look at three industries that were a priori identified as holding significant export potential: construction services, audiovisual services and software services. The objective of the three case studies is twofold. First, we review available evidence on existing export patterns. Second, we identify any barriers to trade that Brazilian exporters face in foreign markets.
4.2 The main findings that emerge from the case studies are the following:
• Balance of Payments (BOP) data give a highly incomplete picture of existing export patterns in the industries considered, especially with regard to construction services and audiovisual services. More research is necessary to complement BOP data with industry studies that provide additional information on exports through commercial establishment and the movement of services personnel.
• In the industries considered in this Chapter, Brazil is constrained by relatively few explicit barriers in its export markets. The most relevant barriers pertain to limitations on the movement of Brazilian services personnel. At the same time, policy regimes in trading partners are not always transparent and bound by a WTO commitment, raising the concern that discriminatory barriers may be imposed at some point in the future.
• Brazil’s presence in foreign countries is affected by a variety of regulatory measures, especially in construction services. Exporters may therefore benefit from increased regulatory cooperation in the form of simplified and harmonized standards as well as the elimination of excessively burdensome re-qualification requirements.
4.3 The next three sections review export patterns and external barriers for each of the three industries considered, using BOP data, evidence from interviews with industry executives, studies in export markets and the WTO commitments made by Brazil’s trading partners.31 The fourth section draw attention to other sectors where Brazil may benefit from the removal of import barriers in foreign countries and identifies important questions for future research.
CONSTRUCTION SERVICES
Existing export pattern
4.4 Obtaining a clear picture of the magnitude of exports of construction services is difficult, for two main reasons. First, the BOPs category “construction services” is defined to include the implementation and installation of engineering projects, as well as the implementation and installation of industrial projects and other assembly orders. However, other categories in the BOPs may well correspond to exports of services related to construction. Thus, the category 'architectural, engineering, and other technical services' includes transactions covering planning,
31 The interviews were conducted by Lia Valls Pereira and Galeno Ferraz between November 2001 and January 2002.
207 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY project design, and supervision of dams, bridges, airports, and turnkey projects. Chapter 2 already illustrated the dramatic increase in export revenues of architectural, engineering, and other technical services in the late 1990s, reaching $1.5 billion in 2000.32 The second difficulty in measuring construction services arises from the fact that services are frequently supplied through commercial establishment abroad, which goes unregistered in the BOPs statistics.
4.5 Construction services, as recorded by the BOP, increased from $7 million in 1996 to $96.2 million in 2000. During 1999/2001, around 75 percent of the receipts of the construction sector came from assembly orders and practically all the remaining receipts from engineering projects (Table 4.1).
Table 4.1: Brazil’s exports of construction services, 1999-2001
Mio $ (%) Industrial projects 0.32 0.3 Engineering projects 30.36 25 Assembly 90.86 74.8 Total construction 121.53 100 Note: Figures shown refer to total exports between 1999 and the first six months of 2001. Source: Balance of Payments Statistics, Central Bank of Brazil.
Table 4.2: Main destinations of construction services exports, 1999-2001 By country (%) By region (%) Germany 74.3 European Union 74.8 Republic of Korea 8.8 NAFTA 3.9 Cayman Islands 7.9 MERCOSUR 0.6 USA 3.9 Other South America 0.0 Bahamas 1.8 Other 20.6 Argentina 0.6 Total 100.0 Sweden 0.2 Singapore 0.2 Panama 0.2 Other 0.4 Total 99.6 Note: Figures shown refer to total exports between 1999 and the first six months of 2001. Source: Balance of Payments Statistics, Central Bank of Brazil.
4.6 As for the geographical composition of trade, exports of construction services are highly concentrated in the European Union (74.8 percent), as indicated in Table 4.2. This export pattern contradicts, however, anecdotal evidence emerging from interviews with Brazilian construction firms, which suggest a much larger share of Latin American markets and the United States (see below). It may be explained by differences in modes of supplying foreign markets, with a greater weight on temporary presence rather than establishment in the case of the European Union.
32 In addition, the category “other services” under miscellaneous business, professional and technical services covers, among other things, payments for local supplies by non-resident enterprises engaged in construction services. This category also shows substantial Brazilian export values, amounting to more than $1 billion in 2000.
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4.7 More research is necessary to better understand recording conventions under the BOP for construction and related services and, where possible, to complement BOP data with industry sources that provide additional information on exports supplied through commercial establishment.
Barriers encountered in foreign markets
4.8 A first impressionistic view of trade barriers that Brazilian exporters of construction services may encounter in foreign markets can be obtained by inspecting the commitments in this sector of important trading partners under the GATS Agreement. The Table in the Annex to this chapter summarizes these commitments for the two most important construction services and for engineering services, the latter often being supplied with construction services in an integrated manner. A few interesting facts emerge. First, the United States, Venezuela, and Japan do not maintain any explicit barriers on services supplied by foreigners through commercial establishment, whereas cross-border supply and the movement of natural persons remains unbound under the GATS. The absence of any commitment under the last mode of supply is important, as it may affect the ability of foreign construction firms to use their own labor in the implementation of projects. The commitments of the European Union and Canada are even more restrictive, as there are additional limitations to market access and national treatment when services are supplied through commercial presence. Chile and Bolivia did not make any commitments on construction-related services.33
4.9 Interviews with executives of the Brazilian construction sector present a mixed picture regarding the extent to which Brazilian exporters face barriers abroad, but the overall impression is that foreign trade barriers represent a relatively minor constraint in firms’ international business operations.
4.10 In Latin American countries, a common requirement is forming partnerships with local firms. In Ecuador, local firms must participate in government contracts according to the share of financing by the Ecuadorian government in the project; but this rule is not applied when the major source of financing is an international organization. Brazilian firms face similar conditions in other parts of the world. In Uruguay, a market reservation for local firms pertains to “small projects.” Again, this is not the major market for Brazilian firms. In Venezuela, government procurement policies state that if local and foreign firms offer equal competitive conditions, the contract must be given to the former. Interviews suggest that the barriers in developed countries are perceived as more binding, but difficult to identify in clear legal terms. For example, in the United States, projects signed by foreign engineers must fulfill various requirements, which are different depending on the American State Federation. This means extra transaction costs and associations with local firms are necessary. Another barrier relates to requirements on the use of equipment in the project. In most cases, the equipment imported must be approved by American government agencies, which reportedly demand lengthy and expensive procedures. Equipment that does not undergo this process can be accepted, but implies higher insurance costs.
4.11 Heavy regulatory requirements explain why the engineering construction firms choose commercial presence as their preferred mode of entry in world markets. According to the executives of the largest Brazilian construction firm, two business strategies predominate. One is
33 In a communication to the WTO Council of Trade in Services, Brazil has proposed the Members make deeper commitments, eliminate restrictions on market access and national treatment in those sectors, and address the issue of trade distortive subsidies in the context of developing horizontal disciplines on subsidies under GATS Article XV (WTO, 2001a).
209 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY to establish an affiliate in the export market country, possibly combined with associations with local firms. The other is to buy a local firm.
4.12 Finally, a relevant barrier affecting Brazilian exporters pertains to the employment of the workforce. It would seem that these barriers force Brazilian firms to rely on more expensive local workers in developed countries rather than on temporarily bringing their own workforce. However, none of the industry executives identified this as a serious barrier.
4.13 Today, the main markets for Brazilian firms are Latin American countries, African countries, Portugal and the United States. Despite the existence of foreign barriers, the interviews with Brazilian executives suggest that weak presence in certain foreign markets is often due to insuperable competitive advantages of local firms, in the form of economies of scale or better financing facilities. Thus, Brazilian presence in Portugal is explained by the lack of big indigenous firms in the sector. In some African countries, high political risks have kept out the big companies of developed countries. Political risk guarantees by the Brazilian government are thought to have played a supportive for Brazilian exporters in these cases. In the case of the United States, the large size of the market allows the presence of a greater number of foreign firms, though their market share is relatively insignificant. Brazil’s strong presence in Latin America is explained by geographic proximity, better knowledge of the local market and cultural habits, and better facilities to exchange business interests, all of which can help obtain a contract.
4.14 The fact that interviews point to a relatively minor role of foreign trade barriers in Brazilian firms’ export activities, may be partially explained by the fact that they are considered a “normal feature of business,” existing also in Brazil. Eliminating some of the existing barriers on labor movement in developed countries, for example, may be regarded as infeasible and may therefore have received little attention by businessmen.
Internal constraints
4.15 The interviews with industry executives suggest that internal barriers represent a relatively greater constraint in expanding services exports. In the past, government procurement policies in the Brazilian case were important in stimulating the national construction sector in the country. Infrastructure building projects (railways, energy, amongst others) implemented by the government were given to Brazilian firms. In the 1970s, some Brazilian firms began to work in foreign markets—primarily in Latin America, Africa, and the Middle East, where local firms did not have sufficient expertise in the construction of large projects. The Brazilian government supported these activities by providing special financing lines. In addition, the development of strong diplomatic ties with the countries of these regions was closely linked to the strategy of promoting Brazilian services exports. Since then, the business environment for the construction sector has changed significantly, evolving towards greater openness (in part promoted by international trade agreements), greater involvement of the private sector in the supply and management of infrastructure services, and a larger role of private investment banks and big institutional funds of developed countries in financing construction projects.
4.16 The interviews uniformly highlighted that the key issue in defining competitiveness in this new environment is financing, especially in the context of medium and long-term transactions. Interviews reveal that in Latin America, financing becomes a crucial element for contracts valued more than $100 million. One firm indicated a joint venture with an Italian firm was successful in African countries, in part because the Italian firm had good access to financing facilities. Executives of the construction and insurance sector point to the need for a new
210 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS
approach to support Brazilian construction firms. The Government still has an important role to play as one of the providers of export finance and insurance guarantees. However, projects need to encompass a greater number of agents, such as the private insurance and banking system, as well as multilateral lending institutions and the governments of the target countries.
AUDIOVISUAL SERVICES
Existing export pattern
4.17 Exports of audiovisual services, like construction services, are difficult to measure, partly because the BOPs classification does not establish a unique category for this industry and partly because services trade may involve commercial establishment abroad. One relevant component of the BOPs relates to international transactions in “motion pictures and tape record rentals.” The export receipts registered under this component in Brazil are modest, just US$0.86 millions between 1999 and the first semester of 2001. As shown in Table 4.3, the overwhelming share (91.4 percent) of exports went to the U.S. markets, with European Union countries recording only a modest share (5.2 percent).
4.18 Exports of audiovisual services also show up in the BOP category “royalties and license fees.” The most relevant sub-category in this regard is income generated through the sale of copyrights abroad, which amounted to $48.3 million dollars in 1999/2001, representing 14.9 percent of all receipts of royalties and license fees (Table 4.4). As in the case of construction services, more research is necessary to complement BOP data with industry studies that would provide a more complete picture of Brazil’s exports of audiovisual services.
Table 4.3: Main export destinations of motion picture and tape record rentals, 1999-2001 By country (%) By region (%) USA 91.4 NAFTA 91.4 Portugal 4.1 European Union 5.2 Panama 1.6 Other South America 1.2 Venezuela 1.0 MERCOSUR 0.0 Austria 0.8 Other 2.2 Netherlands Antilles 0.3 Total 100.0 France 0.3 Japan 0.2 Colombia 0.1 United Kingdom 0.1 Others 0.0 Note: Figures shown refer to total exports between 1999 and the first six months of 2001. Source: Balance of Payments Statistics, Central Bank of Brazil.
Table 4.4: Brazil’s receipt of royalties and license fees, 1999-2001 Mio $ (%) Copyrights 48.3 14.9 Other expenses 1.8 0.6 Franchise 1.2 0.4 Trade-mark 16.8 5.2 Patents 0.4 0.1 Technology supply 26.2 8.1 Technical assistance 17.1 5.3 Registers, deposits for trade-marks, patents 212.7 65.5 Total 324.5 100.0 Note: Figures shown refer to total exports between 1999 and the first six months of 2001. Source: Balance of Payments Statistics, Central Bank of Brazil.
4.19 Since the 1970s, Brazilian audiovisual products, in particular the so-called telenovelas (or soap operas), have proved successful in a large number of foreign markets. Building on these successes, the major producer, the Globo TV network, decided in the early 1990s to have a more
211 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY active role in international markets. An important step in this regard was a contract signed in 1993 with SIC—Sociedade Independente de Comunicações—a new Portuguese TV channel that was created in the process of opening the Portuguese TV network markets to the private sector. Portugal became the main market for audio-visual products of Globo. In 1999, 70 per cent of all Globo external sales came from this country, although the telenovelas are sold to more than 70 countries around the world.
4.20 In addition to Europe, the main markets for telenovelas are Latin American countries and the Spanish-speaking market in the United States. The later market alone is associated with advertising revenues of $1.5 billion in 2001, corresponding to about one third of the entire Box 4.1 Barriers to Brazilian exports of television Brazilian advertising market. In April 2001, programs in Portugal, Spain and Italy Globo entered into a partnership with Demand for Brazilian television programs, in particular Globo’s telenovelas, in the European Union Telemundo, one of the major Spanish-speaking increased substantially in the past two decades due to the television networks in the United States. Over opening of European television markets to private entrants the next 5 years, Globo will deliver a given and the associated increase in advertising financing. Due to close cultural affinities, Portugal proved to be the most annual volume of programs. Telemundo has important market for the telenovelas, but they have also first rights to Globo’s international programs in established themselves in Italy and Spain. What kind of barriers do Brazil’s audiovisual exports face in these the United States. countries? National policy regimes in the European Union are governed 4.21 Selling of programs is not the only by the Television Without Frontiers (TWF) Directive, product of Globo. A second key product is the adopted by the Council of the European Community in 1989. This directive opened intra-EU trade in audiovisual services, International TV Globo Channel. This channel while, at the same time, establishing a 51 percent quota for is directed to Brazilians living abroad and is sold European works—designed to promote the creation of an by Globo to providers of pay TV. It has independent European broadcasting industry. However, the directive allowed flexibility in the implementation of the established a presence in Africa, Australia, quota, only requiring member states to implement them Japan, Latin America, the United States, and “where practical and by appropriate means.” Where the 51 percent quota cannot be achieved, the TWF directive only soon in Europe. Today, the channel has about demands that it must not be lower than the average share that 100,000 subscribers and the aim is to reach existed before the directive came into force. 500,000 over the next 3 years. In the case of Portugal, the television law of 1990 requires broadcasters to devote 40 percent of their broadcast time to Portuguese spoken programs, of which 30 percent should be Barriers encountered in foreign markets of Portuguese origin. These thresholds are lower than those established by the TWF directive and primarily pertain to 4.22 Restrictions on the provision of programs in foreign languages (i.e., not the Brazilian telenovelas). Spain opted for a similarly flexible audiovisual services are pervasive throughout implementation of the TWF directive. The 1994 law adopted the developed and developing world, often the quota system of the directive. In practice, however, the justified by the desire to protect and promote the Spanish authorities have not enforced the quotas and, indeed, several television channels have not observed them. The national culture. The unwillingness to commit situation is similar in Italy, where the 1998 law adopted the to an open trading regime is illustrated by a TWF quota system, but various TV networks continue to have glance at WTO commitments in the area of radio a majority of foreign works in their programs. and television services (see annex tables). Only the United States has bound its liberal market access and national treatment regime under the GATS, whereas all other countries considered chose to not make any commitments in this sector.34
34 In a communication to the WTO Council, Brazil has proposed to make specific commitments in audiovisual services, giving special attention to services in which developing countries have greater potential, such as television. In recognizing national policy objectives of promoting and preserving cultural identity and diversity, as well as the oligopolistic structure of certain audiovisual markets, Brazil has called for a simultaneous debate on subsidy schemes and trade defense and competition measures. See WTO (2001b).
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4.23 Interestingly, however, interviews with executives responsible for the international strategy of the Globo TV network unanimously indicate that external barriers are a minor constraint in selling audiovisual products to foreign markets. To be sure, policies favoring domestic productions exist in virtually all export destinations, including the United States, Japan, Europe, and Latin America. Restrictive measures typically include limitations on foreign equity ownership in domestic TV networks and market reservations for local or regional productions. For example, in Argentina, Chile, Colombia, Mexico, Uruguay, and Venezuela, a minimum share of TV time, ranging from 40 to 80 percent, must be reserved for local productions. Box 4.1 summarizes audiovisual policies in Italy, Portugal, and Spain—markets that have substantial actual and potential export interests for Brazil.
4.24 Given so many barriers, why are they not regarded as impeding Globo’s international business operations? First, market reservation policies are frequently not enforced, especially in Latin America. Second, even where domestic content requirements exist, they typically do not apply to Brazilian exports. For example, in Portugal, Globo’s presence in the form of a joint venture implies that there are no restrictions affecting Globo’s products. In other European countries, joint ventures with local TV stations is also the preferred mode of entry not only because they circumvent the quota system, but they allow access to financing restricted to locally incorporated firms. Moreover, in France, Germany, Italy, Spain, and the United Kingdom, Globo’s telenovelas are unaffected by market reservation policies, which primarily apply to primetime television, where the soap operas play a relatively minor role.
4.25 Finally, in most foreign markets, Brazilian audiovisual products make up a tiny share of the market. They do not threaten local producers and thus do not provoke protective measures. Yet, in some foreign markets, foreign barriers may become more binding in the future— especially in countries where quotas are imposed in principle, but are not consistently enforced (see Box 4.1). If Brazilian exports were to expand significantly or if producers were to enter market segments in which quotas have a stronger presence, foreign trade barriers may become a greater concern for Brazil’s audiovisual industry.
SOFTWARE SERVICES
Existing export pattern
4.26 International trade in software services is recorded under the BOP category computer and information services. However, recorded transactions are likely to be incomplete, since software services are often delivered through the movement of individual service suppliers. Although some data are available on BOP transactions related to labor income and remittances, these data are not broken down by industry, precluding an assessment of how important this mode of service supply is in the case of Brazil.
4.27 Total exports of computer and information services increased at an annual rate of 57.7 percent between 1996 and 2000, amounting to $34 million in 2000. However, software only explained around 12.2 percent of these exports in 1999-2001, with information services accounting for the remaining portion (Table 4.5).
4.28 Table 4.6 presents the regional decomposition of software service exports, which shows that the United States accounts for more than half of Brazil’s exports (64 percent), followed by other countries in Latin America (14.4 percent) and the European Union (12.5).
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Table 4.5: Brazil’s exports of computer and information services, 1999-2001 Mio $ (%) Software 3.1 4.9 Custom Software 4.7 7.3 Information 56.1 87.8 Total 63.9 100 Note: Figures shown refer to total exports between 1999 and the first six months of 2001. Source: Balance of Payments Statistics, Central Bank of Brazil.
Table 4.6: Main destinations of software services exports, 1999-2001 By country (%) By region (%) USA 64.0 NAFTA 70.4 Uruguay 9.0 MERCOSUR 12.6 Mexico 6.1 European Union 12.5 United Kingdom 4.0 Other South America 1.8 Argentina 3.6 Other 2.7 Bahamas 2.1 Total 100.0 The Netherlands 2.1 France 1.7 Spain 1.4 Germany 1.2 Others 4.9 Total 100.0 Note: Figures shown refer to total exports between 1999 and the first six months of 2001. Only software and custom software exports are included. Source: Balance of Payments Statistics, Central Bank of Brazil.
4.29 The balance of payments data, however, significantly understate actual exports of software services. A 1998 study on the Brazilian software sector conducted detailed firm surveys, which suggested export earning of $34.5 million in 1995 (as opposed to $0.3 million reported in the BOP).35 The same study reported that 44 percent of software exports in 1997 went to MERCOSUR countries, followed by Portugal (20.9 percent), the United States (19.3 percent), and other Latin American countries (14.4 percent). In addition, a study by SOFTEX—an industry association that promotes Brazilian exports—suggests that one in three software producers in Brazil had some earnings in international markets in 2000, underscoring the importance of export activities in this sector.36
Barriers encountered in foreign markets
4.30 Software services face few explicit barriers in international markets, unless they are delivered through the movement of individual service providers. This is confirmed by an inspection of GATS commitments on computer and related services of selected trading partners of Brazil (see Annex to Chapter 4). In virtually all countries (except Bolivia and Chile), there are no limitations on market access and national treatment for cross border supply, consumption
35 See Ferraz Filho et al. (1998). 36 See Braga et al. (2000).
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abroad, and commercial establishment. But all WTO Members examined left the movement of natural persons unbound.37
4.31 A similar conclusion is reached by the SOFTEX study referred to above: foreign trade barriers did not feature prominently in firms’ perceived obstacles to software services exports. Instead, access to finance, lack of experience and information about foreign markets, language differences, high fixed costs of entry and quality issues were cited as the key constraints to greater involvement in international markets.
OTHER SERVICES
4.32 In this final section, we briefly draw attention to other areas of potential export interest to Brazil and identify certain questions that deserve careful analysis in future research.
4.33 In a communication to the WTO Council for Trade in Services, the MERCOSUR countries have proposed the deepening of specific commitments in the distribution sector, particularly in wholesale trade services, retailing services and franchising services.38 Current restrictions in a number of developed countries may have adverse consequences for MERCOSUR’s exports of agricultural products and certain industrial goods. For example, if these restrictions lead to concentrated distribution markets, foreign distributors may have monopsony power vis-à-vis exporting firms or they may establish exclusive contracts with exporters from third countries, which may temporarily or permanently divert trade. Foreign liberalization—in particular the removal of existing sectoral exclusions in current GATS commitments—would allow firms to implement more comprehensive export strategies by establishing wholly-owned supply chains or alliances with foreign distributors in order to improve access to external markets.
4.34 A similar consideration applies to tourism services, for which the MERCOSUR countries also called for deeper market access and national treatment commitments under the GATS.39 Exports of tourism services are greatly influenced by the relationship of local service providers with tour operators and travel agents that sell integrated tourism packages to final consumers. Concentrated markets for travel agency services or the inability of local service providers to establish close vertical ties with travel agents abroad may negatively affect a country’s ability to expand its exports of tourism services. Research is needed on the degree to which these considerations apply to Brazil.
4.35 Financial services are another area where Brazil has a growing interest in markets in Latin America and other parts of the world. For example, Itaú—Brazil’s second largest bank— has emerged as the fourth largest banking institution in Argentina. It originally entered the Argentine market to supply export finance services, but later bought local banks to expand into the retail market. In countries with large Brazilian expatriate communities, such as Japan, banks such as Banco Brasil have sought to develop products tailored to their needs. Anecdotal evidence suggests that Brazilian banks may face regulatory impediments in foreign markets.
37 The Members of MERCOSUR, in a submission to the Council for Trade in Services, have proposed the deepening of liberal market access and national treatment commitments in this sector, with a view to increase the participation of developing country WTO Members in world services trade (WTO, 2001c). 38 See WTO (2001d). 39 See WTO (2001e).
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Table 4.7: Main destinations of receipts from professional player transfer fees, 1999-2001 By country Mio $ (%) By region Mio $ (%) USA 69.7 22.5 European Union 205.7 66.4 Italy 60.4 19.5 NAFTA 71.2 23 France 39.0 12.6 ME R C O S U R 18.3 5.9 Other South Germany 35.0 11.3 America 0.3 0.1 Spain 34.4 11.1 Other 14.2 4.6 Portugal 20.1 6.5 Total 309.8 100 Uruguay 16.7 5.4 Japan 9.9 3.2 The Netherlands 9.3 3 United Kingdom 6.2 2 Other 9.0 2.9 Total 309.8 100 Note: Figures shown refer to total exports between 1999 and the first six months of 2001. Source: Balance of Payments Statistics, Central Bank of Brazil.
4.36 Finally, Brazil’s “export” of soccer talent is affected by limitations on the number of foreign players in foreign soccer leagues. Table 4.7 presents export figures from the balance of payments, which indicates substantial receipts from professional player transfer fees, predominantly from countries of the European Union. To the extent that the employment of Brazilian nationals in foreign soccer clubs is temporary, it is considered services trade and falls under the rules of trade agreements in services. In the European Union, the well-publicized Bosman verdict by the European Court of Justice in 1995 removed restrictions on the intra-EU movement of soccer players. However, European soccer leagues still maintain restrictions on the number of players that are not citizens of the extended European Economic Area. For example, in Spain, England and Italy the limit is currently set at 3 foreign players.
Chapter 5. The Economics of Regional Agreements in Services
5.1 There is a large literature on the costs and benefits of integration agreements on trade in goods, and hardly any analysis of the implications of such agreements in services.40 The question arises: is trade in services so different that we need to modify the conclusions reached so far in the realm of goods? In particular, what would happen if Brazil liberalized services trade faster in the bilateral, regional, or hemispheric context than at the multilateral level? And if Brazil were to obtain preferential access to, say, the U.S. or EU agricultural markets, would the benefits justify granting preferential access in services to the U.S. or EU?
5.2 We recognize that the choice of integration strategy may be determined primarily by political considerations (World Bank, 2000a). There is, nevertheless, a need for an assessment of
40 One recent paper, Baier and Bergstrand (2001), does seek to examine the implications of a free trade agreement (FTA) in services but the assumptions limit the value of the results. Services are assumed to differ from goods because they have higher or prohibitive transport costs—but strangely, only when transported across continents while transport costs are zero between countries on the same continent. Not surprisingly, continental FTAs in services are found to be desirable—a conclusion similar to the finding by Frankel, Stein and Wei (1995) for trade in goods. The only other difference examined between trade in goods and services is that the latter face a higher level of protection in services.
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the economic benefits and costs of alternative approaches to services liberalization. How such an assessment might be undertaken is the subject of this chapter. We do not seek to provide a comprehensive analysis of regional integration, but to highlight why the implications may be different in agreements involving services. While this chapter focuses on the integration choices faced by Brazil, the analysis is also relevant to other countries facing similar choices. We proceed in two steps.
5.3 The first part is concerned with the efficiency effects of unilateral policy choice in a particular services market, and addresses two questions: in its independent choice of services policy, is Brazil likely to improve upon the status quo by liberalizing on a preferential basis? And between preferential and non-preferential liberalization, which is likely to produce larger welfare gains?
5.4 The main conclusions are as follows:
• Compared to the status quo, Brazil is likely to gain from preferential liberalization of services trade at a particular point of time—as distinct from the more ambiguous conclusions emerging for goods trade. The main reason is that barriers are often prohibitive and not revenue generating, so there are few costs of trade diversion.
• As in the case of goods trade, non-preferential liberalization is likely to produce larger gains than preferential liberalization ceteris paribus. Non-preferential liberalization is superior because it does not in any way bias consumer choice, and allows consumers to import from the most competitive source.
5.5 The second part examines the economics of international cooperation and addresses the question: are there circumstances in which Brazil is more likely to benefit from cooperation in a plurilateral (or regional) forum than in a multilateral forum?
5.6 We find three main arguments in favor of a plurilateral approach:
• Participants in a plurilateral agreement may gain at the expense of the rest of the world either through improved terms-of trade in competitive markets or by shifting rents towards participants’ firms in oligopolistic markets—unless excluded countries retaliate by concluding similar agreements.
• More efficient bargaining is possible in a plurilateral context than in the multilateral context: there is less concern that outsiders will be able to free-ride on the reciprocal exchange of concessions than if there were a general MFN obligation. However, departures from the MFN principle may create inefficiencies due to increased uncertainty about the value of concessions.
• Regulatory cooperation may be more desirable among a subset of countries than globally. Ideally, countries choose their partners spontaneously sector by sector, depending on the costs and benefits of regulatory harmonization. But under certain circumstances, it may be desirable to choose partners ex ante in macro-agreements and then seek to deepen integration across sectors.
But there is an important general caveat to each of these three arguments:
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• The sequence of liberalization matters more than in the case of goods trade. In particular, the benefits of eventual non-preferential liberalization may be different if it is preceded by preferential liberalization. This is because location-specific sunk costs of production are important in many services, so even temporary privileged access for an inferior supplier can translate into a long-term advantage in the market. Thus, while the elimination of preferences may lead to a relatively painless switch to more efficient sources of goods supply, the entry of more efficient service providers may be durably deterred if their competitive advantage does not offset the advantages conferred by incumbency. These considerations are particularly relevant for Brazil, since it is likely to export mainly goods, and import many services.
THE ECONOMICS OF UNILATERAL POLICY CHOICE
Standard economics of preferences
5.7 The conventional analysis of regional agreements focuses on goods trade and emphasizes two main types of effects.41 The first are ‘trade and location’ effects. The preferential reduction in tariffs within a regional agreement will induce purchasers to switch demand towards supply from partner countries, at the expense of both domestic production and imports from non- members. This is trade creation and trade diversion. Governments will lose tariff revenue, and the overall effect on national income may be positive or negative, depending on the costs of alternative sources of supply and on trade policy towards non-member countries.
5.8 Furthermore, changes in trade flows induce changes in the location of production between member countries of a regional agreement. These relocations are determined by the comparative advantage of member countries, and by agglomeration or clustering effects. In some circumstances, they can be a force for convergence of income levels between countries. For example, labor-intensive production activities may move towards lower wage countries, raising wages there. In other circumstances, they can be a force for divergence. For example, industry may be pulled towards a country with a head- start or some natural advantage, driving up incomes while other countries lag.
5.9 The second source of economic change is ‘scale and competition’ effects. Removal of trade barriers is like a market enlargement, as separate national markets move towards integration in a regional market. This allows firms to benefit from greater scale, and attracts investment projects for which market size is important, including foreign direct investment. Removing barriers also forces firms from different member countries into closer competition with each other, possibly inducing them to make efficiency improvements. In sum, enlarging the market shifts the trade-off between scale and competition, and it becomes possible to have both larger firms and more competition.
