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Failure of Trade Liberalization: a Study of the GATS Negotiation Christopher F

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Failure of Trade Liberalization: a Study of the GATS Negotiation Christopher F Journal of International Business and Law Volume 10 | Issue 2 Article 6 2011 Failure of Trade Liberalization: A Study of the GATS Negotiation Christopher F. Thornberg Ph D Frances L. Edwards J.D. Follow this and additional works at: http://scholarlycommons.law.hofstra.edu/jibl Recommended Citation Thornberg, Christopher F. Ph D and Edwards, Frances L. J.D. (2011) "Failure of Trade Liberalization: A Study of the GATS Negotiation," Journal of International Business and Law: Vol. 10: Iss. 2, Article 6. Available at: http://scholarlycommons.law.hofstra.edu/jibl/vol10/iss2/6 This Legal Article is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Journal of International Business and Law by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Thornberg and Edwards: Failure of Trade Liberalization: A Study of the GATS Negotiation FAILURE OF TRADE LIBERALIZATION: A STUDY OF THE GATS NEGOTIATION Christopher F. Thornberg, Ph D and Frances L. Edwards, J.D.t INTRODUCTION The General Agreement in Trade in Services (GATS) was touted as an exemplary international agreement among nations by which trade may be liberalized in the service sec- tors. The GATS negotiations differed in many ways from its predecessor, The General Agree- ment on Tariffs & Trade (hereinafter "GATT"). The most significant difference rested in the large degree of autonomy that nations had in determining the scope of liberalization to which they would commit. The outcome of the GATS negotiations resulted in a far less productive liberalization in service trade among the member nations. As, a result, it was not as successful as hoped. Instead, the first round of negotiations was rather disappointing due to the emergence of unwillingness to commit (to a large degree) to openness,. The whole process seemed to highlight the fact that countries tend to hesitate to venture into immediate openness for a number of reasons. This article discusses the GATS negotiation process and outcomes. In addition, it analyzes the cross-sectional results that emerged from the initial round of negotiation in 1995 in order to reveal the primary driving forces that determined the degree of liberalization that resulted. Five potential forces are considered: 1) the net gains from trade, 2) special interest influence, 3) international free-riding, 4) internal bureaucratic resistance, and 5) regionalism. The results of statistical analysis strongly suggest that special interests within nations have had the greatest impact on the degree of liberalization. Nations that have a comparative advan- tage in the production of services, and are therefore more likely to be exporting services, committed to the greatest degree of liberalization in service trade. This result stems from the implicit separation of negotiations over the liberalization of trade in goods (under the GATT) from the negotiations over trade in services (under the GATS). The impact of this separation would be to increase the influence of the special interest groups by reducing the number of competing interests. At the time, the implication was quite clear- that the future rounds of GATS negotiations would be much more successful if they were directly attached to the GATT. Section I discusses the GATS negotiation and the processes by which nations make commitments under it. Section II reviews the structure of trade protection, with a preliminary look at potential forces that are indirectly considered when analyzing the decisions by nations in their commitments under the GATS. Section III discusses five theories tested as potential explanations for the cross-country patterns of liberalization found in the data collected. Sec- tion IV discusses the quantification of the results of the GATS negotiations. The data was collected from the Schedule of Specific Agreements filed by the 137 nations associated with t Many thanks to Professor William Dougan of the Department of Economics, Clemson University and participants at a seminar given at the World Service Congress, 1999 for helpful comments and suggestions. 