Economics of preferences in services
5.10 The analysis of preferential agreements in services in which Brazil may participate requires an extension of conventional theory in two ways. First, since services trade often requires proximity between the supplier and the consumer, we need to consider preferences extended not just to cross-border trade, but also to foreign direct investment and foreign
41 This section draws on World Bank (2000a). A review of the standard economics of preferential agreements and new developments is to be found in Panagariya (2000).
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individual service providers. Secondly, preferential treatment could be granted not through tariffs (which are rare in Brazil’s services trade), but through discriminatory restrictions on the movement of labor and capital (e.g., in terms of quantity or share of foreign ownership), and a variety of domestic regulations, such as technical standards, licensing and qualification requirements. The consequences of preferential tariff arrangements are well understood. Do preferences through alternative instruments, impacting both on product and factor mobility, raise new issues?
5.11 The implications of preferential liberalization on factor mobility depend, first of all, on whether it is temporary, i.e., only for the fulfillment of a particular service contract, or relatively permanent. At one extreme, temporary preferential access for foreign consultants or construction companies is analogous to preferential liberalization of trade in products and can be expected to have similar effects. It is as if the service product were carried to the consumer by the supplier, after which the supplier returns home.
5.12 At the other extreme, an integration agreement could imply full integration of product and factor markets, as in the case of the European Union.42 In between, there may be permanent movements of individual suppliers (through migration) and capital (through foreign direct investment) but to a limited extent. This would imply a change in the factor endowments of participating countries—and the precise impact will depend on the specificity of the factors that move. The integration agreements that are being considered by Brazil are as ambitious as far as the product market is concerned, but less ambitious in terms of the implied liberalization of certain types of factor mobility, particularly relating to labor. Our discussion will, therefore, focus on the more limited types of agreements.
5.13 The manner in which privileged access can be granted by Brazil to some suppliers depends on the instrument of protection that it has in place (Chapter 3). For instance:
• Where Brazil imposes a quantitative restriction on the number of service providers or the quantity of services output, it could allocate a larger proportion of the quota to a preferred source. This Brazil already does in air transport services, where it resembles most other countries in allocating passenger quotas on a preferential basis; and in certain professional services, MERCOSUR countries are exempt from the proportional quota Brazil imposes on all other countries. There remains scope for preferential access in other sectors where Brazil has not liberalized fully, ranging from audiovisual services to maritime transport. In some cases, the legal basis already exists in the form of reciprocity requirements.
• Brazil could also relax restrictions on foreign ownership, type of legal entity, branching rights, etc., on a preferential basis. Today, Brazil maintains foreign ownership restrictions in various transport services and reserves the right to impose such restrictions in telecommunications services. Local incorporation is a requirement in a number of services ranging from banking to construction. Even though Brazil does not today grant any preferences with respect to these measures, it is conceivable that the requirements could be relaxed only for providers from a particular country. For example, under NAFTA, Mexico eliminated ownership restrictions on financial institutions established in
42 While, services trade policy at the multilateral level is likely to see a persistence of the asymmetric attitude to the two factors, temporary movement of individuals combined with relatively permanent movements of capital, a more symmetric attitude may be feasible at a regional level—witness, for instance, the experience of the European Union and Caribbean Community.
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the United States, so that non-U.S. institutions needed to establish in the United States to avoid the ownership limits.
• There could be discrimination through taxes and subsidies. But all firms established in Brazil are assured of national treatment, i.e., there is no discrimination against such firms even if they are foreign-owned. So there is no scope really for preferential treatment for some foreign providers post-establishment. However, there may be scope for discrimination with regard to cross-border delivery—e.g., today, Brazil charges a lighthouse fee for foreign maritime vessels that were reportedly waived for providers from some countries.
• Far more feasible is preferential treatment through domestic regulations pertaining to technical regulations, and licensing and qualification requirements. Today Brazil has few provisions for the recognition of foreign qualifications and licenses and it is likely that at least some of the re-qualification procedures are unnecessary. If these were waived only for some of the foreign providers who deserve to benefit, then de facto preferences would result. Similar regulatory preferences could arise in other sectors, ranging from transport to financial services. For instance, owing to the reciprocal recognition of the proof of solvency between the European Union and Switzerland, insurance companies that have their principal place of business in the territory of one of the contracting parties are not obliged to localize funds to a significant extent. The United States agreement with Canada eliminates the need for chartered accountants trained in these countries to duplicate all steps in the licensing process, and provides for abbreviated examination requirements.
5.14 Table 5.1 provides a Table 5.1: Measures affecting trade in services classification of the measures affecting Generating Not generating domestic rents domestic rents trade in services. Traditional trade Variable costs theory has focused on the impact of of foreign (1) (2) Cost- providers preferences when barriers are of type (1), increasing i.e., tariff-like instruments, or (5), i.e., measures Fixed costs of quantitative restrictions on sales, foreign (3) (4) providers essentially on cross border trade. We On number of wish to highlight three forms of Quantitative On final sales providers restrictions discrimination that seem particularly (5) (6) relevant to Brazil’s trade in services:
• Through variable cost-increasing protectionist measures that do not generate rents (“frictional barriers”) (2)—relevant for all modes but easiest to analyze for cross- border trade. • Through measures that affect the fixed cost of supply (3) and (4)—most relevant for commercial presence and easiest to analyze when cross-border trade is not feasible. • Through quantitative restrictions on the number of service providers (6).
Preferential access and frictional barriers
5.15 A large variety of measures that Brazil maintains can have the effect of increasing the variable costs of operation without generating (equivalent) rents. The problem is that it would not usually be correct to treat all the additional costs imposed on foreign services or service suppliers
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of conforming to local recognitions as a form of protection. It is necessary to distinguish between the regulatory burden imposed on the foreign supplier that is necessary to ensure the desired quality of the service and one that is excessive. For instance, the requirement in Brazil that foreign financial service providers incorporate locally (rather than enter as branches) obliges all entities to fulfill local capital and reserve requirements, which has the effect of increasing their costs of operation. It may be that the imposition of some but not all of these costs is justified— e.g., a part of the capital requirement could be fulfilled by the parent institution.
5.16 A variety of other measures can also have the effect of increasing variable costs of operation. One example is the excessive border formalities that impose a burden on international transport service providers.43 Another example of cost-increasing measures is local content requirements, such as the Brazilian stipulation that foreign firms use a certain proportion of local employees—if the foreigner would not freely do so. Restrictions on foreign ownership may also translate into a higher variable cost if such restrictions dampen the incentive of the foreign provider to improve performance, e.g., by transferring technology or improving management.
5.17 We illustrate the implications of preferential access by considering the relatively complex case where the preference is a consequence of selective recognition of foreign regulations pertaining to standards, qualifications or licensing. We can think of any standard as made up of two parts: a "universal" element, consisting of u units of quality, which is identical between countries, and a country-specific element equal to vi units—reflecting either the preference for a higher quality or a different variety. In some sectors, for instance in construction, financial and transport services, it is reasonable to presume that there is a high universal component to standards though there is usually also a country specific element. Within certain professional services, like medicine and engineering, the universal component is also likely to be high, whereas in other professions, like law and accountancy, the country-specific component is likely to be high.
5.18 Let us also assume that the cost of meeting a unit of the standard in country i is constant at ci. The variations in ci are meant to capture inherent advantages that certain countries have in certain areas. If a foreign provider wished to provide a service in country i, it would necessarily have to accept an increase in costs by civi. But it is possible that the first country also refuses to acknowledge the equivalence of the universal part of the standard, and insists on full re- qualification, implying costs ci(u + vi). In this case, ciu would be a measure of the excessive regulatory burden. More subtle forms of protection could involve understatement of the universal element u, and exaggeration of the country specific element vi. Preferential recognition agreements may exempt certain suppliers from incurring whole or part of these costs.
5.19 In situations where the impact of regulation is on variable costs, as is assumed here, the analysis of discriminatory regulation can proceed in a manner analogous to tariffs (see Annex A of this chapter). When tariffs are the instruments of protection, the costs of trade diversion for Brazil would be an important disincentive to conclude preferential liberalization agreements. Despite the increase in consumers' surplus from any liberalization, there may nevertheless be an aversion to such agreements because the displacement of high-tariff imports from third countries by low or no-tariff imports from preferential sources implies lost revenue (i.e., a worsening of the terms of trade). The same reasoning also applies to other regulations, which imply a transfer from foreign suppliers to domestic interest groups. The situation is different when the protectionist instrument is a regulatory barrier that imposes a cost on the exporter without
43 See World Bank (1997) for a discussion of the high transaction costs imposed by administrative requirements on multimodal transport services.
221 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY yielding a corresponding revenue for the government or other domestic entity. There is then no cost to granting preferential access because there is no revenue to lose. Therefore, preferential liberalization would necessarily be welfare enhancing for Brazil.
5.20 However, countries outside the preferential arrangement may lose. The exemption from a wasteful regulation implies reduced costs for a class of suppliers and hence a decline in prices in Brazil. This decline in prices hurts third country suppliers who suffer reduced sales in Brazil and a decline in producers’ surplus. Interestingly, preferential exemptions are likely to increase global welfare even though excluded suppliers lose. The gain to consumers from any decline in price is necessarily greater than the loss to a subset of suppliers. This makes intuitive sense: eliminating wasteful duplication should enhance global welfare; although, of course, a non- preferential recognition agreement would enhance Brazilian and world welfare even more, because the service would be supplied by producers from the most efficient locations.
5.21 Quantitative restrictions on the sales of services and MFN. Examples of such quotas are the restrictions that Brazil maintains in air transport and audiovisual services. The earlier analysis of discriminatory regulation is relevant here. In the case of goods, the quota rents can be appropriated by domestic intermediaries like the importer rather than the foreign exporter. However, in many services, intermediation is difficult because the service is not storable and directly supplied by producers to consumers. Rents are, therefore, usually appropriated by exporters rather than domestic importers. For instance, any rents generated by the quantitative restrictions imposed on road transport by Brazil (in the context of bilateral agreements) accrue to foreign transporters.
5.22 Policy implication. Where Brazil maintains regulations (or quantitative restrictions) that impose a cost on foreign providers, without generating any benefit (such as improved quality) or revenue for the government or other domestic entities, welfare would necessarily be enhanced by preferential liberalization. Examples of such regulations include unwarranted border formalities for freight transport services, excessive local capital and reserve requirements in financial services, and restrictions on foreign ownership that affect the variable costs of operation in a number of sectors. However, non-preferential liberalization would lead to an even greater increase in welfare in Brazil and globally because the service would then be supplied by the most efficient locations.
Preferential access and the fixed costs of entry or establishment
5.23 A number of measures that Brazil maintains can have the effect of increasing the fixed costs of entry or establishment; for instance, the requirement to establish a local presence; license fees for entry into the market; and the need to requalify for foreign professionals. Again, some of these costs may be justified by the regulatory objective.
5.24 To analyze the impact of fixed costs, we need to move away from the perfectly competitive model presented in the previous section. Consider a service industry where firms face constant marginal costs and two types of fixed costs, a firm-specific fixed cost of setting up production (unrelated to policy) and a fixed cost of selling to each market (related to policy).44 The three countries—Brazil (X), partner (Y) and rest of world (Z), are assumed ex ante identical to reduce complexity. Marginal production costs are also initially assumed to be identical. The three markets are assumed to be segmented—which is plausible where cross-border delivery is
44 The model, drawn from Baldwin (2000), is described in more detail in Annex B of this chapter.
222 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS not feasible. For simplicity, we assume that the part of the fixed cost that is necessary is incorporated into the “technologically” given fixed cost, and so the part that we observe is unnecessary.
5.25 We assume that each market has its own norm and complying with these costs F in each market. We also assume that there are no other restrictions on entry and exit in any of the markets, so the number of firms can change as policy changes. This is today a reasonable description of certain services sectors in Brazil and the rest of the world, particularly professional and business services. This description will also be relevant to a range of other services, like financial and transport services, when explicit barriers to entry are eliminated but local qualification or licensing requirements remain. In equilibrium, each firm’s profits will just cover its fixed costs.
5.26 Initially the same fixed-cost regulation applies on an MFN basis. Any firm that wants to sell in more than one market must incur a fixed cost of F in each. So a firm from any country (X, Y or Z) that wishes to sell in all three markets has to pay a total of 3F, and in any two markets (say X and Y) a total of 2F. Say liberalization takes the form of mutual recognition between X and Y, and a service/services supplier that complies with either X’s or Y’s norms, can sell freely in both markets. That is, X-firms and Y-firms have to pay only a total of F to access both the X and Y markets.
5.27 This mutual-recognition privilege may or may not extend to Z-firms. Say it does not, and only X and Y firms benefit. In practice, this exclusion is enforced by restrictive rules of origin (more fully discussed in Chapter 6). That is, X and Y firms only need to meet the norm in their home market and then they can sell in both markets, but Z firms must meet the norm in each market separately. This means that X and Y firms pay only F to access the combined X-Y market, but Z-firms must continue to pay 2F. This results in improved profitability for X and Y firms, which will lead to new entry by, and an increase in the number of, X and Y firms. The increased competition will lead to a decline in prices, and a drop in Z firms. Thus, exclusionary mutual recognition will imply that new X-based and Y-based firms crowd out Z-based firms.
5.28 But consider the situation where Z-firms too are allowed to sell to both X and Y markets after certifying their product in either. Then the fixed cost liberalization benefits all firms equally. This is because now any firm that wishes to sell in the X-Y market need only incur a fixed cost of F - Z firms are no longer disadvantaged. And any firm that wishes to sell in all three markets must incur a fixed cost of 2F—non-exclusionary recognition has reduced the costs of selling to all three markets for each firm from 3F to 2F. This raises profits and attracts new entrants in all countries. Given symmetry, the number of firms in each market rises equally.
5.29 It is evident that even mutual recognition among a sub-set of countries improves the market outcome by leading to increased competition. But does it matter for country X whether recognition is open or exclusionary? Even if firms from each country are identical but there are certain technological fixed costs of entry that limit the total number of firms, then the answer is yes. With exclusionary recognition, Z firms get crowded out of the X-Y market leading to less competition in each market than if Z firms had been allowed to benefit from the mutual recognition agreement.
5.30 If the excluded Z firms have a lower marginal cost of production, then their displacement would lead to an increase in average marginal costs of the firms operating in the market. This increase could even offset the benefits of increased entry and hence competition, created by reducing the fixed costs for X and Y firms. Hence, discrimination through fixed costs would be
223 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY particularly costly if it were directed against the more efficient provider (see also the section on knowledge spillovers).
5.31 Finally, consider the situation where all three countries participate in the recognition agreement. Now a firm in any country must incur a cost of only F in order to sell to all three markets. This raises profits even more and leads to greater entry and competition than in any of the previous cases. Furthermore, there is now no risk of crowding out the more efficient firm. Clearly mutual recognition among all countries is the most desirable outcome.45 The desirability is even stronger if we allow for product differentiation across countries and the fact that consumers of services benefit from greater diversity (see Section 1.1).
5.32 Policy implications. Brazil is likely to benefit from eliminating, even on a preferential basis, any excessive fixed costs of entry imposed on foreign providers—e.g., by removing unnecessary qualification, licensing and local-establishment requirements in professional and financial services. An example of such an initiative is the recognition of educational qualifications initiated within MERCOSUR.
• The gains from a particular preferential agreement leading to the elimination of fixed- costs of entry depend on the competitiveness of the partner countries’ service providers. For this reason, a preferential agreement with the United States or the European Union, where some of the world’s most competitive infrastructural service providers are based, is likely to bring greater benefits than a preferential agreement with other developing countries.
• Regardless of the chosen partners, the presumption that Brazil will benefit from such initiatives is greater if agreements are not exclusionary—i.e., they do not apply restrictive rules of origin. This means, for example, that a Venezuelan who has qualified in Argentina would benefit from recognition in Brazil in the same way that an Argentine does.
• The greatest benefits arise if recognition agreements include all countries that have comparable regulation. That is, if Venezuela has basically the same educational system, then it should also be made party to the mutual recognition agreement. The benefits come from both increased competition and greater diversity of services.
Preferential access and quantitative restrictions on the number of suppliers
5.33 In the previous section, it was assumed that there were no restrictions on entry other than technological or regulatory fixed costs. However, in some markets there are restrictions on the number of firms that operate. This reflects the situation in a number of services sectors in Brazil, ranging from air transport, financial and, until recently, basic telecommunications services. While there are sometimes good reasons to limit entry, such as the existence of significant
45 In this section, we have not addressed the issue of whether fixed costs of entry generate rents for the host country. If all firms have identical costs and there are no other barriers to entry, then even preferential liberalization of fixed cost- increasing barriers are likely to increase welfare. Consider the less obvious case when measures generate rents, as in the case of license fees. Recall that if there are no restrictions on entry then in equilibrium, aggregate industry profits are equal to total fixed costs. If a reduction in fixed costs induces new entry, then the increased competition implies a lower price. The loss in rents from liberalization is equal to the decline in aggregate industry profits which is necessarily lower than the increase in consumer surplus.
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economies of scale, it is not clear that the observed restrictions are motivated by these considerations.
5.34 In such situations, it matters how entry is allowed, i.e., by acquisition (as in financial services) or greenfield (as in telecommunications). Interestingly, allowing limited new entry by foreign firms (i.e., stopping short of removing all barriers to entry), irrespective of whether this is done preferentially or MFN, may not be welfare enhancing. The main reason is that even though consumers benefit from the increased competition, this gain may be offset by the transfer of rents from domestic oligopolists to foreign oligopolists. In such a situation, rent-extracting measures like license fees or profit taxes, are socially desirable because they claw back some of the excess profits that foreign firms make because of the problem of fewness. For similar reasons, it may actually be preferable to allow entry through acquisition, as Brazil does in financial services.46 Even though such entry implies less competition than greenfield entry, it allows domestic firms to extract some of the potential rents through the sale price.47
5.35 We can only be confident that there will be gains from any form of liberalization if all barriers to entry are removed.48 But if only limited entry were allowed, then open non- discriminatory access—e.g., through global auctions of licenses—would dominate preferential access. This would ensure that the new entrants are the most efficient suppliers in the world. In contrast, preferences may lead to entry or acquisition by inferior suppliers. In either case, the downside of preferences may be higher prices for consumers, lower takeover prices for domestic firms or lower license fees for the government.
5.36 Policy implication. Allowing limited foreign entry in concentrated markets can lead to a decline in welfare. In such circumstances, foreign rent extraction can be reduced through license fees and profit taxes, and by allowing entry through acquisition rather than greenfield entry. In any case, non-discriminatory allocation of entry quotas is better than preferential allocation. This will be relevant in future for sectors where Brazil currently maintains policy restrictions on entry, i.e., financial and air transport services.
Sunk costs and the sequence of liberalization
5.37 Sunk costs are important in both goods and services production. However, location- specific sunk costs, i.e., those incurred in supplying a particular market, are arguably more important in a number of services sectors, because their provision requires proximity between the supplier and the consumer.49 One consequence is that preferential liberalization may have more
46 As discussed in Chapter 3, Brazil initially sought to direct new foreign capital into weak domestic financial institutions to help the restructuring process. 47 In these circumstances, price regulation could help prevent the emergence of super-normal profits. 48 However, the existence of significant economies of scale implies that free entry need not lead to a socially optimal outcome (Tirole, 1988). 49 Quantitative evidence on the importance of sunk costs in services is not easy to find because they are hard to estimate. Nevertheless, some studies illustrate their importance in widely differing services sectors. Breshnan and Reiss (1993) find that sunk costs are important even in professional services. Their study of U.S. rural counties reveals that dentists sink significant costs. Furthermore, dentists do not usually compete much on prices and entry also does not foster price competition because patients face substantial switching costs. A single incumbent exists in markets with 800 people or less. The Whinston and Collins (1990) event study of entry suggests that even deregulated airline markets—often cited as an example of low sunk costs—are not contestable, and one reason could be the significance of sunk costs. Beesley (1997) finds that the entry of London Express Aviation into the London-Singapore route in the mid 80s involved non-renewable committed costs (sunk costs) of 400,000-450,000 pounds. The authors argue that even though monetary outlays in the form of recognizable committed costs were negligible (not more than about 1.6 percent of the total cost outlays to be incurred in the same year), the problems of which these costs were symptoms, such as the
225 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY durable consequences than in the case of goods. For instance, concluding an agreement that allows inferior providers to establish may mean that Brazil could be stuck with such providers even when it subsequently liberalizes on an MFN basis.
5.38 Sunk costs matter because they have commitment value and can be used strategically by those who are allowed to enter the market first (Tirole, 1988). A firm that establishes a telecommunications or transport network today signals that it will be around tomorrow if it cannot easily resell the equipment. The commitment value is stronger the more slowly capital depreciates and the more specific it is to the firm. Then if some firms are allowed to enter the market early, these incumbents may accumulate a quantity of “capital” sufficient to limit the entry of other firms.
5.39 Capital need not necessarily take a physical form. A firm may be able to develop a clientele though advertising and promotional campaigns that pre-empt demand. The more imperfect the consumers information and the more important the costs of switching suppliers, the greater the clientele effect. Consumers are often reluctant to switch banks and telecommunications suppliers even when new entrants offer better terms. Such incumbency effects may be stronger in services with network externalities, like telecommunications, where new entrants’ technical standards must be the same as those of the incumbent. The incumbent may also succeed in assuring itself of the services of the most capable franchisees by selecting them initially and imposing exclusivity on them. Each of these forms of “capital accumulation” enhances the first-mover advantages and allows the established firms to restrict or prevent competition.
5.40 Because of the importance of sunk costs, sequential entry can produce very different results from simultaneous entry. A market outcome where one firm enters first is not necessarily worse than one where all firms enter at the same time, but it may well be for several reasons. First, if entry is costly, then the incumbent may be able to completely deter entry so that the outcome is a much more concentrated market structure.50 Second, and from our point of view more important, the first-mover advantage may be conferred on an inferior supplier who may nevertheless use it to establish a position of market dominance.
5.41 How durable such a position is depends on the degree of cost or quality advantage more efficient firms have. A South-South integration agreement (e.g., MERCOSUR) may provide fewer benefits in the short run but be less costly from this point of view in the long run than a South-North agreement. This is because privileged access to a significantly inefficient or poor quality foreign supplier, while producing few benefits in the short run may lead to lower long run costs because such a firm is not equipped to deter entry by more efficient firms. But a slightly inferior U.S. (EU) firm may be able to deter entry by more efficient EU (U.S.) rivals. The key issue is the importance of sunk costs relative to differences in costs and quality.
5.42 Two qualifications to this argument based on sunk costs are important. First, entry by the more efficient firm could take place through acquisition circumventing some of the problems of first-mover advantage. But this would require no asymmetry of information about the value of risk of large capital investments, were not. Gual’s (1999) analysis of market integration policies in European banking argues that endogenous sunk costs in banking include the development of a brand image, the investment in electronic banking, or the development of a strong capital base. The study predicts that if competition focuses on such sunk costs, then concentration is likely to increase substantially with the integration of the European market. 50 In situations of network externalities, entry deterrence could also be through the choice of a standard that is incompatible with that of potential entrants.
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assets and no direct costs of transferring assets. Secondly, in certain services sectors, firms could learn by doing: the experience acquired by the established banks during the previous period reduces their current costs, enhancing their competitiveness and discourages others from entering. This form of entry deterrence may well promote welfare.
5.43 Policy implication. Location-specific sunk costs are important in a large number of services sectors, ranging from professional to telecommunications and financial services. Therefore, Brazil needs to carefully evaluate not just the static costs of granting preferential access to a particular country, but also how the eventual benefits from multilateral liberalization are likely to be affected.
Scale, competition, agglomeration, and knowledge spillover
5.44 Competition and scale. As noted above in Section 5.1.1, it has been recognized that the combining of markets through a regional integration agreement can lead to gains arising from a combination of scale effects and changes in the intensity of competition. In a market of a given size, there is a trade-off between scale economies and competition: if firms are larger, there are fewer of them, and the market is less competitive. Enlarging the market shifts this trade-off, as it becomes possible to have both larger firms and more competition (World Bank, 2000).
5.45 The gains from preferential agreements are likely to be substantial in areas where there is scope for fuller realization of economies of scale, as in certain international transport services, and increased competition, as in business services. In principle, these gains can also be realized through MFN liberalization; but in practice, the full integration of markets requires a deeper integration of regulations that might be more feasible and desirable in a regional context, as discussed below.
5.46 Liberalization as an inducement to FDI. Apart from changing the organization of local industry, if regional agreements create large markets and do not impose stringent ownership- related rules of origin, they may also assist in attracting foreign investment when economies of scale matter. For example, a foreign transport service provider might not find it worthwhile to establish in Latin America if each country market were segmented, but might find Latin America attractive with a continent-wide integrated market.51
5.47 Agglomeration. One force that drives the relocation of activity in a RIA is comparative advantage. But as economic centers start to develop, so cumulative causation mechanisms come into effect, leading to the clustering of economic activity in certain locations (World Bank, 2000). How might preferential liberalization of services trade affect the interaction between “centripetal” forces, encouraging firms to locate close to each other, and “centrifugal” forces, encouraging them to spread out? At this stage, it is possible to make only a few superficial observations.
5.48 Consider first the impact on the location of goods production. Certain services, ranging from telecommunications to transport, have a critical impact on the cost of distance and this would be reduced by the liberalization of these services, even on a preferential basis. The incentive to locate production close to areas where consumers or inputs are concentrated would be dampened.
51 However, if the FDI is induced by high levels of protection against cross-border trade, then welfare may decline, because the private benefits to the foreign investor may outweigh the social benefit from his presence.
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5.49 There are, of course, likely to be centripetal forces operating in the services sectors themselves, making it attractive for firms to locate close to each other. These could result from knowledge spillovers or other beneficial technological externalities, or labor market pooling effects, which encourage firms to locate where they can benefit from readily available labor skills. The elimination of barriers to trade in services and factor mobility may encourage the production of certain services to gravitate to particular locations. For instance, global advertising service producers might gravitate to New York or Rio de Janeiro if there were no barriers to trade in such services. On the one hand, if these services could be easily supplied long-distance, then there need not be an effect on the location of goods production. On the other hand, if these services required proximity between the supplier and consumer, then that would set off further agglomeration forces as the production of goods which rely on these services moved to the same locations.52 More research is needed to improve our understanding of the impact of services liberalization on agglomeration.
5.50 Knowledge flows. Preferential agreements may also promote knowledge flows between member countries. A growing body of work argues that trade flows provide a means for the transfer of technology between countries. For instance, it has been found that access to foreign knowledge is a statistically significant determinant of the rate of growth of total factor productivity.53 Developing countries are found to benefit from foreign knowledge, first, according to how open they are, and, second, according to whether they are open to those countries that have the largest knowledge stocks.
5.51 It would seem that such effects are even stronger when we consider not just cross-border trade but also the movement of factors associated with international transactions in services. In particular, opening trade with countries that are well endowed with knowledge may lead to beneficial transfers of technology. And agreements that cause trade to be diverted away from such countries, adversely affect growth. While MFN liberalization would not divert trade away from technologically attractive partners, non-discrimination is not optimal—it would actually be optimal to subsidize entry by firms that generate larger positive externalities. However, there are two reasons why committing to MFN treatment may nevertheless be a sound strategy. First, the government may find it difficult to prejudge the sources from which firms are likely to generate the greatest spillovers. Second, it is likely that the most competitive suppliers (in terms of costs and/or quality) also generate the greatest positive externalities.54
5.52 Policy implication. The gains from increased competition and exploitation of scale economies, as well as the possibilities of inducing knowledge spillovers, strengthen the presumption that Brazil would gain from a preferential agreement in services. However, each of these arguments provides even stronger support for non-discriminatory liberalization.
52 It is of course, conceivable, that if goods production is already locked into certain locations, that the producers of face-to-face services are obliged to move to the same locations—regardless of the strength of centripetal forces operating within services sectors. See also Markusen (1987). 53 Coe, Helpman and Hoffmaister (1997). See also Lumenga-Neso, Olarreaga and Schiff (2001). 54 However, the correlation of quality of a service from which the consumer benefits and the positive spillovers that are generated may create a dilemma for a poor country. Because consumers may prefer the cheaper low quality service even though the more expensive high quality service is socially preferable.
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THE ECONOMICS OF INTERNATIONAL COOPERATION
Gains at the expense of the rest of the world
5.53 There are certain circumstances in which a single country or a group of countries may derive greater benefits from a preferential arrangement than from a multilateral arrangement. First of all, any one country may benefit if its trading partner offers more profitable reciprocal preferential access than is available multilaterally. Thus for instance, if the European Union for certain political economy reasons were willing to offer Brazil unrestricted access to its protected agricultural market in return for preferential access to the Brazilian services market, then this would be more attractive for Brazil than a multilateral arrangement with more general reductions in European agricultural protection.
5.54 However, it is more difficult to think of circumstances where each country in a preferential arrangement would be better off than if each were to choose non-discriminatory liberalization. One possibility that could arise in competitive markets is that participant countries realize terms of trade gains vis-à-vis the rest of the world.55 In imperfectly competitive markets, there may be collective gains if the arrangement makes it possible to shift rents away from third countries. Finally, there may be gains over time, if there are dynamic economies—for instance, a larger protected regional market offers the opportunity to learn by doing and develop comparative advantage in new areas.
Efficient bargaining
5.55 There is inherently a tension between reciprocity-based bargaining and the most favored nation (MFN) principle. In certain circumstances, a regional approach may be preferable because it facilitates more efficient bargaining.
5.56 The MFN principle is not simply a rule that constrains trade discrimination, but also a rule that influences the multilateral bargaining process.56 Say Brazil is negotiating bilaterally with the European Union in the WTO. It knows that if it grants improved access to its market to the EU, then the MFN rule would oblige it to offer the same level of access to all other countries including, say, the United States without obtaining anything in return. At the same time, Brazil also knows that any improved access it obtains from the European Union will automatically be available to other exporters who have not given the EU anything in return. The temptation to be one of those other countries would be strong.
5.57 More generally, the problem is that countries may try to free-ride on each other during bargaining. Each of the beneficiaries of a concession from a trading partner may be tempted to understate their willingness to pay for it, hoping that offers of reciprocal concessions from other countries will be sufficient to induce the concession. If each country behaves in this way, the result could be that mutually beneficial deals will not be struck. But it is not clear how well founded these fears of free-riding are in practice.
5.58 Nevertheless, in so far as free-riding is a real problem, two possible solutions exist: for beneficiaries to form a coalition to work out a collective offer for a desired concession. For
55 See Panagariya (2001), Winters (1996) and the recent papers by Chang and Winters (forthcoming) and Schiff and Chang (forthcoming). 56 This section draws upon Schwartz and Sykes (1996). But see also Wonnacot and Wonnacott (1981) for an early depiction of the rationale for preferential agreements, and Levy (1994) and Krishna (1998) for a political economy- based analysis.
229 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY example, consider agriculture. Production subsidies play a significant role, and the benefits of any reductions in such subsidies are necessarily extended on an MFN basis. This may be one reason for the emergence of the coalition of the Cairns group of agricultural exporting countries, of which Brazil is a part. In services, the European Union and the United States could be a possible coalition. Together they account for the bulk of world services exports, and, in fact, the bulk of Brazil’s services imports.57 The second solution to the free-riding problem is to abandon product-by-product negotiations and agree instead that every country will reduce barriers according to a mutually agreed formula. This approach may, however, be difficult in services since the instruments of protection do not lend themselves to quantification.58
5.59 However, because there is no complete solution to the free-rider problem, it is likely that the MFN principle prevents the parties in large multilateral trade negotiations from exhausting all joint political gains and makes the optimum bargain unattainable. Ceteris paribus, the desirability of discriminatory arrangements would be greater, the more serious the free-rider problem for non- discriminatory arrangements. Under these circumstances, preferential trading arrangements may make some political sense as a second best alternative. That is, it may make sense for Brazil (or MERCOSUR) to negotiate with the European Union outside the WTO and escape the inhibiting influence of the MFN obligation.
5.60 However, apart from the efficiency costs of departing from the MFN principle described in the previous section, there is another concern raised by preferential arrangements: they tend to undermine the security of trade concessions. A country’s willingness to pay for a concession may be undermined if it fears that its partner might subsequently grant preferred access to someone else. Faced with this possibility it would offer less for the concession in the first place and fewer mutually beneficial deals would be struck. The MFN obligation protects the value of any negotiated concessions against future erosion through discrimination and thus brings benefits for the bargaining process.59
5.61 Policy implication. As Brazil undertakes negotiations in multiple fora, it must assess the costs and benefits of negotiating in the WTO in the knowledge that all concessions will be multilateralized; of negotiating outside the WTO separately with its main trading partners in the knowledge that concessions can be preferential; and of doing both as at present. In this assessment, it must weigh the advantages of the MFN principle in ensuring economic efficiency and safeguarding the value of concessions, against its disadvantages in terms of inhibiting mutually beneficial bargains because of the free-rider problem.
57 In the year 2000, the shares of the EU and U.S. in world exports of commercial services on a balance of payments (BOP) basis were around 40 percent and 20 per cent, respectively. Their shares are probably even greater once FDI is taken into account. For instance, an estimated 40 per cent of Brazil’s BOP services imports in recent years and half of FDI in services originated in the EU, while the U.S. share was round 20 percent of BOP imports and one-quarter of FDI. 58 Sapir (1998). Some have tried to develop formulae for services negotiations but it is doubtful that they will be used (Thompson, 2000). 59 A blanket MFN provision is of course not the only solution to the problem. Each party to a trade agreement could secure in conjunction with the concession additional promises limiting the future concessions that a trading partner could subsequently make in the same domain to other trading partners. However, the transaction and information costs of proceeding in this fashion would be high. Alternatively, members could confine all concessions to well defined multilateral negotiating rounds—as is generally the case, with the exception of regional initiatives. No nation would commit to anything until it could review the entire schedule of proposed discriminatory concessions by each of its trading partners. These approaches offer the prospect of more focused reciprocity-based bargaining. But they compare unfavorably with the simple MFN rule in terms of ease of administration and the maximization of joint surplus.
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Regulatory cooperation: The role of international rules
5.62 The economic case for regulation in services, as in the case of goods, arises essentially from market failure attributable to three kinds of problems, asymmetric information, externalities, and natural monopoly or oligopoly (see Chapter 3). In the first two cases, national remedial measures can themselves become an impediment to trade; in the third case, it is the absence of national regulation that can create trade problems. In order to ensure that domestic regulations at home and abroad support trade, Brazil must decide on the appropriate forum (multilateral, regional) and the approach (international rules, mutual recognition or harmonization) to pursue in each service sector.
5.63 First of all, in dealing with trade impeding domestic regulations (like standards, qualification, and licensing requirements), international rules could deepen the basic non- discrimination obligation by creating a “necessity test” (discussed more fully in Chapter 6). While this test has been given differing interpretations, we would suggest an economic interpretation.60 Economic principles can provide meaningful rules for the choice of instruments. Ideally, state intervention is meant to remedy distortions. The “first-best” instrument is the one that attacks the divergence between the private and the social cost at the source. For instance, in the case of professionals like doctors, a requirement to re-qualify would be judged unnecessary, since the basic problem, inadequate information about whether they possess the required skills, could be remedied by a less burdensome test of competence. In terms of the earlier model, the role of international rules could be to ensure that (a) the v component (where a difference in quality or incompatibility is the issue) is not exaggerated at the expense of the u component (which reflects a certain universal requirement); and (b) that the measures necessary to ensure compliance with the u and v components are not unduly trade restrictive.
5.64 The second way in which international rules have taken sought to deepen the principle of non-discrimination is by creating pro-competitive regulatory principles where monopolistic control of essential facilities may impede market access (again more fully described in Chapter 6). These might pertain to regulating interconnection prices to telecommunications networks (as under the GATS Telecom Reference Paper) or to the allocation of airport slots or to administering deposit insurance schemes. Note that international differences in regulatory standards need not inhibit trade if they conform to certain broad principles. The fact that the Brazilian approach to the regulation of interconnection differs from the United States approach does not by itself limit a U.S. telecom operator’s ability to supply services in Brazil. However, greater similarity of regulatory approaches does make life easier for international traders and investors.
5.65 However, there are limits to what can be accomplished through international rules. First, national regulators may object to what they regard as excessive international scrutiny of their judgments regarding whether certain universal requirements (the u component) have been fulfilled. And more seriously, there is little that international rules can do to address differences across jurisdictions in country-specific requirements (the v component) pertaining to: vertical standards, where differences between countries arise because of different quality standards, such as for instance, in the training of doctors or supervision of banks; and horizontal standards, where differences between countries arise because of incompatibility, e.g., because of differences in their legal systems or network standards in communication and transport services. Differences may reflect national preferences for certain levels of quality or particular varieties, or simply be a legacy of history.
60 For instance, in the WTO context, more emphasis has been placed on WTO-consistency or “least trade- restrictiveness” of measures rather than on the economic efficiency of measures.
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5.66 Policy implication. The institution of a necessity test in international trade agreements would enable Brazilian exporters, e.g., of professional and construction services, to challenge unnecessary regulatory barriers abroad. At the same time, the ability of foreign suppliers to challenge excessively burdensome Brazilian regulations, e.g., in professional services, would ensure that domestic regulations serve legitimate objectives rather than protectionist interests, and hence create benefits for domestic consumers. International rules on access to essential facilities, such as ports and telecommunications networks, provide a similar dual benefit. But there are limits to what can be accomplished through international rule-making, and there will be need for further regulatory cooperation.
Regulatory cooperation: harmonization and mutual recognition
5.67 As noted above, international rules can do little to address impediments to trade arising from fundamental differences across countries in standards. In such circumstances, two approaches are usually proposed: harmonization and mutual recognition. Even though these approaches are sometimes presented as alternatives, the former is either a precondition or a result of the latter. Where differences in mandatory quality standards matter, recognition can only happen once there is a certain degree of harmonization (to establish mutually acceptable minimum standards). Where differences in mandatory standards are so narrow that they do not matter, recognition can be granted and then harmonization happens via a race to the minimum standard.61 A similar logic applies to compatibility standards, but there may be no alternative to full harmonization if differences matter, as for instance in the case of differences in railway gauges and legal procedures.
5.68 There is little, if any, empirical guidance on the payoffs to regulatory cooperation. What are the costs and benefits of deeper harmonization of regulatory standards and/or the establishment of mutual recognition agreements? The lack of empirical evidence complicates the task of deciding on the scope and depth, as well as the geographical reach and the institutional form of cooperation. Nonetheless, several conceptual considerations may assist Brazil in formulating a strategy for regulatory cooperation.
5.69 First of all, if national standards are not optimal, then international harmonization can be a way of improving national standards—as has happened with the Basle accord on financial regulation. In such situations, the best partners for regulatory cooperation are those with the soundest regulatory framework. Second, sometimes standards are captured by protectionist interests, in which case harmonization can serve as a purely liberalizing device. Third, if standards are separable, in the sense that it is possible to have one standard for export and another for domestic consumption, then regulatory cooperation is less of a challenge. But standards may not be separable: economies of scale may make it prohibitively expensive to have separate standards for export production; or a trading partner may make the adoption of country-wide higher standards (of financial regulation, privacy) a condition for trade.62
61 Of course differences in quality standards may well persist as firms produce different qualities to suit different individual tastes, but there would be little logic in maintaining different mandatory quality standards once there is mutual recognition. 62 A similar concern can also arise in the design of pro-competitive regulatory principles. International trade and investment may be facilitated by the detailed harmonization of regulatory regimes, yet there may be a cost if the regulatory measures set out in the international agreement do not coincide with what a country would have chosen in a purely domestic context.
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5.70 If national standards optimally serve national objectives and not separable between markets, there is a trade-off between the gains from integrated markets and the costs of transition and of departing from nationally optimal standards. For instance, Brazil may prefer to maintain a low mandatory standard for certain services, because that reflects the socially optimal trade-off between price and quality whereas the socially optimal trade-off in the United States leads to a higher standard. Harmonization of standards would create benefits in terms of increased competition in integrated markets (as discussed earlier), but would necessarily impose a social cost in at least one market.
5.71 The aggregate adjustment cost of harmonization depends on the distance between the policy-related standards of the countries. The costs are likely to be smallest when foreign regulatory preferences are similar and regulatory institutions are compatible. The benefits of eliminating policy differences through harmonization depend on the prospects of creating a truly integrated market, which depends on the “natural distance” between countries, and that in turn depends on physical distance, legal systems and language, etc. We can conceive of an optimum harmonization area that defines the set of countries for which aggregate welfare would be maximized by regulatory harmonization.63 However, whether an individual country like Brazil benefits from harmonization, and its willingness to participate in such an area, depends on where the standard is set—which determines who will bear the costs of transition.64
5.72 This raises an important question: should regulatory cooperation take place in each sector among spontaneous sets of self-selected countries; or should the group of countries be determined ex ante, and then this group pursues deeper integration across each sector? For example, should MERCOSUR and NAFTA pursue deep integration internally in all sectors, or should sectoral regulatory cooperation be pursued on a crosscutting basis among countries with like regulations? Intuitively, the latter would seem to be the preferable course. It is certainly true for countries that have identical regulations or whose regulations differ in a way that does not matter. And an optimum harmonization area is likely to differ across services sectors, suggesting that it may be desirable for Brazil to cooperate with certain countries on a narrower set of quality standards compared to other countries.
5.73 But it is conceivable that an optimum harmonization area in a particular services sector would not satisfy the participation constraint for each country: i.e., group welfare would be maximized by setting the standard at a level at which it is not attractive for some countries to participate. For example, say Latin American countries as a whole would benefit from the adoption of the same educational system, but Brazil would lose from moving to the ideal harmonized standard. And in some other sector, say construction services, Brazil would gain a lot from harmonized regulations but some other countries would lose. Therefore, in the absence of a sectoral compensation mechanism, it might be easier if a number of such sectoral negotiations were bundled together within a group whose composition was fixed in advance, i.e., a horizontal-agreement like MERCOSUR. How these considerations affect Brazil’s choices is examined more fully in Chapter 6.
63 In the definition of an optimal harmonization area, it must also be recognized that cooperation forums can be a vehicle to exchange information on different experiences with regulatory reform and to identify good regulatory practices. This form of cooperation can be especially useful for regulating new services in sectors with continuous technical change. Developing countries may then have an interest in cooperating with advanced industrial countries that have the longest experience with regulatory reform and/or where the newest technologies are often introduced first. 64 We can think of this issue being the outcome of bargaining. The incentive to harmonize may depend on the relative market size, with the small country having more to gain. This may explain why small countries acceding to the EU bear the full cost of transition. Furthermore, the sequence matters: where the standard is set will depend on which sets of countries negotiate first— e.g., EU 15 and then Eastern European countries, or all together, etc..
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5.74 Policy implication. There are gains from regulatory cooperation for Brazil but also costs. The former will dominate where national regulation can be improved, as in the case of financial services, or is excessively burdensome in all countries, as in the case of professional services. Once national regulations are optimal, the benefits of international harmonization in terms of greater competition in integrated markets must be weighed against the costs of departing from nationally desirable regulations. Finally, Brazil would gain from pursuing regulatory cooperation on a sectoral basis as widely as feasible, but also exploit the scope within cross-sectoral agreements to overcome sector-specific constraints to cooperation.
A caveat: The role of sunk costs
5.75 An important question is whether the sequence—in which regional and multilateral liberalization occur—matters. At least three insights have been presented in the literature, each related to the importance of market-specific sunk costs, discussed in Section 5.1.6. One is that the prospect of a regional integration agreement prompts investments geared towards supplying the markets of partners in the regional agreements. These investments have a “lock-in” effect and for a small country can substantially reduce bargaining power in the subsequent negotiations (McLaren, 1997). Secondly, once such investments are made, multilateral liberalization may become less attractive for a country than regional liberalization (McLaren, 1997, 1999). These arguments have limited relevance to Brazil because regional and multilateral negotiations are proceeding in parallel, and current investment decisions are unlikely to be based on expectations of one or the other outcome.
5.76 The third insight is that in oligopolistic markets, a regional route to multilateral liberalization may offer greater benefits to participants than direct multilateral liberalization (Freund, 2000). The intuition is that initial privileged access to each other’s markets provides firms with a first-mover advantage and an opportunity to commit to high bilateral exports by creating larger distribution networks (a sunk cost) so as to limit future exports by outside firms. As a result, member nations earn higher profits in each other’s markets from the regional path than the multilateral path—and are no worse off in third markets.65
5.77 Note that the model in Freund (2000) described above is symmetric in terms of the importance of market-specific sunk costs. Consider a somewhat different and perhaps more relevant scenario. Brazil has a comparative advantage in goods, and the United States in services. Both can choose to liberalize MFN, or to sequence liberalization: preferential followed by MFN.
5.78 As argued in Section 5.1.6, location-specific sunk costs are arguably more important in services like professional, telecommunications, finance and distribution, than in goods, so even temporary privileged access for an inferior supplier can translate into a long-term advantage in the market. Thus, while the elimination of preferences may lead to a relatively painless switch to more efficient sources of goods supply, the entry of more efficient service providers may be durably deterred if their competitive advantage does not offset the advantages conferred by incumbency. This is an important consideration for Brazil given that it is likely to export goods and import services. So, the benefits of obtaining preferential access for Brazil may be small and temporary, while the costs of granting preferential access could be large and durable. How much this matters depends on whether the provider who benefits from preferences is the most efficient provider globally.
65 In the model, world welfare turns out to be higher because the gains to the original members are greater than the loss to the excluded countries.
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5.79 Finally, regulatory harmonization itself could involve sunk costs of transition. The sequence in which Brazil chooses to harmonize its regulations with different trading partners is not irrelevant. One reason is that the sequence of harmonization may influence the bargaining power of different country groupings in the negotiation over where the harmonized standard should be set. For example, the countries in Eastern Europe that are acceding to the EU now one by one, could arguably have had a greater say in the EU-wide standard in specific areas if they had been original members, negotiating collectively, or both. Thus, harmonization first at the MERCOSUR level, and then at the FTAA or multilateral level could imply different costs and produce a different outcome from direct harmonization at the broader level.
5.80 Policy implication. Brazil’s main export interest is in agricultural and manufactured goods, where location-specific sunk costs are relatively small (unless it creates its own distribution networks), and it is likely to import many services, ranging from professional to financial services, where sunk costs are relatively important. In assessing the implications of a preferential agreement, it must also consider the implications of current preferences on the gains from eventual multilateral liberalization.
Chapter 6. The Rules of International Agreements in Services
6.1 Today, as Brazil engages in negotiations, it is confronted by a number of different models for international agreements on services. The MERCOSUR Agreement is based on the General Agreement on Trade in Services (GATS) negotiated in the WTO, and the EU-MERCOSUR agreement is also to be modeled on the GATS. The greatest freedom to design is in the hemispheric agreement, with the GATS and the North American Free Trade Area (NAFTA) models battling for the soul of the Free Trade Area of the Americas (FTAA) Agreement.66 Throughout the draft (and heavily square-bracketed) FTAA text, one can identify competing provisions lifted from the NAFTA and the GATS. The GATS itself need not be regarded as caste in stone, and it may be possible to negotiate improvements during the current round of GATS negotiations. Brazil, in fact, has shown a willingness to take the lead in reforming the GATS by making a submission on issues relating to the interpretation of the fundamental MFN and national treatment obligations.67
6.2 In addressing questions of design, we must begin by asking: what do we expect from an international agreement? Even though the main challenges in services liberalization are
66 The following objectives for services negotiations within the FTAA were set out in the San Jose Declaration of March 1998: to establish disciplines to progressively liberalize trade in services so as to permit the achievement of a hemispheric free trade area under conditions of certainty and transparency; and to ensure the integration of the smaller economies into the FTAA process. In the preparatory phase (March 1995 to March 1998), it had been agreed to focus on six elements: sectoral coverage, MFN treatment, national treatment, market access, transparency and the denial of benefits. During the first phase of negotiations (June 1998 to November 1999), members of the Negotiating Group on Services discussed in depth the scope of a future agreement in services and the six elements identified above. At the end of 2000, the negotiating group finalized a draft text containing proposed language for the six issues and for other related issues. At their sixth meeting held in Buenos Aires on April 7, 2001 the Ministers Responsible for Trade representing the thirty-four countries participating in the Free Trade Area of the Americas (FTAA) process instructed “the Negotiating Group on Services to submit to the Trade Negotiations Committee, its recommendations on modalities and procedures for negotiations by April 1, 2002, for its evaluation by the TNC during its first meeting following that date, in order to initiate negotiations no later than May 15, 2002.” 67 See Communication from Brazil to the Council for Trade in Services, “MFN, National Treatment and like circumstances,” JOB(01)/165, 30 November 2001.
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domestic, we argue that international agreements can assist in three ways, by helping achieve: greater transparency through rules that require mutual openness; credibility of policy through legally binding commitments; and efficient protection and regulation through rules that favor the choice of superior instruments.
Table 6.1: Brazil and the Design of International Agreements in Services Scope Comprehensive coverage of all modes, including the temporary movement of natural persons in which Brazil has an interest. Transparency Either a rigorous negative list or a comprehensive positive list. One option is to have national “mock schedules” describing all non-conforming measures, with no sector or mode excluded; these schedules need not have a legal status and would serve only to enhance transparency of services regimes. Since MERCOSUR countries are already contemplating comprehensive listing of restrictive measures in all sectors, including such a transparency obligation in other agreements would impose little incremental cost on Brazil and yield significant benefits in terms of improved information on barriers in export markets. Binding Binding of restrictive measures either on the basis of a rigorous negative list or a comprehensive positive list; ensure that bindings reflect actual policy; and place a limit on the number of “unbound” and other discretionary entries like economic needs tests. MERCOSUR countries are already contemplating comprehensive bindings of restrictive measures in all sectors. A similar provision in other agreements would not imply a further loss of flexibility for Brazil, while enhancing security of market access for Brazilian exporters. Explicit barriers • Improved clarity of disciplines under GATS and other agreements that use it as a model. One option is to adopt the distinction under NAFTA: national treatment covers all discriminatory measures and market access all non-discriminatory quantitative restrictions. • Post-establishment national treatment as a general obligation, whereas pre-establishment national treatment subject to negotiations. Brazil has already eliminated all forms of discrimination against locally established foreign suppliers, and flexibility in the latter dimension should preserve negotiating leverage. • Freedom to list variable commitments across modes; but once full commitments are made on all modes, then no form of discrimination (other than that necessary to achieve legitimate regulatory objectives) permitted against the supply of services through any mode (including cross-border delivery). • Non-discriminatory quantitative restrictions treated as under the GATS, i.e., listed in schedules and subject to negotiations, rather than as under NAFTA. All allocations of licenses where entry is restricted subject to open and transparent procedures. Domestic • Examine how far the core disciplines in WTO’s telecom reference paper can be extended to other network- regulation based services, so as to ensure cost-based access to essential facilities. • Examine if a necessity-type test can be made applicable to all intermediation and knowledge based services, and the test be used to create a presumption in favor of economically efficient choice of policy in remedying market failure Brazilian exporters of construction and professional services face regulatory barriers abroad, such as technical standards, qualification and licensing requirements. Similar barriers in the domestic market deprive consumers of access to foreign professionals. Government Requirements of transparency and non-discrimination; link to negotiations on the elimination of trade barriers, procurement particularly restrictions on the temporary presence of natural persons, to fulfill procurement contracts in construction and other services. Brazil’s own procurement regime is transparent at the federal level, while exports of construction services suffer from lack of knowledge about procurement opportunities, and discriminatory procurement abroad may be an issue. Safeguards Creation of an avenue for temporary adjustment-related demands for protection, but only if it can be based on sound economic principles and if it can be made subject to strong, enforceable disciplines that prevent protectionist abuse. Rules of origin Adoption of the most liberal rules of origin that are consistent with strategic bargaining considerations. Recognition Clarification of the GATS provision on recognition (Article VII), with its desirable non-discriminatory and open- ended nature, overrides the exemption for integration agreements (Article V) as far as recognition agreements are concerned. Establish that recognition is not subject to rules of origin.
6.3 The realization of these benefits of international agreements necessarily implies giving up a certain degree of flexibility: to exclude certain sectors or modes of supply, to limit transparency, to reverse liberalization, to discriminate between trading partners, in favor of national providers, and across modes of delivery; and to use domestic regulations to discriminate. The challenge for Brazil is to reap the benefits of stronger rules in services agreements while retaining negotiating flexibility to pursue market access objectives in areas like agriculture that are heavily protected in other countries. A balance may be struck by supporting rules that promote transparency and predictability of policy without imposing general market-opening obligations.
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6.4 This chapter critically reviews the two models of services agreements relevant to Brazil, GATS and NAFTA—as well as MERCOSUR, where it departs from the GATS.68 The chapter also presents specific proposals that seem to promote good policy. Table 6.1 summarizes these proposals and the subsequent sections of this chapter elaborate on the underlying arguments.
SCOPE
6.5 As discussed earlier, the GATS defines trade as the supply of a service through any of four modes: cross border supply of services, purchase of services by consumers in other countries, commercial presence, and services through the temporary entry of natural persons. The NAFTA does not make a similar distinction between modes of supply. Instead, it simply distinguishes investment—in whatever sector, be it goods or services—from cross-border trade in services, defined to include the other three modes, cross-border trade, consumption abroad and the presence of natural persons. However, there is then a separate chapter on the temporary entry of persons, covering both goods and services (see above). Thus, it is really only cross-border delivery and consumption abroad that are bundled together under NAFTA.
Commercial presence
6.6 There has been greater acceptance of commercial presence as mode of delivering services than of the movement of labor. However, even though the GATS may be viewed as an investment agreement for services, insofar as it treats establishment as a mode of delivery to which a number of obligations apply, the Agreement does not develop a comprehensive body of disciplines aimed at protecting investors and their investments. MERCOSUR Members have followed the GATS approach, but have also agreed to separate protocols on investment. Investment provisions under NAFTA, incorporate the elements of an investment treaty, including provisions for investor protection. Furthermore, the Agreement establishes a regime of mixed— or investor-state—arbitration for the enforcement of obligations under the investment chapter of the Agreement.69
6.7 At issue is whether the commercial presence mode in services a la GATS should be treated separately or incorporated into a wider investment mode a la NAFTA. From the purely structural point of view, there do not seem to be strong grounds for favoring either alternative. One possibility in the FTAA is to replicate the NAFTA structure, and treat investment in both goods and services in a single chapter. Another possibility—both in the FTAA and the WTO -if investment in goods is covered—is to generalize the GATS structure to incorporate all modes of supplying both goods and services. In the case of goods, the commitments on the first two modes, cross border trade and consumption abroad, would be identical and take the form of a particular tariff rate, as at present. Commitments on investment in goods could then be scheduled in much the same way as current commitments on commercial presence in services—which is in fact anticipated in the WTO context by the Doha Declaration.70 Such an integrated structure could provide for comprehensive coverage of the movement of natural persons, rather than the current partial coverage in both the WTO and in the NAFTA (see below). The choice of structure
68 This chapter draws upon Hoekman and Sauvé (1994), Braga and deBrun (1995), Prieto (1999) as well as a number of papers by Sherry Stephenson listed in the bibliography. 69 Any NAFTA investor who alleges that a host government has breached an obligation of the investment chapter may convoke an arbitral tribunal to hear the matter. Procedures may be based on ICSID (International Center for the Settlement of Investment Disputes) or UNCITRAL (United Nations Commission on International Trade Law) rules for such arbitration. See Sauvé (1999) and Robert, Sauvé and Steinfatt (2001). 70 Strictly, only with regard to pre-establishment treatment.
237 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY does not, and should not, pre-judge the depth of disciplines on specific modes and sectors. For example, it may well be agreed that all countries would refrain from imposing certain restrictions on cross-border trade in goods, and treat investment in goods more liberally than in services. These issues are discussed more fully below.
Movement of natural persons
6.8 Brazil, like many other developing countries, has a strong interest in the movement of labor, their relatively abundant factor of production. And there is good reason to believe that the liberalization of such movement even on a temporary basis could produce substantial welfare gains for all countries. Estimates by Walmsley and Winters (2002) suggest that allowing an increase in temporary access equivalent to 3 percent of the OECD population for developing country service suppliers could produce global income gains of about $156 billion—greater than the gains from abolition of all merchandise trade barriers.71 The large potential gains justify a comprehensive coverage of this mode in international negotiations despite the significant political difficulties in facilitating greater labor mobility.
6.9 Neither the WTO agreements nor the NAFTA provide comprehensive coverage of this mode. In principle, the movement of natural persons as service suppliers is covered by mode 4 of the GATS, which is defined as "the supply of a service . . . by a service supplier of one Member, through presence of natural persons of a Member in the territory of another Member.” The GATS is limited to temporary movement, although "temporary" is not defined and Members have taken a range of approaches.72 This mode includes independent service suppliers and self- employed, as well as foreign employees of foreign services companies established in the territory of a Member. However, it is not clear that foreign employees of domestic services firms are covered by mode 4, and foreign employees of non-services firms are certainly not covered by mode 4, unless they are working on a contractual basis as independent suppliers.
6.10 The GATS provides no guaranteed access for mode 4 suppliers; access is determined by the nature of each Member's specific commitments. Generally, mode 4 commitments are quite restrictive, tend to mostly concern intra-corporate transferees, and are often subject to economic needs tests. While mode 4 covers service suppliers at all skill levels, Members' commitments tend to be limited to higher skilled categories such as managers, specialists, and professionals. Access under mode 4 can also be affected by MFN exemptions and licensing requirements, including recognition of qualifications, as well as restriction under mode 3. There are no specific provisions in the GATS for facilitated entry, although individual countries' specific commitments may include measures to facilitate entry.73
71 Hamilton and Whalley (1984) found that the elimination of all restrictions on labor mobility could produce gains exceed existing worldwide GNP. 72 The GATS Annex on Movement of Natural Persons Supplying Services under the Agreement contains two important limits on mode 4. Paragraph 1 of the Annex states that the GATS does not apply to "measures affecting natural persons seeking access to the employment markets of a Member, nor . . . to measures regarding citizenship, residence or employment on a permanent basis." Paragraph 4 of the Annex notes that the GATS "shall not prevent a Member from applying measures to regulate the entry of natural persons into, or their temporary stay in, its territory, including those measures necessary to protect the integrity of, and to ensure that orderly movement of natural persons across, its borders, provided that such measures are not applied in such a manner as to nullify or impair the benefits accruing to any Member under the terms of a specific commitment.” Discriminatory visa requirements are not per se regarded as nullifying or impairing such benefits. 73 MERCOSUR directly replicates the GATS model. GATS carve-outs relating to access to the labor market and permanent migration and Members' right to regulate the entry and stay of foreigners in their territory are included
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6.11 Chapter 16 of NAFTA deals with the movement of businesspersons.74 The Agreement is limited to temporary entry, defined negatively as being "without the intent to establish permanent residence" and apply only to citizens of Parties. Access is basically limited to four higher skills categories: traders and investors, intra-company transferees, business visitors and professionals (detailed definitions are provided). However, these groups are not limited to services and may include persons in activities related to agriculture or manufacturing. Labor certification or labor market assessment/tests are removed for all four groups. However, work permits are required for traders and investors, intra-company transferees and professionals, but not business visitors (see footnote 11). While visas are still required, fees for processing applications are to be limited to the approximate cost of services rendered. Dispute settlement provisions cannot be invoked regarding a refusal to grant temporary entry, unless the matter involves a pattern of practice and the businessperson has exhausted the available administrative remedies.
6.12 Under NAFTA, the U.S. provides "Trade NAFTA (TN)" visas for professionals75 that last for one year and are renewable. Canadians can receive TN status at the port of entry on presentation of a letter from a U.S. employer, but Mexicans must currently arrange for their employer to file a labor condition application (although this requirement will expire in January 2004), and then they must apply for a visa at the U.S. Embassy in Mexico. Under NAFTA, the U.S. applies a quota of 5,500 to Mexican professionals, due to expire on January 1, 2004. Canada has chosen not to set a quota on the temporary entry of Mexican professionals. The NAFTA, furthermore, extends duty-free privileges to the tools of the trade (e.g., computers, software, samples, promotional material) imported on a temporary basis by professionals covered under the Agreement's chapter on Temporary Entry of Business People.
6.13 Policy implication. It is desirable that international agreements be comprehensive in their coverage of the temporary movement of natural persons and not exclude any category of skill or type of employment. All measures affecting such movement would fall within the scope of the agreements. Comprehensiveness of coverage does not, of course, prejudge the depth of liberalizing commitments and rules, which would be the subject of negotiations.
TRANSPARENCY
6.14 Transparency is desirable because it helps reduce transaction costs for the private sector and facilitates international trade negotiations. Transparency has two dimensions. One is with regard to existing policies, and the other with regard to future changes in policy as well as processes leading to such changes.
6.15 Most agreements promote transparency on the first dimension by obliging countries to make public all measures of general application. But an agreement’s scheduling technique also has a bearing on the extent to which trading partners are informed about the restrictive measures. verbatim. Market access is based solely on specific commitments, covering the movement of all categories of natural person who provide services within the framework of the protocol. 74 The NAFTA definition of cross-border supply is very broad (Article 1213) and covers in principle all of what would be modes 1, 2, and 4 in GATS terms. But it is necessary to read the agreement as a whole. Chapter 16 is on "Temporary Entry for Business Persons" and though it does not refer explicitly to Chapter 12, it does specify the conditions under which temporary labor movement can take place and in the Annex 1603 specifies the four categories relevant to take advantage of these conditions (i.e., business visitors, traders and investors, intra-company transferees and professionals). It therefore truncates the broad definition of Art. 1213 (c). 75 Criteria include that: the profession is on the NAFTA list; the candidate meets the specific criteria for that profession; the prospective position requires someone in that capacity; and the candidate is going to work for a United States employer.
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GATS compels Members to list all impediments only in a positive list of scheduled sectors. The freedom of GATS Members not to list particular service sectors, or to specify “unbound” for specific modes, allows them to exclude such sectors or modes from the Agreement’s coverage without shedding light on the restrictive measures they maintain in these sectors and modes. Furthermore, there is no requirement under the GATS that bindings reflect actual policy, and in numerous cases, bindings are more restrictive than actual policy.
6.16 The NAFTA takes a “negative list” approach to coverage of commitments. The Agreement compels Parties to list all non-conforming measures at both the national and sub- national levels within prescribed time limits.76 Failure to list non-conforming measures within these limits entails their full and automatic liberalization. But the NAFTA has permitted certain open-ended exclusions that dilute the transparency benefits of the negative list approach. For example, Mexico which has made far-reaching commitments on basic telecommunications under the GATS, in its NAFTA schedule (admittedly negotiated earlier) reserves the right to adopt or maintain any measure relating to investment in, or provision of, telecommunications transport networks and telecommunications transport services. The United States reserves the right to adopt or maintain any measure relating to the provision of maritime transportation services and also states that only air carriers that are "citizens of the United States" may provide cabotage and international scheduled and non-scheduled air service as U.S. air carriers.
6.17 Improved mechanisms to enhance transparency are vitally important. In principle, the adoption of either a rigorous negative list approach or a comprehensive positive list approach would represent a strong commitment to transparency across the board. The requirement to reveal all non-conforming measures in all sectors is inherent in a negative list approach, and the transparency benefits are matched by a positive list approach only if it obliges Members to list all sectors. But if a negative list approach permits open-ended exclusions, then the difference between the two approaches becomes less meaningful. In any case, it is not clear that either a rigorous negative list or comprehensive positive list approach will be feasible in the multilateral context (though the choice of approach in the FTAA is still an open question). Even the exchange of information that was supposed to take place in the WTO’s Services Council produced few tangible results. The WTO’s trade policy reviews are also limited in terms of both sectoral coverage and depth. One desirable approach is the one taken by the Andean Community and being contemplated under MERCOSUR, whereby each Member produces comprehensive lists of restrictive measures that are made available to all other Members. An international agreement along these lines could also help promote domestic transparency regarding a Member’s services regime, by overcoming the reluctance of each country to reveal its restrictions unilaterally. One question is whether these revelations should take the form of legally binding schedules of commitments—as contemplated in the Andean Community and under MERCOSUR. While there would be significant gains in terms of certainty of policy (see section 6.3), this approach does create a link between transparency and bindings, so that the unwillingness to bind (or to bind the status quo) translates into an unwillingness to reveal.77
76 The listing of non-conforming measures at the federal level was completed at the time the Agreement was signed by the three countries' heads of state in December 1992, whereas states and provinces were given a two-year grace period following the Agreement's entry into force to complete their lists. Non-conforming measures of local or municipal governments need not be scheduled under the NAFTA. 77 Conversely, the desire to be transparent can adversely affect the legal clarity of the schedules. For instance, in many GATS schedules, Members have provided information that may be valuable in itself but does not concern the substance of the legal commitment being undertaken.
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6.18 The other issue pertains to changes in policy. The GATS obliges Members to notify other Members of all changes in policy in scheduled sectors that have a significant effect on trade in services. NAFTA goes further in providing the opportunity for parties to comment on proposed changes (“to the extent possible”). The latter is evidently a greater transparency requirement. More evidence is needed to compare the incremental benefits and administrative costs of deeper transparency rules.
6.19 Policy implication. Greater transparency would facilitate international trade and international trade negotiations. The adoption of a rigorous negative list approach or a comprehensive positive list approach would lead to greater transparency. All parties could submit comprehensive “mock schedules” describing all non-conforming measures, with no sector or mode excluded. These schedules need have no legal status and would serve only to enhance transparency of services regimes. Since MERCOSUR countries are already contemplating comprehensive listing of restrictive measures in all sectors, including such a transparency obligation in other agreements would impose little incremental cost on Brazil and yield significant benefits in terms of improved information on barriers in export markets.
BINDING
6.20 All international agreements involve legally binding commitments. One issue is whether countries can choose the extent to which they bind their policies. As noted above, the GATS and NAFTA differ in the method of scheduling commitments. The difference between the “positive list” and “negative list” approaches does not arise from the degree of liberalization that each implies, because either approach can be used to specify a desired level of openness. Apart from the extent of transparency achieved, as discussed above, a difference could arise from the degree to which each country binds its policy regime.
6.21 The NAFTA uses, in principle, a negative list approach. It is presumed that access is unrestricted unless a Member specifies a barrier in a particular sector. Thus, a Member gives up the freedom to introduce any new restrictive measures and effectively binds its regime across the board. These bindings are required to reflect actual policy. Furthermore, any new services developed as a result of innovation or technological advancement, or for any other reason, would automatically be subject to established disciplines. As noted above, the GATS uses a combination of a positive list approach with regard to sectors, and a negative list approach with regard to measures. Thus, a Member is free to increase protection in unscheduled sectors. A further degree of freedom is introduced by the possibility of specifying that a particular mode is “unbound”—which also implies that a Member can introduce new restrictive measures.
6.22 But, as in the case of transparency, if a negative listing permits open-ended exclusions, then the difference between the two approaches becomes less meaningful—the previous section describes, for example, the wide exemptions scheduled under NAFTA by Mexico on basic telecommunication and the United States on maritime transport. Thus, if Members are not ready to make commitments in certain services sectors, they may be tempted to specify heavy-handed restricting measures in their negative lists that would take the substance out of commitments in sectors that they regarded as sensitive. If a rigorous negative list or comprehensive positive list approach is not acceptable, then Members could at least put limits on the number of "unbound" entries in schedules—and ensure comprehensive sectoral coverage.
6.23 There are, however, two more issues that affect the degree to which commitments contribute to legal certainty. First, there are many examples in GATS schedules where the precise nature of legal obligations is not spelled out, e.g., in the references to economic needs
241 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY tests, permitted under GATS Article XVI:2. Even Chile with a relatively open financial services sector has inscribed such a commitment for banking services. When the nature of these needs tests is unspecified, uncertainty and scope for arbitrariness follow. Even if such measures were spelled out fully, they would raise problems regarding the security of market-access commitments if they were in any way made contingent upon unforeseeable circumstances.78
6.24 The second issue is that many Members have chosen to make commitments that are much more restrictive than the status quo. For instance, India has committed to allowing only 25 percent foreign ownership in its telecommunications sector when it actually allows a much greater share of foreign ownership. While ceiling bindings may have positive value, they clearly offer less guaranteed access or legal security than bindings that reflect actual policy. There is an argument, therefore, for seeking ways of bringing bindings closer to the policy status quo. In practical terms, of course, the gap can widen again as markets become more open, unless an undertaking exists, as in the NAFTA, automatically to ratchet up scheduled commitments to reflect any liberalizing policy changes.79
6.25 Policy implication. It is desirable that parties to a trade agreement bind restrictive measures as widely as possible, either on the basis of a rigorous negative list or a comprehensive positive list. Bindings would reflect actual policy and the number of “unbound” and other discretionary entries like economic needs tests would be limited. MERCOSUR countries are already contemplating comprehensive bindings of restrictive measures in all sectors. A similar provision in other agreements would not imply a further loss of flexibility for Brazil, while enhancing security of market access for Brazilian exporters.
EXPLICIT BARRIERS
6.26 Services agreements must create a framework of rules to deal with forms of protection more complex and less visible than tariffs. These include, first, a variety of quantitative restrictions, ranging from cargo sharing in transport services, limits on the number of (foreign) suppliers in telecommunications and banking, to restrictions on the movement of service- providing personnel that affect trade in all services. Then there are numerous forms of discrimination against foreign providers, through taxes and subsidies as well as by allowing less favorable access to essential facilities such as ports, airports or telecommunications networks. And finally, a subtle class of measures that are neither quotas nor explicitly discriminatory but nevertheless have a profound effect on services trade, i.e., domestic regulations such as qualification and licensing requirements. The first two classes of measures are considered in this section, the third in the next section.
6.27 All agreements contain a national treatment provision that in principle prohibits all forms of discrimination. Under the GATS, national treatment applies only in scheduled sectors and
78 The question whether market access should be made contingent on unpredictable circumstances is under consideration in the ongoing negotiations on a possible emergency safeguard mechanism under the GATS. If such a mechanism were to be agreed, it would surely contain provisions against its careless or excessive use. 79 Under NAFTA, any unilateral liberalization is automatically bound. While this ensures that there is no wedge between a country’s actual policy and its GATS commitments, in the absence of a rule to provide credit for autonomous liberalization, such a provision can create a disincentive to undertake such liberalization. It is as if the country foregoes the right to extract “payment” for binding the unilateral liberalization it has undertaken. Therefore, while a ratcheting rule may make sense for an agreement like NAFTA that does not anticipate future rounds of negotiations, it needs to accompanied by a credit rule in agreements that seek to eliminate barriers through multiple rounds of negotiations like the GATS.
242 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS subject to specified limitations. Under the NAFTA, national treatment applies to all sectors unless non-conforming measures have been listed. Both agreements define national treatment as treatment equivalent in effect, not as identical treatment. Thus, both de jure Box 6.1 Ensuring Barrier-Free Trade in Electronically and de facto discrimination are Delivered Products Trade in electronically delivered products, which offers an increasingly viable prohibited. alternative to the movement of individuals, is today largely free of explicit barriers. Brazil with is growing interest in the export of software, entertainment and other services, has a strong interest in this medium. The main concern should be 6.28 The NAFTA provides for an preventing the introduction of new barriers if they become technically feasible and explicit right of non-establishment by dealing with regulatory barriers. WTO Members have so far focused on prohibiting the imposition of customs outlawing all measures requiring the duties on electronically delivered products. It is ironic that considerable local presence of firms or service negotiation energy has been invested in prohibiting the economically superior (and infeasible) instrument of protection whereas little attention has been devoted to providers (e.g., residency requirements inferior (and possibly more feasible) instruments such as quotas and discriminatory for professionals) as a pre-condition for internal taxation. In any case, since the bulk of such commerce concerns services, open trading the delivery of a service. Unless other conditions are more effectively secured through deeper and wider commitments restrictive measures have been specified, under the GATS on cross-border trade regarding market access (which would preclude quantitative restrictions) and national treatment (which would preclude all this provision guarantees free cross- forms of discriminatory taxation). border trade in services. Non- Most countries, including Brazil, have been reluctant to make full commitments on cross-border delivery of services, so there is considerable scope establishment is not addressed directly for an improvement in such commitments. For instance, in data processing, of the under the GATS, but depends on a total WTO Membership of over 130, only 66 and Members have made commitments; and only around two-thirds of these commitments guarantee Member’s commitments on cross-border unrestricted market access. One possible approach to improving commitments would be for all Members to agree that no restrictions would be imposed on cross- trade in services. Greater security of border delivery, either of all services or of a bundle of whose composition could be access for cross-border trade is likely to negotiated. These commitments have additional value because other GATS disciplines, be important for the further development for instance on domestic regulations, would only meaningfully kick in once these of electronic commerce in services (see commitments are in place. It is, in fact, likely that the main impediments to Box 6.1). electronic commerce will come in the form of domestic regulations. Consider for instance the issue of privacy, which could have a profound effect on electronic commerce. In late 1998, the European Union issued a wide-ranging 6.29 Both the NAFTA and the GATS directive that aims to safeguard the privacy of personal data of EU citizens and prevent its misuse worldwide. It is backed by the power to cut off data flows to recognize the potential for non- countries that the EU judges not to have adequate data protection rules and enforcement. The directive caused frictions with the U.S., which accused the EU discriminatory quantitative barriers to of trying to impose laws beyond its own frontiers. A compromise was reached restrict the contestability of service under which the U.S. agreed to set up arrangements for the processing by companies of personal data from the EU, but the issue has not been fully resolved. markets. While NAFTA does not The issue could have an impact on developing countries exports of data prohibit the latter measures, they must processing services, and poses a difficult choice for these countries. If they choose not to enact laws deemed adequate, they could be shut off from participation in this nonetheless be listed in an annex for growing market. In the absence of such laws and given the weakness of local legal transparency purposes and parties shall systems, it might be difficult for private firms in developing countries to emulate United States firms like Microsoft and credibly commit to meet the required high endeavor to eliminate them through standards. future negotiations. Under the GATS If they do enact stringent laws (as Argentina has reportedly done), it is unlikely that they could be made specific to trade with particular jurisdictions, and and the MERCOSUR, all quantitative so the result could be an economy-wide increase in the costs of doing business. restrictions (discriminatory and non- For instance, if private sector estimates generated in the United States are to be believed, information sharing between different institutions saves the customers of discriminatory) are covered by the 90 financial institutions (accounting for 30 percent of industry revenues), $17 market access provision—which billion a year ($195 per average customer household) (Glassman, 2000). It is to address such issues that full-fledged rules on domestic regulations prohibits such restrictions in scheduled would be useful. A country would then be able to challenge regulations that are sectors unless a Member has listed them perceived to be more burdensome than necessary to achieve an objective. This would make it possible to examine whether the objective of privacy could be in its schedule. achieved through less stringent means. In the meantime, the basic non- discriminatory rules under the GATS may offer some recourse. If the European Union were to recognize the United States’ regulations, then other countries would 6.30 The GATS negotiations revealed be able to argue that it should be sufficient for them to adopt the U.S. model rather the difficulties involved in making MFN than the stricter EU model. a general obligation with regard to services in a multilateral setting. In fact, even the NAFTA countries could not agree to liberalize intra-regional trade and investment in services on a full—
243 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY i.e., reservation-free—MFN basis. 80 This, to a large extent, may be explained by the fact that the sectors in which MFN sensitivities have proved most acute in the GATS setting—e.g., air and maritime transportation—are also those in which little tangible progress could be achieved in a trilateral setting. Under MERCOSUR, there can be no qualifications to MFN treatment.
Relationship between market access and national treatment81
6.31 The value of an Agreement depends on the clarity of its rules. There is a need to improve the clarity of the GATS, and to ensure that any new agreement that uses it as a model remedies its flaws.
6.32 The NAFTA makes a cleaner delineation than the GATS of the different classes of restrictive measures. The NAFTA’s national treatment provision prohibits all forms of discrimination, while the residual class of non-discriminatory quantitative restrictions are treated more gently. Under the GATS, there is an overlap between the respective domains of Article XVII on national treatment—covering all discriminatory measures -and Article XVI dealing with market access—covering all quantitative restrictions. Discriminatory quantitative restrictions are covered by both provisions. The problem is confounded by a scheduling convention set out in Article XX that requires that measures falling within the scope of both provisions should be inscribed in the market access (Article XVI) column of the schedule and would be understood to provide a condition or qualification to Article XVII as well.82 Since the precise overlap between Article XVI and Article XVII is not identified, the scope of the national treatment obligation remains ill-defined. It is difficult to determine the precise value, for example, of a schedule entry on commercial presence recording no commitment under market access ("unbound"), or specifying the requirement of an economic needs test, and a full commitment under national treatment ("none", meaning no limitations). Can Members be sure that any licenses to establish would be issued on a non-discriminatory basis?83
The implications of scheduling commitments by mode
6.33 The fact that GATS allows Members to schedule commitments by modes raises both economic and legal issues.
6.34 The first issue is whether the distinction between modes under GATS represents useful flexibility or an invitation to discriminate between modes. Modal neutrality of policy appears to be a desirable principle, because it obliges governments to treat all modes the same way and thus allows the private sector to choose the most efficient mode of supply. But there are two
80The NAFTA's cross-border trade in services and investment chapters adopt what has been called a `reverse MFN' standard, meaning that if a NAFTA partner extends more favorable treatment to a non-NAFTA investor or service provider, it must also extend this treatment to NAFTA investors or service providers. 81 This and the subsequent section draw upon Mattoo (1997). 82 Thus, the market access column contains measures which are inconsistent with Article XV1 only (nondiscriminatory market access limitations) and with both Article XVI and XVII, but there is frequently no indication as to whether the measures concerned are non-discriminatory or discriminatory. 83 Members have differing views on these issues, with many subscribing to the view that the market access provision pertains to the right to establish and the national treatment provision covers post-establishment treatment. Not only is there no textual basis for this interpretation, but it is actually contradicted by the fact that the market access provision also covers post-establishment restrictions (e.g., on the output of a services firm) and the national treatment provision covers “all measures affecting the supply of services.” In any case, there is clearly a need to address this issue.
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problems. First, proponents of modal neutrality often have a conveniently truncated view of modes—the movement of natural persons is implicitly excluded. Secondly, even in the context of the first three modes, there may be a cost to depriving governments of the flexibility to liberalize only specific modes. If a government prefers the liberalization of one mode (say, commercial presence) to another (say, cross border delivery)—because commercial presence creates larger positive externalities—but the liberalization of any mode to autarky, then a modal neutrality rule delivers undistorted liberalization. But if a government prefers liberalization of one mode (commercial presence) to autarky, and autarky to liberalization of another mode (cross-border delivery)—e.g., because liberalized commercial presence imposes smaller adjustment costs in the labor market than liberalized cross-border delivery—then a modal neutrality rule inhibits all liberalization. Thus, in practice, the imposition of a modal neutrality rule, for example by combining one or more modes into a single mode, is not unambiguously desirable.
6.35 The legal issue arises because it is difficult to interpret the scope of the national treatment and MFN obligations even for identical services that are supplied through different modes. Both these obligations prohibit discrimination between domestic services and service suppliers and “like” foreign services and service suppliers. Even though there is nothing in the texts of the national treatment and MFN provisions which suggests that the mode of supply is a consideration in defining "likeness" of a service, WTO Members have adopted a more flexible approach. The mutually agreed technique of scheduling commitments by mode suggests that Members retain the right to discriminate between the same service supplied by different modes—for instance, if a Member has offered to provide national treatment under modes 3 and 4 but not under modes 1 and 2. For the sake of consistency, the same modal distinctions would have to be accepted for MFN treatment.
6.36 However, once a Member has made a commitment to provide full national treatment on all modes, it would seem that this freedom to discriminate ends. The example of a Member who provides a production subsidy to a national services producer provides a useful illustration of these issues.84 For instance, the subsidy may consist of partial payment of fuel costs for transporters serving a particular domestic route. Who else could claim a right to be subsidized, given the national treatment obligation?85 Non-national producers of the like service located in the territory of the Member would seem to be obvious claimants to the fuel cost subsidy. But any subsidy would have an impact also on competitive conditions under mode 1, because cross border suppliers would be competing against subsidized local services. The standard for judging whether treatment is "no less favourable" for the purpose of national treatment must be the treatment of like national services and service suppliers. Therefore, a national treatment commitment under mode 1 would assure cross border suppliers that their services would not face unfavourable conditions of competition compared to nationally produced services.28 In the
84 While Article III.8(b) of GATT 1994 exempts production subsidies from national treatment, subsidies, like all measures affecting trade in services, are automatically subject under GATS to the national treatment disciplines in scheduled sectors unless limitations have been scheduled. 85 An Explanatory Note to scheduling commitments under the GATS clarifies, to an extent, the territorial scope of the national treatment obligation. Paragraph 10 of the Explanatory Note states that: "There is no obligation in the GATS which requires a Member to take measures outside its territorial jurisdiction. It therefore follows that the national treatment obligation in Article XVII does not require a Member to extend such treatment to a service supplier located in the territory of another Member." This would seem to imply, for example, that a Member is not obliged to extend a subsidy provided to suppliers located in its territory to suppliers located outside its territory. It should be noted, however, that the Explanatory Note addresses specifically the treatment of suppliers and does not deal with issues that may arise in relation to the treatment of services— especially with respect to the cross-border supply of a service, when the service is supplied within the territory of a Member while the supplier is located outside it. 28 In fact such a reading of the national treatment obligation may be the most effective discipline on subsidization: the set of potential claimants would be so wide that the incentive to subsidize would be significantly diminished.
245 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY absence of such an interpretation, there is a danger that the national treatment (and MFN) obligations would have limited value with respect to cross-border delivery.
Non- discriminatory allocation of quotas
6.37 One important issue that we identified in Chapter 5, but has received surprisingly little attention in international agreements on services, is how quotas are to be allocated in a manner consistent with the non-discrimination obligation. In the past, this was not a major issue because commitments reflected the status quo and the quotas, particularly with regard to service suppliers, were descriptions of the existing market structure.86 But in the future, as genuine liberalizing commitments are made, the non-discriminatory allocation of quotas is bound to be an important issue. For instance, it has been reported that China promised the European Union that its firms would be granted a specific number of licenses in the insurance sector.87
6.38 Appropriate candidates for a non-discriminatory allocation of quotas would seem to be first-come, first-served rule (e.g., where a large number of work permits are being issued) or a system of auctions to the highest bidder (e.g., where a few telecommunication licenses are being issued).88 In any case, it would seem desirable that the allocation procedures were open and transparent.
6.39 Policy implication. The delineation of the disciplines under GATS (especially between market access and national treatment) needs to be improved—especially if it is to be a model for other agreements—because it is unclear and creates legal uncertainty. One possibility is to adopt the delineation under NAFTA: national treatment covers all discriminatory measures and markets access all non-discriminatory quantitative restrictions.
• It is desirable that post-establishment national treatment be made a general obligation, and pre-establishment national treatment subject to negotiations. Brazil already guarantees the former, and the latter should offer sufficient negotiating flexibility.
• It seems desirable that parties have the freedom to list variable commitments across modes; but once a party makes full commitments on all modes, then no form of discrimination (including through taxes or subsidies) be permitted against the supply of services through any mode (including cross-border delivery). A party could, however, make distinctions that are necessary to achieve legitimate regulatory objectives.
• Non-discriminatory quantitative restrictions are best treated as under the GATS, i.e., be listed in schedules and be subject to negotiations, and not as under the NAFTA.
86 Thus, when Bangladesh’s commitments under GATS state "four licenses issued" in cellular telephony, the ambiguity in the choice of tense is not an accident: the licenses in question had already been issued. 87 In the Bananas Case, the European Union's method of allocating import licenses for bananas from certain sources was found to be inconsistent with Article II because it reallocated quotas and quota rents away from the importers who traditionally imported from these sources (see paragraphs 7.350-7.353 of the Panel Report). In a sense, the Panel's reasoning followed the logic of GATT Article XIII on the "non-discriminatory administration of quantitative restrictions," which requires a distribution of trade approximating the shares which countries might be expected to have in the absence of such restrictions or supplied during a previous representative period. In the services context, the requirement to replicate historical shares may have no relevance if there was no previous foreign presence, or perpetuate historical discrimination if previous quotas were allocated to favored suppliers. 88 Mattoo (2000b).
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Furthermore, it is desirable that all allocations of licenses where entry is restricted be subject to open and transparent procedures.
DOMESTIC REGULATIONS
6.40 Developing countries like Brazil have much to gain from strengthened multilateral disciplines on domestic regulations for at least two reasons.89 First, the development of such disciplines can play a role in promoting and consolidating domestic regulatory reform. The experience with the WTO’s telecommunications Reference Paper is an example of this possibility. Secondly, such disciplines can equip developing country exporters to address regulatory barriers to their exports in foreign markets. Furthermore, unless disciplines are developed to deal with licensing and qualification requirements, market access commitments on the movement of skilled natural persons ranging from architecture and engineering to dentistry— areas in which Brazil has a growing interest—will have only notional value. Similar concerns arise in other regulation-intensive services sectors.
6.41 The diversity of services sectors, and the difficulty in making certain policy-relevant generalizations, has tended to favor sector-specific approaches—described in detail in the Annex to Chapter 6. However, even though services sectors differ greatly, the underlying economic and social reasons for regulatory intervention do not. And focusing on these reasons provides the basis for the creation of meaningful horizontal disciplines at the multilateral level. Such a route is particularly desirable because at the multilateral level, it will be difficult and not necessarily desirable to pursue harmonization and mutual recognition—even though such initiatives can play a significant role at the regional or plurilateral level.90
6.42 The economic case for regulation in all services sectors arises essentially from market failures attributable primarily to three kinds of problems, natural monopoly or oligopoly, asymmetric information, and externalities (see Chapter 3). Market failure due to natural monopoly or oligopoly may create trade problems because incumbents can impede access to markets in the absence of appropriate regulation. Because of its direct impact on trade, this is the only form of market failure that needs to be addressed directly by multilateral disciplines. The relevant GATS provision, Article VIII dealing with monopolies, is limited in scope. As a consequence, in the context of the WTO’s basic telecom negotiations, the reference paper with its competition principles was developed in order to ensure that monopolistic suppliers would not undermine market access commitments (see Annex). There is a need to examine ho far these principles can be generalized to a variety of other network services, including transport (terminals and infrastructure), environmental services (sewage) and energy services (distribution networks).91
6.43 In all other cases of market failure, multilateral disciplines do not need to address the problem per se, but rather to ensure that domestic measures to deal with the problem do not serve unduly to restrict trade. The same is true for measures designed to achieve social objectives.
89 This section draws on Mattoo (2000a, 2002). 90 Such a generic approach is to be preferred to a purely sectoral approach for at least three reasons: it economizes on negotiating effort, leads to the creation of disciplines for all services sectors rather than only the politically important ones, and reduces the likelihood of negotiations being captured by sectoral interest groups. It is now widely recognized that the most dramatic progress in the EU single-market programme came from willingness to take certain broad cross- sectoral initiatives. 91 Work on this issue has been initiated jointly by the OECD and World Bank, and a preliminary set of papers can be accessed from the following website: www.worldbank.org/trade.
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Such trade-restrictive effects can arise from a variety of technical standards, prudential regulations, and qualification requirements in professional, financial and numerous other services; as well as from the granting of monopoly rights to complement universal service obligations in services like transport and telecommunications.
6.44 The trade-inhibiting effect of this entire class of regulations is best disciplined by complementing the national treatment obligation with a variant of the so-called "necessity" test. Such a test is already part of the recently established disciplines in the accountancy sector (see Annex). This test essentially leaves governments free to deal with economic and social problems provided that any measures taken are not more trade restrictive than necessary to achieve the relevant objective. It would seem desirable to use the test to create a presumption in favor of economically efficient choice of policy in remedying market failure and in pursuing non- economic objectives. For instance, in the case of professionals like doctors, a requirement to requalify would be judged unnecessary, since the basic problem, inadequate information about whether they possess the required skills, could be remedied by a less burdensome test of competence. If a necessity test were deemed to be an excessive intrusion on national regulatory autonomy, then a weaker test could be devised to address the most egregious regulatory barriers to trade (e.g., a “not obviously unnecessary” test).
6.45 In sum, the telecommunications and accountancy models, suitably developed and generalized, could together ensure that domestic regulations achieve their objectives without sacrificing economic efficiency. This is not to say that there is no need for sector-specific initiatives, but we can make a useful beginning by taking a cross-sectoral approach.
6.46 Policy implications. It needs to be examined, particularly in the context of developing countries, how far the key disciplines in the basic telecommunications reference paper can be made applicable to all network-based services, transport (terminals and infrastructure), environmental services (sewage) and energy services (distribution networks), so as to ensure access to essential facilities.
• It needs to be examined how far a variant of the "necessity" test can be made applicable to all intermediation and knowledge based services, financial services, professional services, etc., and whether the test can be used to create a presumption in favor of economically efficient choice of policy in remedying market failure.
DISCIPLINES ON RELATED GOVERNMENT POLICIES
Government procurement
6.47 Government procurement tends to be excluded from the scope of most of the agreements. The GATS does not cover government procurement of services, although services and construction services are covered by the WTO plurilateral Agreement on Government Procurement, of which Brazil is not a Member. Services and construction are subject to NAFTA’s disciplines on government procurement, which requires all federal agencies and a number of federal state enterprises to open public contracts to North America-wide tendering. Adopting a negative list approach to entity coverage and a positive list approach to services coverage, such disciplines have contributed to a more liberal environment in a number of service activities where the government is an important consumer (e.g., consulting, engineering and
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construction).92 Services that are excluded in whole or in part include transportation, storage, communications, finance, R&D, and legal, education, and health services.
6.48 There are many good reasons to liberalise government procurement, though WTO experience shows that most countries (developed and developing) are reluctant to immediately accept full liberalisation of procurement of services. At the very least, it would seem desirable to increase transparency, which is in fact the raison d’être of the WTO’s Working Group on Transparency in Government Procurement.93 If countries are unwilling to give up the right to protect, then at least they could agree to bind the margins of preference granted to national suppliers, and make these margins subject to unilateral or negotiated reductions—in a manner analogous to tariffs.94 New transparency disciplines are not likely to be burdensome for Brazil because it has already implemented significant domestic improvements. In fact, the federal level Brazilian E-Government Procurement System “Comprasnet” received a prize from the European Commission, in November 2001, for good practice in e-government and was considered a model for public procurement.
6.49 Even though Brazil is not a Member of the WTO’s GPA, it is negotiating government procurement market access rules within MERCOSUR, in the FTAA and the MERCOSUR-EU Agreements. The Protocol on Government Procurement that is being negotiated in MERCOSUR will establish rules on transparency and non-discrimination. Each MERCOSUR country will grant national treatment to providers from other MERCOSUR countries according to certain mutually agreed thresholds and lists of entities, goods, services and public works.
6.50 It would be natural for countries like Brazil to make their willingness to accept disciplines on government procurement depend on future negotiations under the GATS on measures affecting trade in services. Foreign suppliers can only effectively contest the market for government procurement if they are not unduly handicapped by restrictive trade measures.95 Hence, the creation of genuine international competition for procurement contracts depends crucially on the liberalisation of trade.
6.51 For instance, one of the most important services sectors in the context of government procurement, and one in which Brazil has a significant stake, is construction. All signatories to the GPA have accepted its disciplines in this sector above a certain threshold value. Yet in the GATS, Members have usually not bound themselves to grant market access to the supply of construction services through the presence of natural persons, except for certain limited categories of intra-corporate transferees. The assurance that workers can be temporarily moved to construction sites would greatly increase the benefit of non-discriminatory government
92 An important difference between regional and multilateral agreements in the area of government procurement relates to the lower thresholds that typically apply in the former. 93 It was decided at the WTO’s 4th Ministerial Conference in November 2001 that negotiations on transparency in government procurement would be launched after the 5th Session of the Ministerial Conference on the basis of a decision taken by explicit consensus. Brazil supported the text of the Draft Ministerial Declaration in its proposed wording as far as transparency in Government Procurement is concerned. 94 In this context, it is relevant that the GPA contains two crucial sets of additional disciplines that supplement the national treatment obligation: first, the procedural disciplines, which are important for making the non-discrimination obligation effective in the face of administrative discretion; and second, the enforcement mechanisms—particularly the challenge procedures—which are essential for effective enforcement, given the one-shot and irreversible nature of many procurement contracts. 95 See Article III:3 of the GPA. Evenett and Hoekman (1999) argue that if there were no barriers to entry, than discriminatory procurement would have few long run effects. They note that this requires that foreign suppliers can obtain non-discriminatory access to procurement contracts through the establishment of local presence.
249 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY procurement for developing countries. The same applies to procurement of other services, such as software and transport.
6.52 Policy implication. There is a strong case for negotiating disciplines on government procurement of services. Such disciplines should be linked to negotiations on the liberalization of the trade barriers, particularly restrictions on the movement of natural persons, so that developing countries like Brazil can effectively contest markets for construction and other services in which they have a comparative advantage.
Subsidies
6.53 Neither the NAFTA nor the GATS impose significant general disciplines on subsidization of service industries (as the European Union has done). Article XV of the GATS on subsidies states that Members recognize that in certain circumstances subsidies may distort trade in services, and that they shall enter into negotiations with a view to developing the necessary multilateral disciplines to avoid such effects. These negotiations are also to address the appropriateness of countervailing procedures. Little progress has been made in these negotiations. MERCOSUR specifies that general subsidy disciplines, once developed, will apply to services.
6.54 Today, of course, the key discipline of national treatment applies to subsidies in scheduled sectors unless Members have listed limitations in this regard—as Brazil has done. If national treatment applies fully to each mode, as we suggest it should be (Section 6.4), then it becomes a potentially powerful discipline once limitations are negotiated away. There would still remain the issue of export subsidies—for example, Brazil’s exports of construction services may be affected if firms from other countries have access to subsidized export finance.
6.55 Policy implication. National treatment seems to be a critical discipline on subsidies. It would automatically be applied as existing limitations on national treatment are negotiated away. The requirement that subsidies be provided to both national and foreign providers would ensure that subsidies are not an instrument of protection but of attaining legitimate social objectives. There would still be a need to address the issue of export subsidies in services.
Emergency Safeguard Measures
6.56 The role of safeguard action is thus to provide temporary relief in order to make possible gradual rather than abrupt adjustment. None of the Agreements under consideration have a safeguard mechanism, though negotiations on this issue are underway in the WTO. The existence of a safeguard mechanism may influence a country’s willingness to eliminate some of the restrictions they currently maintain. That is, its existence would help induce further liberalisation by providing insurance against extreme situations and creating political reassurance that the government retains the freedom to respond to injurious situations. The central objective of safeguard action must be to facilitate adjustment. A Member may be reconciled to reductions in national output and employment in a particular industry, but the speed at which this is happening (due to a rapid increase in imports) imposes a high social cost.
6.57 Furthermore, by providing an avenue for legitimate demands for temporary protection to facilitate adjustment, a safeguard mechanism would prevent contamination of the system by
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resort to grey-area measures.96 It would be easier to enforce other GATS disciplines stringently, and prevent abuse of other provisions or domestic regulations, if there existed a feasible safeguard provision through which legitimate demands for temporary protection could be expressed.
6.58 But in order to ensure that this provision itself does not become subject to abuse, it is necessary to create adequate disciplines on its use. It is the feasibility of creating meaningful disciplines on ESMs in services that is the greatest challenge, given the paucity of statistics. For instance, the unavailability of disaggregated trade statistics for most services sectors would make it difficult to establish a causal link between increased imports and injury—a central requirement in the goods case.
6.59 In any case, it may be desirable to create a presumption in favour of economically superior instruments of safeguard action. In certain cases, it may not be appropriate to apply safeguard action across all modes. For instance, if the motive of such action is to protect domestic employment, then there may be little reason to take action against existing or new foreign investment. In many cases, even though safeguard actions may be justified, restrictions on imports may not provide a solution in response to certain shocks, and may not be the most desirable instruments. Direct support may be a more suitable instrument than import restrictions, provided that the necessary resources can be raised without creating other distortions. This seems to suggest that there may be some merit in linking the negotiations on safeguards with those under subsidies.
6.60 Policy implication. There is in principle a case for emergency safeguard measures, but their creation must be based on sound economic considerations. Furthermore, we suggest that their use only be allowed in areas where the quality of available evidence precludes their protectionist abuse.
MULTILATERAL RULES FOR REGIONAL AGREEMENTS
6.61 Article V of the GATS sets out the conditions that must be satisfied by regional integration agreements liberalizing trade in services involving GATS Members. Analogous to Article XXIV of the GATT, Article V of the GATS imposes three conditions on economic integration agreements between signatories of the GATS.97 First, such agreements must have "substantial sectoral coverage" (Art. V:1(a)). An interpretive note states that this should be understood in terms of the number of sectors, volume of trade affected, and modes of supply. With respect to the latter, economic integration agreements should not provide for the a priori exclusion of any mode of supply. Second, regional agreements are to provide for the absence or elimination of substantially all discrimination (defined as measures violating national treatment) between or among the parties to the agreement in sectors subject to multilateral commitments. This is to consist of the elimination of existing discriminatory measures and/or the prohibition of new or more discriminatory measures, and is to be achieved at the entry into force of the agreement or on the basis of a reasonable time frame (Art. V:1(b)). Third, such agreements are
96 In the Uruguay Round, it was sought to create an honorable yet flexible safety valve for temporary protectionist pressures precisely in order to prevent the use of grey area measures such as VERs. The Agreement on Safeguards reflects a compromise: a weakening of the substantive disciplines in Article XIX, for instance those on compensation, and a strengthening of the procedural disciplines, for instance those ensuring increased transparency of investigations and increased need to justify actions. 97 The complete text of the Article is reproduced in Annex 2.
251 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY not to result in overall higher trade and investment barriers against third countries within the respective sectors or subsectors.
6.62 These rules are not particularly strong or clear. As far as the internal dimension of integration agreements is concerned, the minimum that seems to be required is a standstill commitment and substantial sectoral.98 In those instances where this is clearly not the case, Article V:2 allows participants in integration arrangements to argue that such an agreement should nonetheless be accepted insofar as it is part of a wider process of economic integration or trade liberalization among member countries. Furthermore, the Agreement provides for even greater flexibility in this respect when developing countries are parties to an agreement, as MERCOSUR is and the FTAA will be. Furthermore, in the services context, the judgment of whether the overall level of barriers has been raised is likely to be difficult given the complexity of the barriers. Finally, the Working Parties that have been established to determine the multilateral consistency of preferential liberalization agreements notified to the GATT and the WTO have been singularly unsuccessful in reaching unanimous conclusions.
6.63 On the whole, it appears that most types of agreement could satisfy the conditions imposed by the GATS. Moreover, few WTO Members have displayed much enthusiasm in strengthening existing rules, even though negotiations on this issue have been mandated at WTO’s Doha Ministerial Meeting. Countries, therefore, have considerable freedom to design integration agreements for service sectors.
RULES OF ORIGIN
6.64 Under international law, the nationality of a company is determined for most purposes by the country of incorporation. However, the criterion of incorporation has been deemed to be inadequate for certain purposes. For example, it may accord nationality to corporations that are incorporated in a country for tax avoidance or related purposes, but do no business or have no assets in that country. This perceived inadequacy is reflected in many bilateral and plurilateral trade and investment agreements.99 GATS Article V states that a juridical person constituted under the laws of a party to a regional agreement shall be entitled to treatment granted under such an agreement provided it engages in substantive business operations in the territory of the parties to such an agreement. But in an agreement involving only developing countries, more favorable treatment may be granted to juridical persons owned or controlled by natural persons of the parties to such an agreement.
6.65 Most regional agreements extend benefits to all investors and service providers that are nationals or permanent residents of a member country, or are incorporated under the laws of a Party. Ownership or control is not the primary criterion. The NAFTA requires that service providers, regardless of nationality, either carry out substantial business operations in the territory of any Party (for cross-border trade in services) or be incorporated in and carry out substantial business operations in a member country (for investment) in order to receive NAFTA
98 The “and/or” in the drafting of Article V suggests that a mix of standstill and liberalization will be enough. 99 Bilateral investment treaties (BITs) negotiated between certain OECD countries and developing countries may include ownership or control as the primary or as additional factors for determining the origin of a corporation. The BITs of countries such as France, Germany and the United Kingdom rely primarily on the incorporation criterion, “referring to control or substantial interest only in specific contexts, such as the grant of national treatment to investments by nationals of a party” (Fatouros, 1987, p. 302). The U.S. BITs use a combination of incorporation and substantial interest, while other countries such as Switzerland focus only on control.
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treatment.100 In addition to incorporation, the EC requires that entities conduct substantial business operations within member countries. The “single passport” approach adopted by numerous services-related EC Directives generally affords foreign-established entities non- discriminatory terms of access to Community markets.101 The MERCOSUR adopts a similar rule of origin. It defines the service supplier of another Member as constituted or otherwise organized under the law of that Member and engaged in substantial business interests in the territory of that Member or any other Member.
Box 6.2 Liberal rules of origin minimize trade diversion The Mexican experience suggests that a liberal rule of origin played a critical role in neutralizing any strong preferences that U.S. and Canadian owned banks received from Mexico under NAFTA. Trade preferences under NAFTA and the EU-Mexico FTA. Before the coming into effect of NAFTA, Mexico imposed restrictions on foreign ownership of banks in Mexico. Under NAFTA, Mexico extended a preference to U.S. and Canadian based banks over other foreign banks in the form of unrestricted foreign equity participation: banks based in the U.S. and Canada could set up wholly owned subsidiaries in Mexico, being subject only to aggregate market share limits. Mexico chose an incorporation test in connection with the admission of foreign banks, where a bank’s nationality was determined by the place in which it is incorporated, provided it conducted substantial business operations in that place. Thus, even European or Asian banks based in the U.S. could set up wholly owned subsidiaries in Mexico.* In 2000, Mexico implemented another regional agreement: the EU-Mexico FTA, which extended the right to establish fully owned and controlled financial affiliates in Mexico to Europe-based banks. The degree of liberalization between the EU and Mexico became almost equivalent to the degree of liberalization between Mexico and the other NAFTA countries. Did Mexico’s NAFTA commitment lead to preferential treatment of U.S. and Canadian banks? The experience of several European banks suggests that the liberal rules of origin under NAFTA prevented substantial trade diversion. For example, in 1994, Banco Santander established a financial group in Mexico as a subsidiary of Santander’s American subsidiary in Puerto Rico, using the NAFTA benefits. Once established, in 1997, Santander acquired Invermexico, and formed Grupo Financiero Santander Mexicano. Further, in 2000, Santander acquired Banco Serfin and formed Grupo Financiero Santander-Serfin. In the second half of 2001, after the EU-Mexico free trade agreement was in effect, Grupo Financiero Santander Serfin’s ownership was transferred from the American (Puerto Rican) subsidiary to Banco Santander Central Hispano of Spain. Similarly, ING Barings (Mexico) was established in November 1995 as a subsidiary of the American subsidiary of ING Bank NV (Netherlands). However, in 2001, after the entry into force of the EU-Mexico (2000) agreement, ownership of ING Barings (Mexico) was transferred from ING Barings (USA) to ING Bank NV (Netherlands) as it was more efficient from a tax standpoint to be directly owned by the parent rather than by a holding company in a third jurisdiction. In a slightly different fashion, HSBC Bank Mexico S.A. was established in August 1995 when HSBC USA Inc. (an American holding company of the Hong Kong and Shanghai Banking Corporation) took over Republic National Bank of New York, which had already established a subsidiary in Mexico. The name Republic National Bank was changed to HSBC Bank Mexico S.A. HSBC Bank Mexico is owned entirely by HSBC USA Inc, which is, in turn, owned by HSBC Holdings PLC of Great Britain. Foreign banks have acquired a significant share of the Mexican market in the last few years as is evident from Table 6.2. In the year 2000, besides controlling the largest and third largest financial groups (both under Spanish control), they managed 48 percent of the banking system assets, 46 percent of the outstanding loans, and hold 48 percent of the banking system capital. In addition, the Bank of Nova Scotia controlled the seventh largest (Inverlat), and Citibank, the eighth largest banks in Mexico. In July of 2001, Citibank and Banamex merged to create the largest bank in Mexico, which comprises the operations of Banamex, Citibank Mexico, and Banca Confia. Foreign banks have also made inroads into the retail segment. Citibank, Canada’s Bank of Nova Scotia, and Spain’s BBVA and BSCH, after having operated with a relatively small presence, recently acquired control of Mexican banks with a sizeable participation in retail banking. ______*Since the gradual opening of Mexico’s financial markets involved the maintenance of foreign market share limitations, there was concern that Mexico might give precedence to Canadian or U.S. financial institutions over non-NAFTA applicants during the transition period when the aggregate ceilings were close to being met. Language contained in Mexico’s financial services reservations under NAFTA (Annex VII) suggests that, in administering license applications, the Mexican authorities would attempt to ensure, inter alia, that benefits were not denied to enterprises controlled by U.S. or Canadian nationals because of expansion in Mexico of institutions controlled by non-NAFTA Parties.
6.66 We saw in Chapter 5 that rules of origin play a critical role in determining the degree to which regional trading arrangements discriminate against non-member countries, and hence the
100 The financial services chapter of the NAFTA offers one exception to the above rule, with Canada adopting a control test to determine a financial institution's eligibility for NAFTA benefits. As well, the maintenance of foreign market share limitations during the transition towards liberalized Mexican financial markets could prove problematic depending on the size and speed with which firms from non-NAFTA countries secure access into Mexico's market. 101 While the principle of mutual recognition of home-country licensing and certification does provide EC professionals with greater Community-wide mobility, the creation of a truly integrated market for professional services still faces a number of regulatory impediments. This is reflected in the recent proposal of EC Commissioner Martin Bangemann for an EC `entity' for the joint cross-border practice by liberal professions. Seeking to fill a gap in EC law, such legal entity could be formed by natural persons and firms, and the entity itself could carry out the professional activity. It would be for use only by certain defined professions. The EC maintains discriminatory rules of origin for professional practice by limiting the benefits of mutual recognition described above to EC nationals. The same applies to the temporary entry privileges obtaining for business people under the FTA and the NAFTA, which are reserved to member countries' citizens.
253 BRAZIL – TRADE POLICIES TO IMPROVE EFFICIENCY, INCREASE GROWTH AND REDUCE POVERTY extent of potentially costly trade diversion. When levels of protection differ between participating countries, the effective preference granted to a trading partner depends on the restrictiveness of the rule of origin. In the extreme, if one participant has a completely open market, the adoption of a liberal rule of origin by the other participants is equivalent to MFN liberalization. Not surprisingly, participants who seek to benefit from preferential access to a protected market would argue for restrictive rules of origin. (See Box 6.2 and Table 6.2.)
Table 6.2: Foreign Participation in the Mexican Banking Sector (as of Dec. 2000) Name of Mexican Foreign bank Stake (%) Market Share Institution ownership of Assets (%) Santander Mexicano Santander Hispano 99 5.7 (Spain) Serfin Santander Hispano 100 8.5 (Spain) BBVA-Bancomer BBVA (Spain) 30.5 19.7 Bital Santander Hispano 16.3 9 (Spain) & BCP (Portugal) Citibank Citibank 100 4 J.P.Morgan J.P.Morgan (USA) 100 1.8 Chase Manhattan Chase Manhattan (USA) 100 0.2 Dresdner Dresdner (Germany) 100 0.2 ING Barings Bank ING Bank NV 100 0.2 (Netherlands) HSBC Mexico S.A. HSBC Holdings PLC 100 0.2 (UK) Bank of America Bank of America (USA) 100 0.2 BNP BNP Paribas (France) 100 0.1 ABN Amro ABN Amro Bank 100 0.1 (Netherlands) Bank of Tokyo- Bank of Tokyo (Japan) 100 0.1 Mitsubishi Source: “Update on Foreign Financial Institutions in Latin America,” Salomon Smith Barney (2000).
6.67 Whether it is in the interest of a protected market to accept restrictive rules, depends on two conflicting considerations. The adoption of a liberal rule of origin minimizes the costs of trade diversion and is economically efficient. But it suffers from the bargaining handicaps of the MFN approach. It reduces the incentive for anyone to negotiate a preferential agreement, and it reduces the negotiating leverage vis-à-vis third countries. For instance, if Brazil accepts a liberal rule of origin in MERCOSUR, then it is as if it were liberalizing on an MFN basis where the Argentine market is already open. There are likely to be efficiency gains from doing so; but it does mean giving up negotiating currency vis-à-vis those countries that can use Argentina to access the Brazilian market.
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6.68 Policy implication. It is desirable that parties adopt the most liberal rule of origin that is consistent with strategic bargaining considerations.
RECOGNITION
6.69 Recognition agreements are like sector-specific preferential arrangements, and can have similar trade-creating, trade-diverting effects. We saw in Chapter 5 that the gains from recognition within a sub-set of countries are likely to maximized, and the adverse consequences for outside countries minimized, if they do not contain restrictive rules of origin—i.e., any provider from outside countries (say a Brazilian dentist) that fulfils a regulatory requirement in one participant country (Portugal) has access to the entire market (Europe). We also saw that ideally all countries with similar regulatory requirements should participate in mutual recognition requirements.
6.70 In this context, the interpretation of the GATS provision on recognition (Article VII) is likely to be of considerable importance. The provision attempts to strike a difficult balance. On the one hand, it is permissive and allows a Member at any point of time to recognize the standards of one or more Members and not of others. On the other hand, it seeks to ensure that this freedom is not abused by prohibiting the use of recognition as a means of discrimination and requiring a Member who enters into a recognition agreement (RA) to afford adequate opportunity to other Members to negotiate their accession to such an agreement or to negotiate comparable ones. In this respect, Article VII mandates an openness vis-à-vis third countries in a way that Article V, dealing with economic integration agreements, does not. How can it be established whether acceptance of some standards and not others is discriminatory? Making distinctions between services and service suppliers in the pursuit of certain domestic policy objectives, such as to ensure the quality of professional services, financial stability, and competitive market conditions, is economically sensible—as we saw in Chapter 3. It would, therefore, be desirable to allow Members the legal freedom to pursue such objectives, but to discipline the exercise of such freedom by ensuring that the choice and level of instruments is not more burdensome than necessary—with economic efficiency considerations playing a role in this assessment.
6.71 What is the empirical significance of MRAs? It is possible to provide a preliminary answer thanks to the transparency requirement created by Article VII:4: Members must inform the Council for Trade in Services about existing MRAs and of the opening of negotiations on any future ones. Until some time ago, 21 notifications have been received under Article VII:4, of which 10 are from Latin American countries, 4 from the United States, 3 from Switzerland, and 1 each from the European Commission, Australia, Norway and Macau. Not surprisingly, all but one of these pertain to the recognition of educational degrees and professional qualifications obtained abroad.
6.72 Interestingly, mutual recognition of qualifications is also mentioned as an element of 11 regional integration agreements, notified under GATS Article V:7(a). These agreements include the one establishing the European Union, agreements between the European Union and neighboring countries, and the Closer Economic Relations Treaty between Australia and New Zealand. This raises the question of whether MRAs concluded in the context of a regional integration agreement are still subject to the disciplines in Article VII:2 and 3. One view may be that Article V provides an exception to the fundamental non-discrimination obligation in Article II and therefore an exemption also to similar obligations contained in other GATS provisions, including Article VII. Alternatively, it could be argued that all MRAs, regardless of whether they are concluded by parties to a regional integration agreement or other Members, are covered by Article VII and its disciplines cannot be circumvented by appealing to Article V.
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6.73 These conflicting interpretations mirror the choice discussed in Chapter 5 between pursuing regulatory cooperation sector by sector or within the context of macro-agreements. The following proposal presents a possible reconciliation, which would allow parties to pursue deeper integration within macro-agreements and also keep the door open for cooperation with outsiders who have similar sectoral regulations:
6.74 Policy implication. It is desirable that GATS Members establish that Article VII, with its non-discriminatory and open-ended nature, overrides Article V of the GATS as far as RAs are concerned; and that recognition not be subject to rules of origin. This interpretation would help to generalize the liberalizing impact of RAs. While an RA amounts to an acceptance of likeness vis-à-vis suppliers from a particular country, it also defines the appropriate standard of treatment vis-à-vis suppliers from other countries.
Chapter 7. Brazil in International Services Negotiations
7.1 Brazil has traditionally adopted a defensive position in international negotiations in services, based on a perceived comparative disadvantage in services and a restrictive domestic trade and investment regime. But circumstances have changed. Services exports in certain sectors, ranging from architectural and engineering to television services, are displaying remarkable growth rates, as shown in Chapter 4. And Brazil has initiated its own program of reform in a wide range of services sectors, as described in Chapter 3. In this new context, there is a strong case for more active engagement in international negotiations. The form that this engagement takes may, however, differ across regional and multilateral fora.
THE CASE FOR A PRO-ACTIVE APPROACH
7.2 First, reciprocity-based market access negotiations could help deliver reform at home and access to markets abroad. Stronger international rules on domestic regulations, government procurement, and subsidies would yield a similar dual benefit (Chapter 6). Finally, international commitments would lend clarity and credibility to the domestic reform process.
Reciprocity
7.3 Brazil is now at a critical juncture. It is an increasingly willing reformer, but confronted by opposition to reform domestically. At the same time, market access in areas of major export interest—mostly in agriculture and manufacturing, but also to the movement of service supplying personnel—remains impeded. International engagement pits these two elements against each other constructively. On the one hand, domestic reform would be facilitated if the government could demonstrate that there were payoffs in terms of increased access abroad. The gainers from the increased access, be they exporters of agricultural goods, steel, professional services or other products, could represent a countervailing voice to groups that resist reform.102 On the other
102 In fact, Brazil’s commitments in certain services sectors reveal the potential benefits of international engagement. For instance, in certain post-Uruguay Round services negotiations, Brazil undertook to make commitments after the National Congress adopted the required legislation, but this proved difficult to accomplish. One reason may have been that these sectors were negotiated on their own. In the context of a multisectoral negotiation, the political economy
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hand, the need to demonstrate external payoffs to secure greater openness at home makes Brazil a credible bargainer, and could help induce trading partners to open their own markets.
7.4 Overall, the value of international engagement might be limited if prospects for securing increased market access are dim—as for instance, might be suggested by the conditions imposed during the passage of fast-track legislation in the United States. However, this pessimism needs to be credibly tested, by a willingness on Brazil’s part to open its markets in return for improved access. Success in this regard is not assured, but its chances can be improved if Brazil were to align itself with countries that press for sound open policies.
Strengthened international rules
7.5 Consider four examples of how there would be gains from stronger international rules. First, ignorance itself is a barrier to trade. Stricter rules on transparency of policies and policy- formulating processes would create a greater awareness among domestic producers of opportunities to sell abroad and what is needed to take advantage of them. Such rules could also have a pro-competitive effect on the home market by improving the information available to domestic and foreign suppliers.
7.6 Brazil’s exports of construction services may suffer from lack of knowledge about procurement opportunities, as well as discriminatory procurement abroad (Chapter 4). The domestic procurement regime has been significantly improved at the Federal level. Stronger international rules on government procurement would require limited adjustments at home and yield significant benefits in terms of access to markets abroad.
7.7 Subsidies are often the best instrument to achieve social and other objectives and it would not be desirable to deny a government the right to employ subsidies in a range of services sectors, but it is desirable to preclude their protectionist abuse abroad and at home. Brazil’s exports of audiovisual and construction services may be adversely affected by foreign subsides directed to local producers, although some of the consequences may have been avoided by establishing abroad (Chapter 4). Domestically, the acceptance of a national treatment discipline implies a desirable commitment not to discriminate. Such a commitment need not compromise the achievement of social objectives. For instance, the experience of a number of countries reveals that universal service objectives are best met by subsidizing the most efficient provider, national or foreign.
7.8 Brazilian exports of construction and professional services have run into the barriers created by domestic regulations, such as technical standards, qualification, and licensing requirements (Chapter 4). These same barriers in the domestic market deprive consumers of access to foreign professionals. While a great deal will need to be done in a bilateral or plurilateral context (see below), international rules could help ensure that such regulations are not more burdensome than necessary to achieve legitimate regulatory objectives. If such a “necessity test” seems unduly intrusive, then it would be worth considering at least a weaker requirement that regulations are “not obviously unnecessary.”
would have been different because the legislature could have been presented with international agreements that were a package of foreign and domestic concessions.
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Credibility
7.9 Finally, international engagement can serve as a commitment to good policies in two respects: providing guarantees against reversal of current policies and credibly promising future reform. Brazil’s commitments in international agreements are not comprehensive and do not always reflect actual policy (Chapter 3). This is evidently the case where no commitments were made or certain modes were scheduled as unbound (for example, in GATS and MERCOSUR on transport, certain business services, audiovisual services); in other cases, actual policy has become more liberal since commitments were made (for example, in MERCOSUR on telecommunications). International trade commitments in financial services are of limited value, as they merely reflect discretionary policy.
7.10 Brazil also did not take advantage of multilateral commitments to lend credibility to future reform programs—as many other countries did in a sector like telecommunications under the GATS. Precommitment to future openness can help to strike a balance between the reluctance to unleash competition immediately and the desire not to be held hostage in perpetuity to the weakness of domestic industry or the strength of vested interests.
THE FEASIBILITY, DESIRABILITY AND FORM OF A PLURILATERAL APPROACH
7.11 Brazil is today engaged in negotiations in multiple fora, and must address the question: are the benefits of international engagement best realized in a plurilateral or multilateral context? The fact that negotiations are taking place bilaterally or in small groups is not the key issue, because that is how all negotiations take place even in the WTO. The real issue is whether the eventual outcome is a preferential policy regime (as in the case of regional agreements) or a non- discriminatory policy regime (as is mostly the case in the WTO). Three questions need to be addressed: is it feasible for Brazil to grant preferential access to its services market? Under what circumstances would it be desirable to do so? And what form should a plurilateral approach take?
Feasibility
7.12 At first sight, it is not obvious how a preferential agreement in services would be implemented. Clearly, where Brazil has open markets, there is little scope for preferential access through the selective elimination of explicit barriers. Where Brazil still maintains restrictions, the question is whether they can be eliminated selectively. Based on our study of Brazilian policy, several types of barriers could be used as instruments of preferences (Chapters 3 and 5). First of all, the preferential use of explicit or implicit quantitative restrictions is already visible in air and road transport, and professional services, but could also play a role in the allocation of future licenses in other areas, like certain segments of telecommunications and financial services.
7.13 Secondly, domestic regulations, like educational qualification requirements, are already less stringent for professionals from specific countries, and these measures certainly lend themselves to preferential elimination in a large number of services sectors. In fact, Brazil’s MERCOSUR commitments are more liberal than GATS commitments only in certain professional and business services.
7.14 Third, it is conceivable that restrictions on foreign ownership, imposed today in a variety of transport services, could be relaxed for nationals of certain countries—as Mexico did in the context of NAFTA. It is also possible that service providers from certain countries could be
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exempted from the current requirements on the legal form of commercial presence (i.e., through local incorporation) or the current restrictions on branching in financial services.
7.15 The benefits of any reduction in domestic subsidies cannot be denied to any exporter. But the benefits of a weaker requirement not to discriminate in the granting of subsidies could be extended only to suppliers of certain countries. For instance, Brazil extends national treatment in certain professional and business services only to MERCOSUR countries. Similarly, in government procurement, certain transparency disciplines have a public good aspect—everyone benefits from the requirement that the intention to procure be publicly announced. But the benefit of other deeper non-discrimination disciplines could be provided more selectively, as is happening currently between parties to the WTO’s plurilateral Agreement on Government Procurement.
7.16 Finally, there is a more subtle way in which preferences can be extended. The commitments under GATS in a key sector like financial services retain a certain amount of executive discretion, and correspondingly inflict a certain degree of uncertainty on international providers. Clear-cut market opening commitments in the context of a plurilateral agreement could create a more certain environment for suppliers from a small group of countries even though the actual policy environment is no different. For example, there is no evidence that MERCOSUR providers have better access to the Brazilian telecommunications market than other GATS Members, but they do have the security of commitments under MERCOSUR whereas Brazil today has no commitments on basic telecommunications under the GATS.
Desirability
7.17 Even though it can be done, is it desirable? The answer would be relatively simple if Brazil’s policy choices were unilateral. We have argued that the preponderance of prohibitive and frictional restrictions create a strong presumption that a country would benefit from preferential liberalization of services tradee—compared to the more ambiguous results in the case of goods trade. However, the country would benefit even more if it liberalized on a non- discriminatory basis, because then its consumers would be free to choose the best source in the world. But Brazil is part of an interdependent world where there is scope for cooperation. And here, there may be reason to proceed plurilaterally. First, of all it might be more efficient to bargain reductions in protection in small groups than multilaterally. In the latter case, the “free rider” problem can prevent mutually beneficial bargains from being struck. Bilaterally, or in a small group, a country need not give anything without getting something in return, and what it gets, only it gets.
7.18 Brazil would need to judge, first of all, as to what forum lends itself most to mutually beneficial bargaining in areas of greatest export interest; second, whether the domestic costs of granting preferential access are outweighed by the gains from obtaining preferential access. In this latter assessment, Brazil would need to take into account that the sequence of liberalization matters more in services than in the case of goods trade. In particular, the benefits of eventual non-preferential liberalization may be different if it is preceded by preferential liberalization. The main reason is that location-specific sunk costs are more important in services, so even temporary privileged access for an inferior supplier can translate into a long-term advantage in the market. Thus, while the elimination of preferences may lead to a relatively painless switch to more efficient sources of goods supply, the entry of more efficient service providers may be durably deterred if their competitive advantage does not offset the advantages conferred by incumbency. These considerations are particularly important because Brazil’s main exports today are goods and many services are likely to be imported.
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7.19 The tension between efficiency and bargaining considerations is reflected in the choice of a rule of origin. A liberal rule of origin minimizes the costs of trade diversion and is economically efficient. But it creates the same problems for bargaining as negotiations under the MFN rule: partners’ willingness to pay for preferential access is dampened because they will be subject to greater competition from third countries; and the country itself loses future negotiating leverage vis-à-vis third countries. These considerations are going to be particularly important in the FTAA and European Union-Mercosur negotiations, because the United States and the European Union already host most major service suppliers. Full access to either with liberal rules of origin (Mexico’s choice under NAFTA) would approximate MFN liberalization.
Form
7.20 Brazil is playing an active role in the design of international agreements in services. The greatest freedom to design is in the FTAA, but the GATS, MERCOSUR and the EU- MERCOSUR agreements need not be seen as caste in stone, and it may be possible to negotiate improvements in each. One reason Brazil may prefer the GATS structure is because this is a familiar model and the proliferation of structurally different agreements imposes a cost in terms of complexity and negotiating resources. However, the GATS, like other agreements, has certain imperfections (Chapter 6) which will not be easy to remedy—in part because of the existing negotiated schedules of specific commitments. Regional agreements can, therefore, be used to improve upon the existing models. In fact, these experiments create positive externalities in terms of learning—as the NAFTA, EU and GATS did from each other—and they may one day converge to an ideal model.103
7.21 A more important determinant of Brazil’s stance in various fora will be how much discretion it wishes to retain in matters related to services policy. Its position in these negotiations will naturally be affected by the prospects of improved market access in other areas like agriculture. Nevertheless, there is a good case for strengthened international rules on services trade policy. First, all explicit protection should be transparent and predictable. Existing initiatives under MERCOSUR imply that the incremental cost of the transparency obligation is low. However, the legislative changes necessary to ensure clear-cut policy in areas like financial services may be easier to accomplish in the context of an international negotiation, which produces reciprocal gains. Second, the scope of international negotiations should be comprehensive, so no mode (e.g., the movement of persons) or sector (e.g., air transport) is excluded from the liberalizing benefits of reciprocity-based negotiations. Third, since Brazil has already eliminated all forms of discrimination against locally established foreign suppliers, a post-establishment national treatment rule should be acceptable. Agreement on these rules would contribute to good policy at home and improved access to markets abroad, without depriving Brazil of negotiating leverage.
7.22 Regulatory cooperation is the one area where it is possible to support a plurilateral approach without qualification, based not on the efficiency of bargaining but on the efficiency of policy itself. As suggested above, the “necessity test” could be negotiated in the WTO as a floor discipline, the benefits of which are extended to all countries, but deeper regulatory cooperation, based on harmonization and mutual recognition, naturally takes place among a subset of similar countries (Chapter 5). But how is the composition of the subset best determined? Ideally, Brazil would choose its partners spontaneously, sector by sector depending on the costs and benefits of regulatory harmonization. However, it might also be possible to choose partners ex ante in
103 See Salazar-Xirinachs (forthcoming).
260 Part IV: BRAZIL’S SERVICES TRADE AND INTERNATIONAL TRADE NEGOTIATIONS horizontal agreements like MERCOSUR and then seek to deepen integration across sectors. The former approach is visible in areas like audiovisual services; the latter, for instance, in river and multimodal transport, and with respect to educational qualifications; and there has been a shift in emphasis from the former to the latter in land transport and financial services (see Annex).
7.23 There is a strong case for exploring the possibility of regulatory cooperation at a wider level in other important areas. In the area of multimodal transport, vital for efficient trade in goods, the only initiative seems to be at the MERCOSUR level. There are obvious gains from creating similar trade-facilitating arrangements with other countries. In the area of electronic commerce, which is bound to be an important medium of trade, significant initiatives have been taken at the MERCOSUR and FTAA levels, but there may be a need to widen and deepen further the scope of regulatory cooperation. Finally, Brazil has a dual interest in mutual recognition agreements: where it is a participant, it would benefit by giving outsiders the opportunity to participate, and where others negotiate such agreements in areas of export interest, Brazil should use multilateral rules to ensure that it is not excluded (Chapter 6).
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268 Part IV ANNEX
Annex to Chapter 2
Millions of US dollars Figure A1: Disaggregated services trade balances, 2000 2,500
2,000
1,500
1,000
500
0 Sea transport Air transport Postal and courier Telecommunications Reinsurance Freight insurance Misc. business, Construction Computer and -500 services prof., tech services services information services
-1,000
-1,500 -2,000
-2,500
Source: IMF Balance of Payments Statistics
Figure A2: Composition of services exports, 2000
Transport services Communication services Other Telecom 3% 3% Air transport 21.1%
Postal & courier Sea services transport 97% 76%
Insurance se rvices Personal, Cultural and Recreational services
Auxiliary services Other direct Audiovisual & 0.6% insurance related 1.3% services 27%
Other services 73% Reinsurance 98.1%
Source: IMF Balance of payments statistics
269 Part IV ANNEX
Figure A3: Composition of services imports, 2000
Transport services Communication services Postal & Other courier transport services 2% 3%
Air tr ansport 34%
Telecom Sea transport 97% 64%
Insurance services Personal, cultural and recreational Auxiliary services services 1% Reinsurance Other 21% Freight 28% insurance 34%
Audiovisual services 72% Other direct insur ance 44%
Source: IMF Balance of payment statistics
270 Part IV - ANNEX
Annex to Chapter 3
A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service
TELECOMMUNICATIONS Fixed-line Market access: Two service providers licensed in The sector regulator (ANATEL) is Brazil is a member of the International each of the following market segments: local institutionally independent but linked to Telecommunications Union, which has services (divided in 3 regional districts), inter- the Ministry of Communications. It is responsibilities in global radio frequency regional long distance, and international financed by regulatory fees. management and the setting of international services.104 Since January 1st 2002, companies are standards on communications technology. ANATEL is responsible for the allowed to offer services beyond their establishment of interconnection rates Brazil is a member of the Inter-American concessioned market segments, if certain rollout (through price caps) and the regulation of Commission on Telecommunications (CITEL), and quality standards are met. retail tariffs (though price caps). which is linked to the Organization of American Since January 1st 2002, there are no more States (OAS). Among other things, CITEL Resale of leased line capacity is restrictions on the number of licensees, but promotes the mutual recognition of conformity apparently not permitted. International operators cannot request authorization to offer assessments of telecommunications equipment simply resale (ISR) is permitted in certain domestic long distance without also offering local within the Western Hemisphere, advances the circumstances, but restricted to the two services.105 Moreover, there are detailed rollout use of coordinated standards, and publishes facilities-based license holders. requirements, which are gradually phased out until research on important regulatory issues (e.g., the end of 2005. After 2005, the market will be Universal service is promoted through universal service). fully liberalized. network rollout obligations in licenses.106 The MERCOSUR working sub-group on A universal service fund (financed by There are no entry restrictions on the provision of communications also has responsibilities in the license and spectrum fees as well as from leased-line services. area of radio frequency management, the service operations) was established in coordination and harmonization of standards and There are no limitations on foreign ownership. 2000. recognition. It has approved a large number of However, the executive branch, in the use of its The regulation of Internet telephony is resolutions in these areas. The working sub- legal prerogative, may consider the establishment uncertain as it is considered a value group has three thematic commissions devoted
104 Since both local and inter-regional long distance service suppliers are allowed to offer “intra” regional long distance services, this market segment actually has 4 competitors. Moreover, a license holder is prohibited from holding 20 percent or more of the equity in any other concessionaire. 105 Domestic long distance is, in turn, a prerequisite to offer international long distance services. 106 The Brazilian policy distinguishes between “public” license holders and “private” license holders. Universal service obligations only apply to “public” license holders.,
271 Part IV ANNEX
A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service of limits regarding foreign participation, “taking uncertain, as it is considered a value group has three thematic commissions devoted into consideration Brazilian interests in the context added service and thus does not fall under to public telecommunications services, radio of its relations with other countries.” ANATEL’s mandate. communications and broadcasting. Callback services are not permitted by law, but are commonly used. National treatment: There are no limitations on national treatment. Mobile Market access: Two mobile licenses were Mobile services are also regulated by (see above) competitively auctioned in each of 10 regional ANATEL, including the management of districts (A and B bands). Two additional mobile the radio spectrum management and the licenses were auctioned in each of 3 regional regulation of interconnection prices. districts (D and E bands), although there were no second bidders in two of the regional districts.107 Fixed operators are eligible to enter the mobile market if they fulfill certain rollout obligations by the end of 2001. There are no limitations on foreign ownership. However, the executive discretion described above also applies to mobile services. ANATEL has announced the auctioning of licenses for third generation wireless services, with a view to starting operation by 2003. National treatment: There does not appear to be any limitation on national treatment. Value-added No limitations on entry in the provision of Internet The General Telecommunications Law and data services. only applies to value-added services, insofar it ensures access to interested There are no limitations on foreign ownership. parties to existing telecommunications
107 The three regional “districts” are each made up of two or more of the regional “areas”.
272 Part IV ANNEX
A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service networks in order to provide value-added services. There does not appear to be any regulation of prices charged by ISPs. The supply of Internet access services over the cable TV network is permitted.
FINANCIAL SERVICES Banking Market access: According to the 1988 federal The Brazilian Central Bank is responsible Brazil has adopted the core principles for (commercial constitution, participation of foreign capital in the for the licensing, regulation and effective banking supervision of the 1988 Basle presence) Brazilian financial services market is restricted, supervision of all banks in Brazil. accord. except for authorizations based on international Commercial banks are permitted to Brazil has negotiated Memoranda of treaties or representing national interest, as provide insurance and securities services, Understanding for the exchange of supervisory determined by presidential decree. A formal but their real estate activities are information and cooperation with a number of legislation on foreign bank entry—as foreseen in restricted. Bank ownership of non- national supervisory authorities. the 1988 constitution—has not been written. financial firms is also restricted, but non- The MERCOSUR block has produced Use of the “national interest loophole” was made financial firm ownership of banks is not. agreements on matters relating to supervision to restore the health of insolvent national banks, There is an explicit compulsory depositor and cooperation, including with respect to starting in 1995. Conditions of entry are decided insurance scheme that is funded by banks. money laundering. The Common Market Group on a case-by-case basis. In practice, foreign bank (GMC) determined that Member States adopt entry has occurred only through acquisition of Medium and large-sized banks are subject the information transparency rules Brazilian banks. Authorizations for foreign banks to on site inspections by supervisors once recommended by the Basle Committee. have been accompanied by ad hoc conditions and every two years. limitations, including branching rights. A technical cooperation project between Past privatization of national banks were MERCOSUR and the IADB has been initiated, There are no stated limitations on foreign equity conducted through competitive auctions which seeks to harmonize mechanisms for ownership. based on the highest stock price offered. global consolidated supervision, rules on National treatment: Limitations on national transparency, solidity, and liquidity of financial treatment were abolished in 1994. For examples, systems. foreign banks are allowed to (and do) acquire domestic banks in Brazil. Banking Brazilian natural and/or juridical persons are not The transfer of funds abroad needs to (see above) (cross-border prohibited from investing locally obtained funds in follow certain procedures, as specified in Harmonization efforts in MERCOSUR have supply) foreign financial markets Central Bank Bill No 2 677
273 Part IV ANNEX
A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service supply) foreign financial markets. Central Bank Bill. No. 2,677. facilitated the transfer of funds to financial markets of Member countries. There are ongoing negotiations regarding cross- Brazilian banks are not allowed to offer checking Loans taken up abroad must be registered border trading of investment funds within or savings accounts for its clients in foreign by the Central Bank, usually a swift MERCOSUR. financial institutions. procedure. Brazilian banks do not face any restrictions in making loans to clients established abroad. Insurance and Market access: The National Council for Private Under MERCOSUR, recent agreements pertain reinsurance Insurance (Conselho Nacional de Seguros to cooperation among supervisory authorities There are no rules expressly restricting (commercial Privados - CNSP) is the regulatory body and mandatory civil responsibility insurance for participation of foreign capital in insurance presence) for private insurance, whereas the automobile owners or drivers traveling through companies in Brazil.108 CNSP has the legal Superintendence for Private Insurance MERCOSUR. Further cooperation on obligation to apply to companies whose capital is (Superintendência de Seguros Privados - supervisory issued is envisaged. not entirely Brazilian restrictions equivalent to SUSEP) is responsible for guaranteeing those imposed by the home countries of these observance of the norms and editing companies. normative instructions in conformity with Insurance brokerage is restricted to Brazilian the rules set out by the CNSP. nationals or permanent residents in Brazil in the case of natural persons; and to firms organized in accordance with Brazilian laws, headquartered in Brazil and registered with SUSEP; directors, managers, and administrators must be Brazilian nationals or permanent residents in Brazil. Reinsurance services are still exclusively provided by Brasil Resseguros (IRB). Attempts to privatized IRB have so far been unsuccessful. National treatment: There does not appear to be
108 As explained in the case of banking services, the Federal Constitution restricts the participation of foreign financial service suppliers in the Brazilian market. However, the “Act of the Transitional Constitutional Provisions” interprets insurance and reinsurance as services other than financial, eliminating the need to obtain a Presidential decree to authorize foreign entry. It is worth noting, however, that Brazil’s WTO commitment still makes reference to the enactment of a Presidential decree.
274 Part IV ANNEX
A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service any limitation on national treatment. Insurance The contracting of insurance and reinsurance from Contracting cross-border insurance and (cross-border abroad is limited to risks which do not find reinsurance depends on authorization by supply) alternative coverage in Brazil or that are not SUSEP (insurance) and by IRB “convenient for national interests.” (reinsurance). Attempts to open the contracting of insurance in foreign currency to certain risks have, so far, been unsuccessful.
TRANSPORT SERVICES Road freight Cross-border supply: The Brazilian Department of Road The 1990 Agreement on Terrestrial Transport transport Transport, through a normative and the 1992 Agreement on Basic Unified For Argentina, Bolivia, Chile, Paraguay, Peru services instruction released in 1999, regulates the Traffic Regulations set minimum standards with and Uruguay: granting of original and complementary regard to the grant of driving licenses and Conditions of market access of freight service licenses. The main conditions for the certain characteristics of vehicles (including providers are detailed in the 1990 Agreement on grant of a complementary license include safety standards). At the same time, the Terrestrial Transport. Carriers must obtain an the presentation of an original license as signatories mutually recognize driving licenses original license (from their home authorities) and a well as information on legal and certain vehicle characteristics. These complementary license (from the authorities of the representation and insurance coverage. provisions are not present in the bilateral trading partners). Agreement with Venezuela. The Agreement establishes that cargo and In 1998, Argentina, Bolivia, Brazil, Chile, passengers will be allocated pursuant to bilateral Paraguay, Peru, and Uruguay established an agreements and on the basis of reciprocity. Brazil agreement that defines common standards applies bilateral quotas in accordance with the regarding the transportation of dangerous 1990 Agreement. products. Licensed foreign carriers are not permitted to provide local transport services. A “rule of origin” applies, which requires that carriers must have more than half of their voting
275 Part IV ANNEX
A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service shares in the hands of nationals of the country that issues the original license.109
For Venezuela: An agreement on terrestrial transport has similar provisions regarding licensing requirements and rules of origin. Commercial presence: Foreign companies must be organized as a joint stock company and are not allowed to own more than 20 percent of the capital stock Rail freight Foreign establishment—in the form of a The sector regulator is the Federal services “sociedade anonima”—is allowed in each of the Commission on Railway Transport (commercial main six regional railway networks (part of the (COPER). It is integrated into the presence RFFSA system). No company (domestic or structure of the Ministry of Transport. only) foreign) is allowed to own more than 20 percent of The networks were concessioned in the the equity of an operating company, unless late 1990s for a 30-year period with a otherwise authorized.110 possible extension of the contract thereafter. The concession contracts established output and safety targets for the first five years as well as a maximum tariff to be charged for services. In addition, it required the concessionaires to operate “mutual traffic.”
109 In the case of Brazil, the constitution does not differentiate between Brazilian firms of national and foreign capital. A normative instruction by the Road Transport Department clarifies that in the case of Brazil what really applies is the need to be legally constituted in accordance with the legislation in force. Hence, all transport firms established in Brazil, irrespective of ownership and control conditions, qualify for application of the provisions of the 1990 Agreement on Terrestrial Transport. 110 In two regional railway systems, the limits were set at 33.3 percent and 40 percent.
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A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service Maritime Cross border supply: Only limited cargo Maritime transport services are regulated freight reservation for international maritime shipping in by the Ministry of Transport. transport the form of bilateral agreements with Algeria, A new registry was set up (REB) in 1997, services Angola, Argentina, Chile, Peru, Romania, and which is only available for vessels Uruguay. The existing law still allows for the entitled to fly the Brazilian flag and possibility of cargo reservation where the countries which grants registered ships tax benefits at the other end of a bilateral route discriminate in vis-à-vis non-registered operators. favor of nationally generated cargo. Foreign shipping operators are required to The 1996 cabotage law limits foreign participation pay a lighthouse fee that does not apply to in cabotage to countries that have reciprocal Brazilian-owned ships (although some agreements with Brazil. However, a 1997 law countries are exempted from this fee). allows for coastal and inland shipping when foreign vessels are chartered by Brazilian shipping Brazilian shipping enterprises benefit companies. from certain preferential financial arrangements for the production of Commercial presence: As of 1995, foreign equity vessels in Brazilian shipyards destined for in commercially established maritime operators exports. was limited to 40 percent. To carry the Brazilian national flag, shipping enterprises must be Brazilian maritime operators benefit from nationally incorporated and managed and 2/3 of certain government procurement the crewmembers must be Brazilian nationals. preferences. Brazilian shipping enterprises are allowed to charter foreign vessels for the provision of international maritime services. Seaport Foreign firms are allowed to bid for terminal Depending on the type of port, the services concessions, but must abide by the Brazilian relevant regulators are the 8 Dock public tenders law, which requires that concession Companies, Port Councils, and the contracts be awarded to those having a legal National Department of Waterway representation in Brazil. Transport. There are no limitations on foreign ownership. For the main seaports, port tariffs, which are determined on a terminal-by-terminal basis, are set by the dock companies, but
277 Part IV ANNEX
A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service must be approved by the port councils. The port councils typically have the authority to decide on the entry of new port operators.
For the main ports, terminal concessions were given for a 20 to 25 year period. Mandatory port services include pilotage, towing, and tug assistance, navigation aids, berth and berthing services. Air transport Cross border supply: Access of foreign carriers is The main regulator is the Federal Brazil is a member of the International Civil determined by the 63 bilateral air service Department of Civil Aviation (DAC), Aviation Organization, which develops agreements. The existing structure of ASAs which is still linked to the Aeronautics international standards and practices for the safe heavily regulates capacity and tariffs on most Command, under the Ministry of and efficient conduct of international air international routes. One open skies agreement Defense. It is responsible for the services. (OSA) with New Zealand has been concluded.111 regulation of fares and routes, the management of airports, as well as the In 1996, Brazil, Argentina, Bolivia, Chile, conclusion of bilateral agreements. Paraguay, and Uruguay signed a Sub-Regional Air Services Agreement, known as the Fortaleza Agreement. The Agreement, ratified in 1998, provides for flexibility in reciprocity provisions and expansion of regular sub-regional air services to routes other than those provided for in bilateral agreements. Commercial presence: Commercial establishment can be approved, but foreign participation is limited to 20 percent of voting and 25 percent of non-voting shares.
111 An open skied agreement with the United States is envisaged for the near future.
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A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service Airports are all publicly operated. Multimodal Under the 1994 “Recife” Agreement on transport international multimodal transport between MERCOSUR countries, carriers can obtain a special multimodal license in their countries of origin and must indicate the operation of multimodal transport under this Agreement in all documents related to the transport of goods.
DISTRIBUTION SERVICES Wholesale- There do not seem to be any restrictions on foreign trade services, entry (including the mode of entry). Retailing There is no limit to foreign equity ownership. services, Franchising services Construction services Architectural, Entry by foreigners can only take one of the All architectural, engineering and engineering following two forms: construction firms must be registered with and • the Regional Council of Engineering and construction Commercial establishment. There is no Architecture in the state where their services limitation on foreign equity ownership. The activities are to be executed. In the case foreign firm must have a “responsible engineer” of a “consortium,” registration can be or architect who holds a license to practice in requested by the Brazilian partner. Brazil. A “responsible engineer” must be a • Cross-border supply, which requires the permanent resident of Brazil, but not creation of a “consortium” with a Brazilian necessarily a Brazilian citizen. partner and the transfer of technology to the Brazilian partner during the duration of the Foreign professionals must obtain a services contracted. temporary visa and their registration should be valid for no longer than two years, corresponding to the expected duration of the working contract. Also, the firm employing the foreign
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A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service professional must ensure that a Brazilian assistant of comparable level of experience to the foreign professional be made available at all times for the duration of the project.
Foreign degrees must be notarized by a Brazilian Embassy, translated into Portuguese, and then validated by the Brazilian Ministry of Education. Professional services Horizontal Brazilian firms supplying professional services The main regulators of professional [Agreements on mutual recognition, measures must maintain a ratio of at least two Brazilian services are Regional and Federal harmonization of educational standards] nationals for three employees. For MERCOSUR Councils. Foreigners (except Portuguese countries this rules is restricted to certain nationals) are not eligible to be politically professional areas. represented in the Councils. There are no quantitative limitations on the Article 48 of the Law of the Directives number of temporary visas that can be issued. and Foundations of the National Education and a resolution by the old Federal Education Council govern the rules regarding the case-by-case revalidation of diplomas. Legal services Foreign legal consultants must organize In order to practice, lawyers need to themselves in firms exclusively devoted to register with the Brazilian Lawyers consulting in foreign law and exclusively staffed Organization (OAB)—Brazil’s Bar with consultants in foreign law. Association. Registration requirements do not discriminate against foreigners for the provision of domestic legal services. The name of firms devoted to consulting in foreign law may be the original name provided it is duly authorized in the
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A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service country of origin. The expression “Consultants in Foreign Law” must be attached to the name of the firm. Since March 2000, foreign professionals seeking to provide international legal services face different registration requirements, including evidence of a resident visa, passing of a law exam, proof of good conduct in the home country, endorsement of three Brazilian lawyers, and the guarantee that the country of the foreign lawyer reserves equal treatment to Brazilians. Accounting Commercial establishment must take the form of a Registration with the Ministry of services “sociedade anonima.” Education and the Regional National Council requires passing of the “accounting proficiency exam,” offered once a year by these institutions. Both natural and juridical persons must prove that those performing technical activities in accounting are fully capable and qualified professionals, duly registered as provided for in the law. In cases where accounting is demonstrably the main activity of a juridical person, most of the joint stock must belong to a partner accountant (or to partner accountants). In addition, foreign firms can only practice accounting in Brazil if they yield their name to a national firm. Medical In order to offer medical services, services professionals must be registered in the Regional Medical Council
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A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service Regional Medical Council. Foreigners are required to present upon registration proof of proficiency in Portuguese language—given by the Brazilian university, which has revalidated the medical diploma. There are two situations in which the medical foreign professional does not have to be registered with the Council: whenever he/she has been invited by a university, association, or institution, and whenever he/she is already studying medicine in Brazil. Dental, Registration is necessary for both natural services, and juridical persons. Biological There are no provisions specific to services, foreign professionals or juridical persons. Nursing services, Psychological services Journalism Registration with the Ministry of Labor is required. The professional must present a diploma related to communications as well as proof of his/her Brazilian nationality. As a free lancer, the professional must also show proof of Brazilian nationality as well as a statement by the employer of its interest in registering the professional and hiring him/her as a collaborator.
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A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service
AUDIOVISUAL SERVICES Television “Special Service of Subscription Television” There are detailed regulations regarding [Agreements on cultural cooperation] (TVA, using radio-electric VHF or UHF waves) is network interconnect arrangements reserved to Brazilian national companies. between telecommunications and cable Broadcasting companies can only employ TV operators. technicians that are Brazilian citizens and reserve DTH services require the use of satellite management posts to Brazilian professionals. A transmission services, which may be best endeavor provision demands that firms contracted from Embratel, the operator of reserve up to 20 percent of their programs for Brazilian satellites Brasilsat I and II. independently produced Brazilian audiovisual works. The General Telecommunications Law of 1997 foresees that the granting of access Foreign participation in the provision of cable TV to telecom services necessary for the is limited to 51 percent of voting capital. Service provision of radio and TV programs is concessions follow the general rules detailed in the based on reciprocal treatment of Brazilian legislative framework on telecommunications. firm in partner countries. Cable TV operators must make available at least one channel exclusively devoted to the broadcasting of independently produced Brazilian audiovisual works. The provision of ”Direct to Home Television Services (DTH)” seems to be limited to Brazilian national companies. Audiovisual A 1993 law grants tax benefits to Brazilian For any audiovisual production to be production audiovisual works, discriminating against foreign characterized as Brazilian, it must be firms not established in Brazil. produced by a Brazilian company of national capital and/or be co-produced The adaptation of foreign audiovisual work in with a foreign company. However, Brazil needs to be undertaken under contract with subsidiaries of foreign companies a Brazilian firm and use of at least one third of incorporated in Brazil are considered Brazilian artists and technical personnel must be Brazilian companies. made. Video distribution service providers are required to have a minimum percentage of Brazilian titles in their stock The copying and the reproduction of
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A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service their stock. The copying and the reproduction of original cinematographic works must be done in laboratories established in Brazil. Similarly, movie theaters must feature Brazilian films for a certain minimum number of days per year, as determined by the responsible authorities.
COMPUTER AND RELATED SERVICES Software, There seem to be no limitation on foreign equity The Secretariat of Informatics and database and ownership. Automation Policy (SEPIN), which is data- linked to the Ministry of Science and processing Technology, regulates the sector. services Software must be registered with the SEPIN, in order to be distributed in Brazil.
POSTAL AND COURIER SERVICES Postal The Brazilian Enterprise of Post and Telegraphs services (ECT) is the sole provider of the core postal services: letters and postcards, telegrams, “argupated” correspondence.
Courier and Existing laws do not make any reference to third The Brazilian customs authority express mail party provision of postal services. Thus, there determines the types of products that can services appear to be no explicit restrictions on the be shipped into Brazil by express mail. provision of services by foreigners.
ENVIRONMENTAL SERVICES Solid waste There are no restrictions on the participation of disposal foreign companies. services
Sewage There are no restrictions on the participation of services foreign companies.
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A. OVERVIEW TABLES OF THE MAIN EXPLICIT BARRIERS AND REGULATORY MEASURES AFFECTING SERVICES TRADE Regulatory context Sub-sector Explicit restrictions Addressing market failures and Regulatory cooperation promoting universal service
HEALTH SERVICES Hospital and There are no restrictions on foreign participation in The National Agency of Alternative other health- the “alternative” (i.e., private) health care system. Health Care (ANS) regulates private related medical care service provides. services TOURISM SERVICES Tourism and According to Brazilian law, the provision of travel related services and activities related to tourism are free services from restrictions, except in regard to taxation and the construction of buildings. Only Brazilian companies whose majority of voting shares are in the hands of Brazilians can benefit from certain tax benefits.
DATA SOURCES: The information provided in the tables is based on a variety of sources. A consultant report prepared by Mario Marconini provided the main background information on Brazil’s foreign investment regime and on sectoral measures affecting services trade. This information was complemented by the following sources: On Brazil’s foreign investment regime: World Bank (2001), Centro de Estudo das Sociedades de Advogados (1998), information provided on websites of the Inter-American Development Bank (http://alca-ftaa.iadb.org/). On telecommunications services: information provided on the website of ANATEL (www.anatel.gov.br), various studies by Bank of National Development (BNDES), Melo and Gutierrez (2001), and National Institute of Standards and Technology (2001). On distribution services: studies by the BNDES, and articles from the business press. On banking services: Melo, Rios and Gutierrez (1997), Bonelli (2000), and information provided on the websites of the Brazilian Associations of International Banks (www.abbi.com.br), the Brazilian Central Bank (www.bcb.gov.br), the Ministry of Finance (www.fazenda.gov.br), and articles from the business press. On express mail and courier services: is based on an analysis of laws and regulations from Brazilian Senate (www.senado.gov.br). On transport services: studies by the BNDS, ALADI (2000), Gyamfi and Ruan (1996), Marques and Robles (1995), Newton (????), Thomson (2001), Trujillo and Mombela (2000), and UNCTAD (1999), World Bank (1998, 1997, 2000a and 2000b), information provided on websites of the Ministry of Transport (www.transportes.gov.br), the Civil Aviation Department (www.dac.gov.br), the Brazilian Association of International Transporters (www.abti.com.br), the National Department of Road (www.dner.gov.br), the National Transportation Commission (www.cnt.org.br), the Brazilian rail operator (www.rffsa.gov.br ), the Port of Santos (www.portodesantos.com.br ), and articles from the business press. On construction services: UNCTAD (2000) and WTO (1998). On professional services: information provided on the websites of the Brazilian Labor Party (http://www.pt.org.br/assessor/vrnova.htm), the Ministry of Foreign Affairs (www.mre.gov.br/mre_port/manualdcj11.htm), and Brazilian Bar Association (www.oab.org.br).
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B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Limitations on Limitations on Limitations on Limitations on Market Access National Treatment Market Access National Treatment Horizontal The rule of proportionality applies except in the case of specialized No proportionality applies to people coming from other Member commitments technicians, highly qualified professionals, and managers. States of the MERCOSUR that practice specialized technical Specialized Technicians and highly professional qualified functions, by means of economic necessity managed by the foreigners can work under temporary contract with legal entities Ministry of Labor. The ratio of at least two Brazilians for each established in Brazil three employees must be observed by the legal person who acts in the following areas: communications, terrestrial carrier, commercial establishments in general 112 BUSINESS SERVICES Legal services Not scheduled Not scheduled The law related professional The law related professional must: must: – register with the OAB, - provide a proof of residence in Organization of Brazilian Brazil in order to obtain the Lawyers, as “consultant in working license. international law” – present a lawyer license from a Member Country and proof of good conduct signed by the institution where the license was obtained and by three Brazilian lawyers. Architectural services Modes 1,2 and 4: Unbound Modes 1,2 and 4: Unbound Foreign service suppliers will Fully Liberalized* only be allowed to conduct any Mode 3: Foreign service Mode 3: No limitations activities in Brazil if: suppliers must: – They are associated with a – join Brazilian service national service supplier suppliers in a specific type of through a specific type of legal legal entity (consorcio); the entity (consorcio). Brazilian partner shall maintain – They have the request for a the leadership. temporary registration of the
112 MERCOSUR Commitments under business services were made in the II Round of Negotiations in December of 2000.
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B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment – The contract establishing the foreign juridical person. This consorcio must clearly define its must be done through a objective Brazilian juridical person Accounting, auditing Mode 1: Unbound, except that a Modes 1, 2 and 4: Unbound Same as GATS Same as GATS and bookkeeping foreign service supplier may services cede its name to Brazilian Mode 3: Special registration professionals requirements for accountants who wish to audit such Modes 2 and 4: Unbound companies as financial institutions and savings and Mode 3: Participation of non- loans associations. Brazilian residents in juridical persons accounting and auditing controlled by Brazilian nationals standards must be followed. is not allowed. A foreign service supplier shall not use its foreign name, but may cede it to Brazilian professionals who will constitute and exercise full participation in a new juridical person within Brazil.
Engineering services Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Same as GATS Fully Liberalized* - advisory and consultative Mode 3: Same conditions as in Mode 3: No limitations engineering services architectural services. - industrial engineering - engineering design The foreign service provider - other engineering must: services - be associated with a Brazilian - integrated engineering service provider through a services “consorcio” - the Brazilian service provider must conduct the work - the objective of the “consorcio” must be clearly identified
287 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Urban Planning Modes 1,2 and 4: Unbound Modes 1, 2 and 4: Unbound Same as GATS Fully Liberalized* services Mode 3: Same conditions as in Mode 3: No limitations Architectural services.
The foreign service provider must: - be associated with a Brazilian service provider through a “consorcio” - the Brazilian service provider must conduct the work - the objective of the “consorcio” must be clearly identified.
Medical and Dental Not scheduled Not scheduled Professionals and companies Professionals and companies Services, Veterinary providing psychological providing psychological Services, services are subject to the services are subject to the Services provided by agreements by psychologists agreements by psychologists midwives, nurses, from each MERCOSUR from each MERCOSUR physiotherapists and Member State. The agreements: Member State. The agreements: para-medical personnel Protocol of Agreements on the Protocol of Agreements on the Legal Aspects of the Legal Aspects of the Psychologist Services of Psychologist Services of MERCOSUR, and Protocol of MERCOSUR, and Protocol of Agreements on the Ethical Agreements on the Ethical Principles of the Psychologists Principles of the Psychologists of MERCOSUR and Associate of MERCOSUR and Associate Members Members Biological, Not scheduled Not scheduled Fully Liberalized* Fully Liberalized* Pharmaceutical and Psychological Services
288 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Computer and related Not scheduled Not scheduled Fully Liberalized* Fully Liberalized* services (Constancy Services related to the installation of computer hardware, Software- implementation services, Data- processing services, Data-base services, and Other Research-and- development services: Not scheduled Not scheduled - R&D services on All modes are unbound All modes are unbound natural sciences, - R&D services on biology Three modes are unbound† Three modes are unbound† - R&D services on social sciences and humanities All modes are unbound All modes are unbound - Interdisciplinary research and development services All modes are unbound All modes are unbound - Interdisciplinary research and development services in Three modes are unbound† Three modes are unbound† biology
Real estate services - Involving own or Not scheduled Not scheduled The foreign person must: Fully Liberalized* leased property, - prove that he/she has been - Real estate services living in Brazil for the last three without operators years - the registration of the physical and juridical person regarding real estate must be done at the “Regiao do CRECI”
289 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Rental/leasing services Not scheduled Not scheduled All modes are unbound, with no All modes are unbound, with no without operators exception rule exception rule -related to ships without crew
- airplanes without crew All modes are unbound, with no All modes are unbound, with no exception rule exception rule
- other transport All modes are unbound, with no equipment without crew exception rule Fully Liberalized*
- other machinery and Fully Liberalized* Fully Liberalized* equipment without workers Advertising services Mode 1: Foreign participation in Modes 1, 2 and 4: Unbound Same as GATS Same as GATS the production is limited to 1/3 of the footage of advertising Mode 3: Foreign producers must films. Larger participation is live in Brazil for at least three conditional on the use of years before they are authorized Brazilian talent and production to be engaged in film production house. Advertising films must be spoken in Portuguese, unless the use of a foreign language is required by the subject of the film
Modes 2 and 4: Unbound
Mode 3: Foreign participation is limited to 49 per cent of the capital of companies established in Brazil. Leadership must remain with Brazilian partners. Professionals are subject to the Brazilian Code of Ethics of Advertising Professionals
290 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Market research and Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Fully Liberalized* Fully Liberalized* public opinion polling Mode 3: No limitations Mode 3: No limitations Management consulting Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Fully Liberalized* Fully Liberalized*
Mode 3: No limitations Mode 3: No limitations Administration Not scheduled Not scheduled Fully Liberalized* Fully Liberalized* consultancy Technical testing and Not scheduled Not scheduled The foreign service provider Fully Liberalized* analysis services must: - be associated with a Brazilian service provider through a “consorcio” - the Brazilian service provider must conduct the work - the objective of the “consorcio” must be clearly identified Building cleaning Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Fully Liberalized* Fully Liberalized*
Mode 3: No limitations Mode 3: No limitations Translation and Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Same as GATS Fully Liberalized* interpretation services Mode 3: No limitations Mode 3: No limitations Services incidental to Not scheduled Not scheduled All modes are unbound Fully Liberalized* agriculture, hunting and forestry Services incidental to Not scheduled Not scheduled All modes are unbound All modes are unbound fishing, mining, manufacturing and energy distribution Placement and supply Not scheduled Not scheduled The foreign supplier must show Fully Liberalized* service personnel the Commercial Board the location of the company: - the company licensed to operate in Brazil - the Brazilian nationality of the partners
291 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Investigation and Not scheduled Not scheduled The foreign ownership and Fully Liberalized* security operation of companies providing investigation and security services is prohibited in Brazil
Related scientific and Not scheduled Not scheduled The foreign service provider Three modes are unbound† technical consulting must: services - be associated with a Brazilian service provider through a “consorcio” - the Brazilian service provider must conduct the work - the objective of the “consorcio” must be clearly identified
Maintenance and repair Not scheduled Not scheduled Fully Liberalized* Fully Liberalized* of equipment, Building – cleaning services, Photographic services, Packaging services
Printing and publishing Not scheduled Not scheduled All modes are unbound Fully Liberalized* services, and Convention services
113 COMMUNICATION SERVICES Voice telephone Not scheduled Not scheduled Modes 1 and 2: No limitations Modes 1, 2 and 3: No services, limitations Packet-switched data Mode 3: Until, 12.31.2001, up transmission services, to two suppliers of local, long Mode 4: Unbound, except as Circuit-switched data distance inter-regional and indicated in the horizontal transmission services, international voice telephone commitments. Telex services, services will be allowed and up
113 MERCOSUR Commitments under business services were made in the I Round of Negotiations in June of 2000.
292 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Telegraph services, and to four suppliers of long Facsimile services distance, intra-regional voice telephone services will be allowed. After this date, other licenses may be granted.
Mobile services: Not scheduled Not scheduled Modes 1 and 2: No limitations Modes 1, 2 and 3: No Analog/Digital cellular limitations services, Global mobile Mode 3: Duopoly for the satellite services, cellular services until Mode 4: Unbound, except for Paging services, 12/31/2001 in the States of horizontal commitments. Trunking services, Amazonas, Roraima, Amapa, and Maranhao.
Mode 4: Unbound, except for horizontal commitments.
Value Added Services: Not scheduled Not scheduled Modes 1, 2 and 3: No Modes 1, 2 and 3: No Electronic mail, Voice limitations limitations mail, On-line information and data Mode 4: Unbound, except for Mode 4: Unbound, except for base retrieval, horizontal commitments. horizontal commitments. Electronic data interchange, Enhanced/value-added facsimile services, including store-and- forward, store-and- retrieve, Code and protocol conversion, On-line information and/or data processing
293 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment
DISTRIBUTION SERVICES Wholesale Trade Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound No documentation available No documentation available Services Mode 3: No limitations Mode 3: No limitations
Retailing Services Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound No documentation available No documentation available
Mode 3: No limitations Mode 3: No limitations
Franchising Mode 1: Franchise contracts Modes 1, 2 and 4: Unbound No documentation available No documentation available must be in conformity with the Industrial Property Code to be Mode 3: No limitations eligible for payment of royalties.
Modes 2 and 4: Unbound
Mode 3: No limitations 114 FINANCIAL SERVICES All insurance and Mode 1: Unbound, except for: Mode 1: None for: All modes are restricted, except All modes are restricted. insurance-related - insurance on freight: No - Insurance on freight, for mode 3. Insurance companies in order to services limitations. However, except for contracts on, - As far as insurance on freight, operate in Brazil must be - Life insurance, commercial presence is and any liability arising commercial presence is required incorporated under Brazilian Insurance on freight, required for contracts on, from, imported goods; for contracts on, and any law, in the form of a “sociedade Property insurance, and any liability arising liability arising from, imported anonima,” and the enactment of Medical care insurance, from, imported goods. - body, machinery, and goods. a Presidential decree is required. Liability insurance, civil liability insurance - body, machinery, and civil - As far as insurance on freight, Body, machinery and - Body, machinery and may be authorized for liability insurance may be commercial presence is required civil liability insurance civil liability insurance vehicles registered in the authorized for vessels registered for contracts on, and any for vessels may be authorized for REB. in the Brazilian Special Registry liability arising from imported vessels registered in the (REB), depending on internal goods. Brazilian Special - Unbound for other supply conditions. -body, machinery, and civil Registry (REB), services liability insurance may be depending on internal authorized for vessels registered supply conditions in the Brazilian Special Registry
114 MERCOSUR Commitments under business services were made in the Protocol of Montevideo in July of 1998.
294 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Modes 2 and 4: Unbound Modes 2 and 4: Unbound (REB), depending on internal supply conditions. Mode 3: Incorporation under Mode 3: No limitations Brazilian law in the form of a “sociedade anonima:, and the enactment of a presidential decree, are required.
Work accident Modes 1, 2 and 4: Unbound All modes: Unbound. Same as GATS Same as GATS insurance Mode 3: The National Social Brazil will undertake Security Institute (INSS) is the commitments regarding sole authorized supplier. commercial presence in the work accident insurance market within two years after the adoption by the National Congress of legislation regulating such presence. Reinsurance and Modes 1, 2 and 4: Unbound All modes: Unbound Same as GATS Same as GATS retrocession Mode 3: Future regulations will Brazil will undertake permit supply by private commitments regarding institutions. Meanwhile, it is of commercial presence in the the exclusive competence of the work accident insurance market Brazilian reinsurance institution within two years after the (IRB- Brasil Resseguros S.A.) adoption by the National to accept mandatory or Congress of legislation facultative reinsurance, in Brazil regulating such presence. or abroad, as well as to distribute reinsurance it does not retain. Auxiliary Services – Modes 1,2 and 4: Unbound Modes 1, 2 and 4: Unbound Same as GATS Same as GATS agencies and brokers Mode 3: For legal persons, Mode 3: No limitations incorporation under Brazilian law is required.
295 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment Consultancy, actuarial Modes 1,2 and 3: No limitations and surveys Mode 4: Unbound except as indicated in horizontal commitments. Banking and other Modes 1 and 2: Unbound Modes 1 and 2: Unbound Same as GATS Same as GATS financial services - Acceptance of the Mode 3: The establishment of Mode 3: No limitations. following funds from new branches and subsidiaries For the services of credit cards the public: (i) demand of foreign financial institutions, and factoring, national treatment deposits; (ii) time as well as increases in the shall be granted in commercial deposits; (iii) savings participation of foreign persons presence, if these services are deposits destined for in the capital of financial defined as financial services in housing finance. institutions incorporated under future legislation adopted by the - Lending of all types, Brazilian law, is only permitted National Congress. including: (i) consumer when subject to a case-by-case credit; (ii) mortgage authorization by the Executive credit Branch, by means of a (these sectors refer to Presidential decree. Applying modes 1,2,3) investors may be required to fulfill specific conditions. Foreign persons may participate in the privatization program of public sector financial institutions and, in each case, commercial presence will be granted, also by means of a Presidential decree. Otherwise, commercial presence is not allowed. (iii) financing of For those banks established Mode 4: Unbound, except as Same as GATS Same as GATS commercial within Brazil before Oct. 5th indicated in horizontal transactions. 1988, the aggregate number of commitments. branches is limited to that existing on that date. For those banks authorized to operate in Brazil after that date, the
296 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment number of branches is subject to the conditions set out, in each case, at the time authorization is granted.
Financial institutions, unless otherwise specified, shall take the form of a “sociedade anonima” when incorporated under Brazilian law.
Mode 4: Unbound, except as indicated in horizontal commitments.
Services provided by Modes 1 and 2: Unbound. Modes 1 and 2: Unbound. Same as GATS Same as GATS non-financial institutions Mode 3: No limitations, except Mode 3: No limitations (i) Trading for own that: account or for the - legal persons must be account of customers, incorporated under Brazilian whether on an exchange law; or in a regulated over- - only legal persons may the-counter market, of provide the services listed in securities and items ii and iii; derivatives; (ii) - clearing services shall be Clearing services for provided by "sociedades securities and anônimas.” derivatives; (iii) Public offerings of securities in a regulated over-the-counter market.
297 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment (iv) Advisory services, Same as GATS Same as GATS investment and portfolio research and advice and credit analysis. (v) Portfolio management of Mode 4: Unbound, except as Mode 4: Unbound, except as investment funds indicated in the horizontal indicated in the horizontal subject to the regulation commitments. commitments. of the Securities Commission
TOURISM AND TRAVEL RELATED SERVICES Hotels Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound No documentation available No documentation available
Mode 3: No limitations Mode 3: Brazilian firms operating in the Amazon and Northeastern regions benefit from tax credit incentives. Other incentives are limited to firms with majority of capital held by Brazilian citizens. Restaurants Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound No documentation available No documentation available
Mode 3: No limitations Mode 3: Brazilian firms operating in the Amazon and Northeastern regions benefit from tax credit incentives. Other incentives are limited to firms with majority of capital held by Brazilian citizens.
298 Part IV ANNEX
B. BRAZIL’S COMMITMENTS UNDER GATS AND MERCOSUR Sector GATS Commitment MERCOSUR Commitment
TRANSPORT SERVICES Rail transport services: Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Subject to the Annex on Land and Maritime Transport Services of Rail freight the Protocol of Montevideo115 Mode 3: Governmental Mode 3: No limitations authorization required. The granting of new authorization is discretionary. The number of service suppliers may be limited. Road transport services: Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Subject to the Annex on Land and Maritime Transport Services of Road freight the Protocol of Montevideo Mode 3: Foreign participation is Mode 3: No limitations limited to 1/5 of the voting shares of Brazilian companies engaged in this activity. Pipeline transport Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Same as GATS
Mode 3: No limitations Mode 3: No limitations Services auxiliary to all Modes 1, 2 and 4: Unbound Modes 1, 2 and 4: Unbound Same as GATS modes of transport: - Cargo handling Mode 3: No limitations Mode 3: No limitations - Storage and warehousing Air transport services Not scheduled Not scheduled Subject to the Annex on Air Transport Services of the Protocol of Montevideo. MERCOSUR’s air transport services is regulated by the Agreement on Sub-Regional Air Services116
Notes: Mode 4 is subject to horizontal commitments.
115 The Protocol of Montevideo Annexes include the Land and Maritime Transport Services. According to the Annexes transport services will make part of the MERCOSUR Liberalization Program. 116 The Agreement on Sub-Regional Air Services was signed in Fortaleza, Brazil, in December 1996, by Argentina, Bolivia, Brazil, Chile, Paraguay and Uruguay. The Agreement entered into force in Brazil through the Presidential Decree No 3.045, on the 5th of May, 1999. This Agreement regulates air services between Brazil and MECOSUL Members and Associate Members.
299
Part IV ANNEX
Annex to Chapter 4
WTO COMMITMENTS BY SELECTED TRADING PARTNERS IN SECTORS OF EXPORT INTEREST CONSTRUCTION RELATED SERVICES
Country General construction work for buildings General construction work for civil Engineering engineering USA -except marine dredging- -except marine dredging- 1,2,3: None 1: Unbound 1: Unbound 4: (MA) Unbound, except as indicated in the 2,3: None 2,3: None horizontal commitments. In addition, U.S. 4: (MA) Unbound, except as indicated in the 4: (MA) Unbound, except as indicated in the citizenship is required for licensure in DC. horizontal commitments. In addition, an in- horizontal commitments. In addition, an in-state (NT) In-state residency is required for licensure state office must be maintained by all office must be maintained by all contractors in in: Idaho, Iowa, Kansas, Maine, Mississippi, contractors in Michigan. Michigan. Nevada, Oklahoma, South Carolina, South (NT) None. (NT) None. Dakota, Tennessee, Texas, and West Virginia. EU 1: Unbound 1: Unbound 1: GR, I, P: unbound GR=Greece; 2: None 2: None 2: None I=Italy; 3: (MA) I: Exclusive rights are granted for 3: (MA) I: Exclusive rights are granted for 3: (MA) E: Access is restricted to natural F=France; construction, maintenance and management of construction, maintenance and management of persons. I,P: Access is restricted to natural P=Portugal highways and airport of Rome; P: Exclusive highways and airport of Rome; P: Exclusive persons. Professional association (no E=Spain rights are granted for maintenance and rights are granted for maintenance and incorporation) among natural persons permitted. management of highways; GR: Nationality management of highways; GR: Nationality (NT) None condition for manager of the board of condition for manager of the board of directors 4: Unbound, except as indicated in the directors of construction companies supplying of construction companies supplying the public horizontal commitments. in public sector. sector. Limitations: (MA) GR: Condition of nationality; (NT) None (NT) None (NT) I,P: Residence requirement. 4: Unbound, except as indicated in the 4: Unbound, except as indicated in the horizontal commitments. horizontal commitments. Limitations: (MA) GR: Nationality condition Limitations: (MA) GR: Nationality condition for for manager of the board of directors of manager of the board of directors of construction companies supplying the public construction companies supplying the public sector. sector.
301 Part IV ANNEX
WTO COMMITMENTS BY SELECTED TRADING PARTNERS IN SECTORS OF EXPORT INTEREST CONSTRUCTION RELATED SERVICES
Country General construction work for buildings General construction work for civil Engineering engineering Argentina 1,2,3: None No commitments -1,3,4 (MA) Persons seeking to provide 4: Unbound, except as indicated in the professional services must obtain recognition of horizontal commitments. their professional degree, enroll in the relevant college and establish legal domicile in Argentina. Legal domicile: does not involve residence requirement. 1,2,3: None 4: Unbound, except as indicated in the horizontal commitments. Chile No commitments No commitments 1,2: Unbound 3: None 4: Unbound, except as indicated in the horizontal commitments. Venezuela 1: Unbound 1: Unbound 1,3: Unbound 2,3: None 2,3: None 2: None 4: Unbound, except as indicated in the 4: Unbound, except as indicated in the 4: Unbound, except as indicated in the horizontal commitments. horizontal commitments. horizontal commitments. Canada 1,2: None 1,2: None 1, 2: (MA) None, other than: Consulting 3: (MA) None; (NT) None other than: 3: (MA)None, other than: Construction Engineers (Manitoba): Requirement for a Construction Contractor (Ontario): A non- (Ontario): An applicant and holder of a commercial presence for accreditation; resident who will be consuming or using waterpower site development permit must be Engineers (British Columbia, Newfoundland, tangible personal property in Ontario is incorporated in Ontario. Alberta, Ontario, New Brunswick, and Nova required to deposit with the Treasurer 4 (NT) None Scotia): Must be permanent resident for percent of the amount to be paid under the 4: Unbound, except as indicated in the accreditation contract or post a guarantee bond for the horizontal commitments. Limitations: (NT) (Québec): Citizenship requirement for same.; (Newfoundland): A deposit of 6 Construction (Ontario): An applicant and holder accreditation percent of the contract amount or a bond of a waterpower site development permit must 1: (NT) None, other than: Engineers equivalent is required from non-resident be a resident of Ontario. (Saskatchewan): Residency requirement for contractors. accreditation. 4: Unbound, except as indicated in the 2: (NT) None horizontal commitments. 3: None 4: Unbound, except as indicated in the
302 Part IV ANNEX
WTO COMMITMENTS BY SELECTED TRADING PARTNERS IN SECTORS OF EXPORT INTEREST CONSTRUCTION RELATED SERVICES
Country General construction work for buildings General construction work for civil Engineering engineering horizontal commitments. Limitations: (MA) Engineers (British Columbia, Newfoundland, Alberta, Ontario, New Brunswick, and Nova Scotia): Must be permanent resident for accreditation (NT) Engineers (Saskatchewan): Residency requirement for accreditation.
Japan 1: Unbound 1: Unbound 1,2: None 2: None 2: None 3: (MA) None (NT) None, except as indicated in 3: (MA) None (NT) None, except as indicated 3: (MA) None (NT) None, except as indicated in the horizontal commitments. in the horizontal commitments. the horizontal commitments. 4: Unbound, except as indicated in the 4: Unbound, except as indicated in the 4: Unbound, except as indicated in the horizontal commitments. horizontal commitments. horizontal commitments. Bolivia No commitments No commitments No commitments
303 Part IV ANNEX
AUDIOVISUAL SERVICES
Country Radio and television USA 1,2,3: None; 4: (MA) Unbound, except as indicated in the horizontal commitments. (NT) None EU (GR=Greece; I=Italy; F=France; No commitments P=Portugal; E=Spain) Argentina No commitments Chile* No commitments Venezuela* No commitments Canada* No commitments Japan No commitments Bolivia* No commitments
*MFN exemptions: Canada: Differential treatment is accorded to works co-produced with persons of countries with which Canada may have co- production agreements or arrangements, as well as to natural persons engaged in such co-production. Differential treatment is accorded to works co-produced with persons of countries with which Québec may have co-production arrangements, and to natural persons engaged in such co-productions, as well as to natural and juridical persons engaged in film and video distribution pursuant to bilateral arrangements for the distribution of film, video and television programming in its territory. Chile: National treatment is granted for co-produced cinematographic works in accordance with existing or future cinematographic co-production agreements. Bolivia: National treatment for co-produced cinematographic works in accordance with existing or future agreements. Venezuela: Agreement on coproduction of cinematographic works: (measures apply to Chile): national treatment is granted for cinematographic works coproduced by the two countries; freedom of movement and residence granted to the artistic and technical personnel working on coproduced cinematographic works; the necessary facilities are granted for the import and export of material and equipment for making and exploiting coproduced cinematographic works. Ibero-American Cinematographic Integration Area (measures apply to Brazil, Argentina, Ecuador, Cuba, México, Nicaragua, Peru, Panama, Dominican Republic, Colombia, Spain, Italy): freedom of entry, residence and movement are granted to nationals responsible for activities related to cinematographic production; the showing of Ibero-American cinematographic works is facilitated on existing audiovisual channels in each of the signatory countries. Latin American Cinematographic Coproduction Agreement (measures apply to: Brazil, Argentina, Cuba, Ecuador, Mexico, Nicaragua, Peru, Panama, Dominican Republic, Colombia, Spain, Italy); national treatment for coproduced cinematographic works; cinematographic works must be made by professionals who are nationals of or resident in member States; movement and residence of the artistic and technical personnel working on cinematographic works is facilitated; the import and export of material and equipment necessary for making coproduced cinematographic works is facilitated; coproducing countries are entitled to the profits from exploitation of the work on their territory; systems for the use or exchange of services, material and products agreed upon by the coproducers may be allowed; directors of such coproductions must be nationals of or resident in one of the member or coproducing States in Latin America, the Caribbean or other Spanish-speaking or Portuguese-speaking countries. Agreement on the creation of a Latin American Cinematographic Common Market: (measures apply to: Brazil, Argentina, Cuba, Ecuador, Mexico, Nicaragua, Peru, Panama, Dominican Republic, Colombia, Spain, Italy): national treatment for coproduced cinematographic works for the purposes of distribution and showing by any medium and, as a result, enjoyment of all profits and rights related to places where the works are shown, projection fees, distributions fee and other prerogatives. European Union: For parties to the Council of Europe Convention on Transfrontier Television or other European countries with whom an agreement may be concluded: measures which define works of European origin, in such a way as to extend national treatment to audiovisual works which meet certain linguistic and origin criteria regarding access to broadcasting or similar forms of transmission. For all countries with whom cultural cooperation may be desirable (agreements already exist, or are being negotiated, with the following countries: Algeria, Angola, Argentina, Australia, Brazil, Burkina Faso, Canada, Cape Verde, Chile, Côte d'Ivoire, Colombia, Cuba, Egypt, Guinea Bissau, India, Israel, Mali, Mexico, Morocco, Mozambique, New Zealand, São Tomé e Principe, Senegal, States in Central, Eastern and South-Eastern Europe, Switzerland, Tunisia, Turkey, Venezuela): Measures based upon government-to-government framework agreements, and plurilateral agreements, on coproduction of audiovisual works, which confer National Treatment to audiovisual works covered by these agreements, in particular in relation to distribution and access to funding. For European countries: Measures granting the benefit of any support programmes (such as Action Plan for Advanced Television Services, MEDIA or EURIMAGES) to audiovisual works, and suppliers of such works, meeting certain European origin criteria. For parties to the Council of Europe: Waiver of the requirement in Spain to obtain licences for the distribution of dubbed films of non-Community origin, granted to films of European origin that are especially recommended for children's audiences. Foreign participation in companies in Italy exceeding 49 percent of the capital and voting rights, subject to a condition of reciprocity. For Finland, Norway, Sweden, Iceland: Measures taken in Denmark that are adopted for the implementation of benefits in conformity with such support programmes as the NORDIC FILM and TV FUND in order to enhance production and distribution of audiovisual works produced in Nordic countries.
304 Part IV ANNEX
COMPUTER AND RELATED SERVICES
Country Software-implementation services Data-processing services USA 1,2,3: None; 4: (MA) Unbound, 1,2,3: None; 4: (MA) Unbound, except as except as indicated in the horizontal indicated in the horizontal commitments. commitments. (NT) None (NT) None EU 1,2,3: None; 4: Unbound, except as 1,2,3: None; 4: Unbound, except as GR=Greece; indicated in the horizontal indicated in the horizontal commitments. I=Italy; commitments. F=France; P=Portugal E=SPAIN Argentina 1,2,3: None; 4: Unbound, except as 1,2,3: None; 4: Unbound, except as indicated in the horizontal indicated in the horizontal commitments. commitments. Chile No commitments No commitments Venezuela 1: None, only legal representation 1: None, only legal representation required; 2,3: None; 4: Unbound, required; 2,3: None; 4: Unbound, except except as indicated in the horizontal as indicated in the horizontal commitments. commitments. Canada 1,2,3: None; 4: Unbound, except as 1,2,3: None; 4: Unbound, except as indicated in the horizontal indicated in the horizontal commitments. commitments. Japan 1,2: None; 3: (MA) None (NT) 1,2: None; 3: (MA) None (NT) None, None, except as indicated in the except as indicated in the horizontal horizontal commitments; 4: commitments; 4: Unbound, except as Unbound, except as indicated in the indicated in the horizontal commitments. horizontal commitments. BOLIVIA No commitments No commitments
305 Part IV ANNEX
DISTRIBUTION SERVICES
Country Wholesale-trade services USA - except wholesale trade of alcoholic beverages, firearms and military equipment- 1,2,3: None; 4: (MA) Unbound, except as indicated in the horizontal commitments.(NT) None EU 1: (MA) E, I, P: State monopoly on tobacco; F: Unbound for (GR=Greece ; I=Italy; pharmacies. (NT) None F=France; P=Portugal; 2: None ; 3: (MA) E, I, P: State monopoly on tobacco; F: E=Spain) Wholesale pharmacies are authorized according to the needs of population and within established quotas. State monopoly on tobacco and matches. (NT): None; 4: Unbound, except as indicated in the horizontal commitments. Limitations: (MA) F: Condition of nationality for wholesale of pharmaceuticals. (NT) E,I,P: Residence requirement. Argentina 1,2,3: None; 4: Unbound, except as indicated in the horizontal commitments. Chile No commitments Venezuela No commitments Canada 1: None, other than: (MA) Sales of Amusement machines (Québec): Services must be supplied through a commercial presence; Citizenship requirement to sell amusement machines; Marketing of Fish Products (Nova Scotia): Nova Scotia residents require ministerial approval to enter into agreements with non-residents; Sale of Motor Vehicles (Saskatchewan) and Automobile Dealers and Salvage Dealers (Newfoundland): Services must be supplied through a commercial presence; (NT) Fish Buyers (Newfoundland): Non-residents must be registered and licensed in order to purchase unprocessed fish from primary producers and/or process fish. 2: None 3: (MA) None, other than: Fish Buyers (British Columbia): Mobile fish buyers licenses are not issued to foreigners. (NT) None 4: Unbound, except as indicated in the horizontal section. Japan 1,2,3: (MA) None (NT) None, except as indicated in the horizontal commitments; ; 4: Unbound, except as indicated in the horizontal commitments. Bolivia No commitments
306 Part IV ANNEX
Annex to Chapter 5
A. Preferential recognition: Variable cost-increasing measures
Assume that there are three countries: country X is an importing country, facing an upward sloping domestic supply of a particular service (say because of increasing opportunity costs) and countries Y and Z are potential exporters. Let us say that cx > cy > cz, and that in the absence of any trade the prevailing price in country X is p*. Assume now that country X recognizes the equivalence of the universal component of the standard obtained in country Y, but not in country Z. There are several possibilities, but we consider only two:
No trade prior to recognition: Prior to recognition, service providers from both countries Y and Z were required to meet the full standards in country 1 but neither found it worthwhile to do so, i.e., cy(u + vy) + 117 cx(u + vx) > p* and cz(u + vz) + cx(u + vx) > p*. But cy(u + vy) + cx vx < p*, i.e., when the universal
117 It may be asked why some individuals from countries Y and Z do not directly meet the standard in country X instead of first qualifying at home. One reason is that providers are often allowed to enter foreign markets only on a temporary basis (as under the GATS), so they need to be qualified also to serve the home market. Where longer term movement of providrs is allowed, we need to assume that the individual elements of qualifications are not separable, and that there is a part, say w, which is universally recognized as equivalent. The incentive to meet the standard at home arises as long as cyw and czw are sufficiently smaller than
307 Part IV ANNEX component of standards in country Y is recognized as equivalent to that in country X, then suppliers from Y find it worthwhile to export to country X, and the price in X will fall. Hence, if all foreign suppliers had been completely deterred from supplying to country X by the absence of recognition, then any recognition agreement is necessarily trade creating.
Country Z exports to country X prior to any recognition: In this case, cz(u + vz) + cx(u + vx) < p* < cy(u + vy) + cx(u + vx), i.e., when all foreign suppliers were required to requalify, only those from the third country were willing to supply country 1. But cy(u + vy) + cx vx < cz(u + vz) + cx(u + vx), i.e., once the second country suppliers are exempted from the basic qualification requirement, they gain a competitive edge over the third country. That is, if suppliers from the third country were already present in the first country, then the recognition of second country suppliers would put them at a competitive disadvantage and could lead to trade diversion.
118 This situation is depicted in Figure 1. The pre-recognition situation involves domestic output q2, consumption q3, and imports from Z, q3 – q2. After country X recognizes qualifications in country Y, domestic output declines to q1, consumption increases to q4, and imports from Y, q4 – q1, displace imports from Z. The welfare effects are straightforward. Consumer surplus rises by A + B + C + D as consumption expands from q3 to q4. The area A is a gain at the expense of domestic suppliers, whose surplus falls with their output. Area D is the gain from the better allocation of consumption expenditures; area B the gain from the resources released as inefficient domestic supply contracts; and area C the gain arising from the elimination of wasteful requalification.
The area C + E is of crucial significance, and can be interpreted in several different ways. It helps to recall the analysis of preferential arrangements when tariffs are the instruments of protection. In that case, area C + E would be the loss in government revenue because preferential imports displace high tariff imports. While C is gained by consumers, E is completely lost because supply comes from the more expensive source, and is the loss due to trade diversion. The net gain to the country is only B + D – E, and could be positive or negative. In the example here, C + E were the costs of requalification for country Z suppliers when they supplied country X. If these costs were completely dissipated, then they do not enter the welfare calculus of country X. That is, there is no cost of trade diversion for the importing country and the net gain to the importing country from the recognition agreement is B + C + D. If, however, part of these requalification costs (say a fraction α) were appropriated by country X, perhaps as the producer surplus of its qualification granting industry or as some form of regulatory rent, then they would be foregone with trade diversion and would need to be taken into account: the net gain to the importing country from the agreement would be B + C + D – α(C + E).
B. PREFERENTIAL RECOGNITION: FIXED COST-INCREASING MEASURES
Following Baldwin (2001), we consider an industry marked by Cournot oligopolistic competition with firms facing constant marginal costs and two types of fixed costs, a firm-specific fixed cost of setting up production (unrelated to policy) and a fixed cost of selling to each market (related to policy). The three countries – home (X), partner (Y) and rest of world (Z), are assumed ex ante identical to reduce complexity. The inverse demand function of a typical nation is pj=1-Qj, where pj and Qj are the price and total sales in market j (j=X, Y or Z). The total quantity in market j is (Σniqij) where qij is sales of a typical i-based firm in market j; ni is the corresponding number of i-based firms. Marginal production costs are initially assumed to be identical. The three markets are assumed to be segmented—which is plausible where cross-border delivery is not feasible. Domestic regulations impose an additional fixed cost on cxw. The w element is suppressed here to keep the notation simple. Non-separability is indeed an aspect of many qualifications: a student can usually not switch institutions after doing only part of a course. 118 The initial part of the following discussion resembles closely the discussion in Pelkmans and Winters (1988).
308 Part IV ANNEX non-local firms. To capture this simply, we assume that each market has its own norm and complying with these costs F in each market. 119 The equilibrium price in market X, px, equals the sum of two terms. The first term, 1/(1+Σni), reflects the level of overall competition. The second term, (Σnicix)/(1+Σni), reflects the average marginal cost of firms active in the market (cix is the market-specific marginal cost). It is assumed that the number of X and Y firms are identical, n, and n* is the number of Z firms. The number of firms operating in the domestic market is allowed to vary with policy. Let us say that there are no other restrictions on new entry in the country. Then, in equilibrium each firm's profits will just cover its fixed costs. It is intuitively obvious (and easy to show) (i) that the equilibrium number of X and Y firms, i.e., n, falls as their fixed cost F rises, and (ii) that n rises as the Z-firms' fixed cost F* rises. Similarly, the equilibrium number of Z firms, i.e., n*, falls as F* rises and as F falls.
119 The equilibrium is found by solving the nine segmented market first order conditions for the nine levels of sales. The model’s linearity allows us to find solutions for prices, consumption, welfare, the numbers of firms, trade flows, etc.
309
Part IV ANNEX
Annex to Chapter 6
APPROACHES TO REGULATORY COOPERATION UNDER DIFFERENT AGREEMENTS
1. Under the GATS
The GATS seeks to strike a difficult balance between national regulatory autonomy and multilateral rules. Today GATS Article VI dealing with domestic regulation primarily provides a mandate (in Article VI:4) to develop disciplines under the GATS to ensure “that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services.”
Pending the entry into force of disciplines developed pursuant to Article VI:4, the only current disciplines are contained in Article VI:5, which requires that
“. . . the Member should not apply licensing and qualification requirements and technical standards that nullify or impair any existing sectoral commitments in a manner which: (i) does not comply with the criteria outlined in subparagraphs 4(a) [objectivity and transparency], 4(b) [not more burdensome than necessary to ensure the quality of the service], and 4(c) [in the case of licensing procedures, of not being in themselves a restriction on the supply of the service]; and (ii) could not reasonably have been expected of that Member at the time the specific commitments in those sectors were made.” (emphasis added)
The requirements in (i) could have constituted a powerful discipline, but element (ii) renders them toothless. In the extreme, it could be read as “grandfathering” all existing restrictive requirements. Thus country X could argue that training in medical schools in X had always been a requirement to practice in X and it could, therefore, "reasonably have been expected" when the specific commitments were made. This provision seriously limits the scope for translating the commitments under GATS into non-discriminatory market access.
At the end of the Uruguay Round, a Working Party was established to develop disciplines for regulations affecting trade in accountancy services. The resulting disciplines on accountancy, represent an important step forward in the definition of rules on domestic regulation under the GATS, because they contain a binding “necessity test.” Members are required to “ensure that measures not subject to scheduling under Articles XVI or XVII of the GATS, relating to licensing requirements and procedures, technical standards and qualification requirements and procedures are not prepared, adopted or applied with a view to or with the effect of creating unnecessary barriers to trade in accountancy services. For this purpose, Members shall ensure that such measures are not more trade-restrictive than necessary to fulfill a legitimate objective.”
The rest of the disciplines either add some limited value added to existing GATS Articles (III, Transparency) or specify the application of the necessity test to types of measures. In some key cases, however, the specific rules contain language weaker than the necessity test. For example the provision on residency requirements says that Members “shall consider” whether less trade restrictive means could be employed to achieve the same policy objective and the provision on qualification requirements states that “A Member shall ensure that its competent authorities take account of qualifications acquired in the territory of another Member, on the basis of equivalency
311 Part IV ANNEX of education, experience and/or examination requirements.” (emphasis added) A proposal to create a presumption in favor of a test of competence as the least trade restrictive measure received little support.120
As part of the WTO Agreement on Basic Telecommunications, a post-Uruguay Round Agreement concluded in 1997, a Reference Paper on Regulatory Principles was adopted. The Reference Paper creates broad principles on key aspects of regulation in telecommunications, without necessarily aiming to harmonize regulatory regimes. Specifically, there was concern that the lack of pro- competitive regulation on key matters such as network interconnection and number portability could forestall competition from new entrants in otherwise open service markets. This fear was compounded by the fact that telecommunications markets in many member countries were still dominated by fully or partially state-owned entities and the separation of regulatory, policy and operational responsibilities had not progressed to the same point.
The Reference Paper covers principles in the following six areas: competitive safeguards; interconnection; universal service; public availability of licensing criteria; independent regulators; and allocation and use of scarce resources. The provisions on competitive safeguards require members to prevent major suppliers from engaging in anti-competitive cross-subsidization and abusing control over information. Arguably, some of the most significant obligations concern network interconnection, which must take place on non-discriminatory, transparent, and reasonable terms and at cost-oriented rates (among other obligations). The provisions regarding independent regulators require the regulatory body to be impartial, separate from and not accountable to any service supplier.
2. Under NAFTA
As things stand today, NAFTA does not have general rules on domestic regulations other than the national treatment obligation. Existing rules on regulation focus on two areas: the licensing and certification of professionals, and access to public telecommunications networks. However, in these areas, it goes further than the GATS. It is significant that the NAFTA rules already require that licensing and certification requirements not be more burdensome than necessary to ensure the quality of the service and not be in themselves a restriction on the provision of the service. Each NAFTA country must also to seek to ensure that licensing and certification requirements and procedures are based on objective and transparent criteria, such as competence. Furthermore, appended to the Agreement’s cross-border services chapter, the Professional Services Annex, is the first generic blueprint aimed at encouraging and assisting all professions interested in reaching mutual recognition agreements to be contained in a trade agreement.121 The Annex sets out procedures—in areas such as recognition of diplomas, examinations, experience, professional conduct and ethics, alternatives to residency requirements, and liability insurance—aimed at the development of mutually acceptable standards of professional practice, a pre-requisite to any meaningful liberalization of trade in ‘accredited’ professional services.
120 The Disciplines are also subject to three constraints which limit their impact. Firstly, they apply only to those WTO Members which have made commitments in the accountancy sector, not all. Secondly, they have no immediate application, but enter into force only when formally integrated into the GATS, which requires waiting until the current negotiations have been concluded. Thirdly, and most importantly, they do not apply to measures which are subject to scheduling under Articles XVI and XVII. In other words, a domestic regulation that has the effect of denying market access or national treatment is not automatically negated when the Disciplines enter into force but must be addressed through future negotiations of specific commitments. This came as a disappointment to those who had hoped to see at least some “behind the border” issues being dealt with by way of rules having general application. 121 The core provisions of the NAFTA’s annex on professional services found their origin in the Canada-United States FTA annex on mutual recognition for architects.
312 Part IV ANNEX
Three elements complement the NAFTA package on professional services. First, an agreement to remove, within two years of the Agreement’s entry into force, all citizenship and permanent residency requirements attached to the licensing and certification of professional service providers (i.e., the obligation to be a ‘landed immigrant’).122 Second, the establishment of detailed work programmes aimed at liberalizing the licensing of foreign legal consultants and providing for the temporary licensing of engineers. Third, the development (in NAFTA’s chapter on Temporary Entry of Business People) of governing principles and rules under which citizens of each NAFTA country may have access to the other NAFTA countries on a temporary basis to pursue business opportunities without meeting a labor market (or economic ‘needs’) test.
The NAFTA chapter on telecommunications has a dual purpose: to set out reasonable and non- discriminatory terms under which firms can gain access to and use of public networks and services, and to delineate conditions that may be attached to the provision of enhanced telecommunications services. Under the Agreement, ‘reasonable’ conditions of access and use means that companies will be allowed to operate private leased networks for intra-corporate communications, attach terminal or other equipment to public networks, interconnect private circuits to public networks, perform switching, signaling, and processing functions, and use operating protocols of the user’s choice. The NAFTA goes beyond the GATS by requiring that private leased circuits be made available on a flat-rate pricing basis and that rates for public telecommunications services reflect economic costs. It also breaks new ground by circumscribing the range of conditions that may be attached to the provision of enhanced telecommunications.
The NAFTA also recognizes the importance of addressing the problems of technical barriers to trade in the goods-services interface. Thus, the land transportation package is accompanied by a six-year work program on standards harmonization in areas such as vehicle size, driver certification, emission standards, road signs, carriage of dangerous goods, etc. The NAFTA also sets in motion a common approach towards standards for telecommunications equipment attached to public networks and sets up a telecommunications standards sub-committee to develop a work programme on standards harmonization. The Agreement also foresees the mutual recognition of conformity assessment procedures.
3. Under MERCOSUR
MERCOSUR has general rules that are similar to the rules of the GATS agreement. However, it has taken significant initiatives to accomplish harmonization and mutual recognition in specific areas.
The Agreement contains a provision on the recognition of professionals through the development of mutually acceptable criteria to determine the equivalence of licenses, certifications, professional degrees, and accreditations granted by another member country. The Agreement also encourages the elaboration of mutually acceptable standards and criteria for the exercise of professional services that would later be accepted by all countries.
This framework has given rise to a pioneering project on architecture, engineering, and agronomy. An independent body was created which comprises professionals from all member
122 In part, the agreement to remove citizenship and permanent residency requirements stems from the recognition of the growing body of jurisprudence in all three countries regarding the unconstitutionality of such requirements. Rather than subjecting such measures to the dispute settlement provisions of the NAFTA, it was agreed that failure to eliminate such measures within the agreed time limits would allow other NAFTA countries to maintain or reinstate equivalent measures in the affected sector.
313 Part IV ANNEX countries and promotes harmonization and mutual recognition in the sub-region—the Integration Commission for Agronomy, Architecture, Engineering and Geology in the MERCOSUR (CIAM). In 1998, CIAM concluded a resolution for the mutual recognition of licenses among monitoring bodies of the four member states for professional services. The organization monitors the official MERCOSUR work on a number of issues of interest, in particular the work undertaken by the Ministries of Education with regard to recognition of diplomas. In May 2001, it passed a resolution on “Single and Nationally Valid Criteria” that charged CIAM with the establishment of prerequisites and procedures for the recognition of equivalencies in educational background and professional experience in the different member countries.
At the official level, MERCOSUR has progressed a great deal on the matter of recognition of diplomas and acceptance of degrees across countries. There are five major protocols on the recognition of certificates, degrees and studies that cover all levels of education: on basic and intermediate non-technical, on intermediate technical, on the continuance of graduate studies in MERCOSUR Universities, on the exercise of academic activities in the countries of MERCOSUR, and on the development of human resources at the modify level. In addition, Ministers of Education have established working plans for adapting basic and technical- professional syllabi to reflect the specificities of the sub-region and, through the signing of a “Memorandum of Understanding on the Implementation of an Experimental Mechanism for the Accreditation of Undergraduate Courses” in July 1998, created an instrument for the automatic recognition of diplomas from accredited higher education courses in the member countries, thus moving away from the requirement applicable to third countries to revalidate diplomas obtained from institutions outside of Brazil.
Regulatory cooperation within MERCOSUR has also occurred in other services sectors. In 1999, a working sub-group devoted to financial matters (SGT-4), which is directly connected to the block’s Common Market Group (GMC)—hierarchically, the second most important decision- making body—has launched a new agenda, incorporating a number of supervisory issues such as: global consolidated supervision; cooperation agreements among supervision organs of the member countries; improving the national financial systems, including banking, capital markets and insurance, with a view to increasing transparency, reliance and efficiency; harmonization in presenting information; and the exchange of information regarding the evolution and functioning of the sector. In addition, Resolution 53 was passed in 2000 in relation to a minimum regulatory agenda for the prevention and repression of money laundering.
With regard to insurance services, the same working sub-group has set out the future work program to include the creation of a databank of information; standardization and classification of relevant information for supervisors of MERCOSUR, through the widening of the cooperation agreement; minimum information content in insurance contracts and consumer-related matters; access and exercise of the insurance and reinsurance activity by intermediaries; and cross-border commercialization.
Substantial efforts have also been made in harmonizing and recognizing regulatory standards in telecommunications. The block has a specific working sub-group devoted to communications and a whole host of resolutions have been approved at appropriate levels and internalized in the four member countries.123 Working Sub-Group 1 on Communications has three thematic commissions devoted to matters of interest to the sector, namely: on Public Telecommunications
123 Since 1993, Brazil alone has internalized more than 20 MERCOSUR resolutions through ANATEL Resolutions as well as Federal Acts and Decrees. See ANATEL (www.anatel.gov.br).
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Services, on Radio-communications and on Broadcasting.124 Each of these commissions has a very broad agenda, focused primarily on harmonization and recognition efforts.
The Commission on Public Telecommunications Services, for example, deals with mobile services, converging services, numeration issues, interconnection among member countries, procedures for accreditation and certification of telecommunications equipment (goods-related issue), revision and adjustment of current mobile cellular service agreement, prices and telecommunications fares among member countries. The Commission on Broadcasting covers Digital TV, FM Broadcasting Agreements, Satellite Broadcasting, and Multi-point-multi-channel Signal Distribution TV Agreements.
In the area of electronic commerce, which is bound to be an important medium of trade, MERCOSUR is engaged in a process of exchange of information on countries’ respective legislation on this issue, as well as on the implementation of such legislation. In particular, MERCOSUR countries are engaged within MERCOSUR, with the European Union and in the context of FTAA negotiations in the exchange of information on the following issues: the identification of obstacles to the development of electronic transactions; the recognition of certificates of electronic signatures and the facilitation of cross-border certification services; the use of electronic contracts; the liability of service providing intermediaries; the development of statistical methods applicable to electronic commerce; the protection of consumers in the ambit of electronic commerce; the development of codes of conduct.
Co-operation also aims at promoting the access of small and medium enterprises to new technologies, including Internet-based technologies and means of communication; supporting dialogue and exchange of experiences with academic and research bodies and the private sector, focusing on the development of new technologies and services for electronic communication and information; and identifying measures to promote production and trade of digital goods.
Relatively less has been achieved on regulatory cooperation in the area of transport services. In part, this may be due to bilateral and regional agreements among the MERCOSUR countries that existed before the MERCOSUR block was created. Indeed, the annexes on land, water and air transport services formally preserve these agreements. Nonetheless, an important effort was made within MERCOSUR towards the facilitation of multimodal transport through the “Agreement on Multimodal Transport in the Context of MERCOSUR” of 1994 (Council Decision 15/94). Moreover, in 1997 a Resolution by the GMC was concluded on general conditions for civil responsibility insurance for the multimodal transport operator (MTO).
4. Under the Andean Community125
Much has also been achieved on regulation under the Andean Community. Decision 439, adopted by the Andean Community Commission in 1998, governs the services liberalization process for the region. It calls for the development of criteria for the recognition of titles, licenses, and authorizations to provide services. With regard to the harmonization of regulatory measures in specific service sectors, Article 15 of Decision 439 foresees the adoption of relevant sectoral decisions, based on studies conducted by the General Secretariat. However, many initiatives on regulatory cooperation within the Andean Pact were already taken before Decision 439 and those continue to apply.
124 There is a fourth thematic committee devoted to Postal Services under the SGT-1. 125 This overview is partly based on María Esperanza Dangond (2000).
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Important early agreements on regulatory issues include several initiatives with regard to road transport, establishing the Andean system of highways; creating the Andean civil responsibility insurance policy for international road transport. More recent decisions on road transport include the establishment of a “penalty” regime for authorized transporters and the regulation of limits of weights and dimensions of vehicles.
Several decisions on multimodal transport define the responsibilities, rights, and obligations of multimodal transport agents and regulate the registration of international multimodal transport operators. Initiatives with regard to telecommunications include the establishment of the general conditions for the use of the orbit-spectrum resource by authorized parties and the creation of rules on interconnection, the use of public telecommunications networks and services, and the recognition of enabling titles and authorizations to provide services among member countries.
5. The European Union
The principle of mutual recognition—which originated in decisions of the European Court of Justice—requires Member States to allow products lawfully introduced into the commerce of one EC country to be sold in all other Member States. While relatively straightforward when applied to goods, the intangibility of services often implies that mutual recognition procedures need to be complemented by common EC-wide minimum ‘quality’ standards. This requires the negotiation and adoption of EC Directives or Regulations. Much of the EC-92 program has thus consisted of Directives related to specific service industries.
For example, the second Coordinating Banking Directive makes home countries responsible for prudential supervision (e.g., setting and enforcing liquidity and solvency standards), subject to the requirements of other EC Directives that establish minimum standards in this regard. It allows any credit institution authorized in one EC Member State to establish branches and provide banking services anywhere in the EC (the so-called single passport).126 In addition to banking, there are also directives on investment services (securities markets), mutual funds, and insurance. These have proven to be more difficult to formulate than the banking directive, in large measure because of the greater diversity both of the activities covered and of existing regulatory structures in individual Member States.
On insurance, an important milestone was the adoption of the Motor Services Directive, and the third Life and Non-life Directive which lay down the framework for the free cross-border provision of services, the single license, home country control, and abolition of prior control of premia and policy conditions for all insurance risks and policy holders.
In the area of professional services, European Union directives have established the General System for the mutual recognition of professional qualifications, which allows—except in well- defined circumstances—individuals holding a professional diploma from one Member State to practice their profession in another Member State. Although certain sectoral directives establish mutual recognition of professional diplomas based on harmonized minimum levels of training, recognition of the educational degree is not a necessary condition for practicing a profession in another Member State. This approach has in part resulted from the difficulty of harmonizing within the EU educational systems that often exhibit strong differences and entrenched national
126 However, foreign financial institutions remain subject to the host country’s business rules—such as reporting requirements and restrictions on permissible products and activities. This potentially limits the extent to which there will be a genuine single market for financial services.
316 Part IV ANNEX institutions. It also relies on the enforcement powers of the EU itself, as professional who are denied mutual recognition of their qualifications in other Member States can contest the decision of regulators in national and EU courts.
6. Outside formal trade agreements
Regulatory cooperation outside trade agreements also plays an important rule in fostering the adoption of common standards and the recognition of foreign services and service providers. In many service sectors, multilateral regulatory bodies exist, often linked to the UN system, which set standards and promote regulatory cooperation through the exchange of information among regulators. Examples of such bodies include the International Telecommunications Union (ITU), the International Civil Aviation Organization (ICAO), the International Maritime Organization, the Universal Postal Union and many others.
Such organizations also exist at the regional level. For example, in the Western Hemisphere the Inter-American Telecommunications Commission (CITEL) has emerged as an important organization fostering regulatory cooperation. CITEL was formally given a very broad mandate by the Summit of the Americas, which includes a number of important harmonization, and recognition issues.127
Finally, regulatory cooperation takes the form of sectoral agreements on specific regulatory issues at the bilateral and regional levels. The Figures below graphically illustrate the web of cooperation agreements for selected services sectors in Latin America (including those linked to trade agreements). Bilateral and regional regulatory cooperation tends to be more frequent in the case of transport, where regulatory measures are directly linked to specific border or infrastructure issues between two countries. They also tend to be important in the area of education, focusing on the harmonization and mutual recognition of primary, secondary and university education.
127 The most important of these issues are the following: developing and promoting the use of coordinated standards documents to promote the interconnectivity and the interoperability of telecommunication networks and services; publication of a book—Universal Service in the Americas—which analyzes the strategies and programs developed by the member states to promote universal telecommunications service in the Hemisphere for all segments of the population; publication of the Blue Book on Telecommunications Policies for the Americas, which serves as a guide to the countries of the region in managing and reforming the communications and information sector.
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