325 Published by Scholarly Commons at Hofstra Law, 2011 1 Journal of International Business and Law, Vol. 10, Iss. 2 [2011], Art. 6 THE JOURNAL OF INTERNATIONAL BUSINESS & LAW the agreement and then quantified into a measure of liberalization that is comparable across the countries for use in a statistical analysis. (See Appendix 1). Section V presents the results of a regression analysis that tests these various hypotheses. In conclusion, the authors discuss the potential reasons for the poor results of the GATS negotiations and discuss and recom- mend potential future strategies for negotiating international agreements. I. THE GATS NEGOTIATIONS The reduced costs of international travel and communication, combined with in- creasing world wealth and the corresponding increase in the demand for services, has lead to a steady increase in the international trade of services. These services include transport, commu- nications, finance, business and tourism. The total value of this trade in 1995 accounted for approximately 19% of total trade, which consists of merchandise and service trade combined (See Table 2.1). This percentage is up from 15% in 1980. Total world income flows, i.e. the payments from domestically owned overseas factors of production, which are arguably an- other form of service trade, totaled nearly the same as service trade and had been growing at a similar rate. Table 2.1: Services as Percent of Total International Trade, 1980-1999 North Western World America Europe Asia 1980 15.2% 13.3% 20.7% 13.3% 1985 16.4% 19.0% 20.0% 12.7% 1990 18.5% 22.4% 20.3% 14.2% 1995 19.0% 22.3% 20.3% 15.3% 1999 19.4% 23.5% 21.4% 14.6% Data source- the World Trade Organization. The World Trade Organization (hereinafter "WTO") acknowledged this trend when it set up the first round of the GATS talks in the late 1980's.1 This agreement was adopted as an extension of the GATT with a general mandate for the progressive liberalization of interna- tional trade in services by member nations.2 The GATS agreement set out the general obliga- tions of the members, the most important being Most Favored Nation treatment (hereinafter "MFN"), transparency, and freedom of payments and transfers. MFN treatment under GATS was equivalent to the treatment set up under GATT in that it obligated a member to treat a supplier of services from any VTO member nation with "no less favorable" treatment than would be given to suppliers of services of any other coun- try.3 Transparency created a requirement that each member clearly and fully reveal any laws 1 The General Agreement on Trade in Services, Uruguay Round Final Act, Annex 113, 33 I.L.M 1130 t April 15, 1994) [hereinafter "GATS"] (started in the 1986 as Punta de Este ministerial Declaration). 2 Id. at art. XIX(1). This process is discussed in Articles II-XV of the document. It is interesting that while the agreement indicates that existing barriers should be reduced over time in order to encourage increased access, it does not provide a direct mechanism through which this should occur. ' id. at art. II(l), (2). Due to the unilateral nature of the GATS commitments and the fear of international free- riding, nations were actually given the ability to exempt themselves from MFN under certain circumstances in order to restrict the access of specific other members to domestic markets. Any of these 'Article II exemptions' 326 http://scholarlycommons.law.hofstra.edu/jibl/vol10/iss2/6 2 Thornberg and Edwards: Failure of Trade Liberalization: A Study of the GATS Negotiation FAILURE OF TRADE LIBERALIZATION or regulations that would affect another entering member's producers in services.' Finally, the fundamental concern of members that there would be no restrictions regarding interna- tional transfer and payments related to a member's commitments was assured under the GATS articles. 5 It appears that the goal of the initial GATS round was primarily to negotiate service trade and to create a structure that would facilitate future rounds of negotiations. As such, nations were given a large amount of leeway as to their initial commitment in the way of service trade liberalization. Each member country was required to supply the WTO with a form known as a Schedule of Specific Commitments (hereinafter "SSC"). Under these sched- ules, members indicated the specific service sectors in which they were willing to make com- mitments to the ideals of Market Access and National Treatment. 6 Market Access dealt with the treatment of the service as it entered the economy.7 Member countries that agreed to complete liberalization in Market Access for a specific service sector agreed to not use any of the service trade barriers listed in Table 2.2. In contrast, National Treatment dealt with the manner in which the service provider was treated once it entered that market. Under the GATT, National Treatment was automatic something that was not true for GATS and distin- guished the two. Liberalization implied that treatment should be no less favorable to the entering foreign service provider, once entered into the economy, than would be given to domestic or national services. According to the SSC, the members were also supposed to clearly announce any limitations to these ideals as well.8 In practice, however, which sectors were actually listed on the schedule was left completely up to the nation in question after a series of rounds of bilateral negotiations between the various participating nations.9 These were to be described on a sector by sector basis, were to indicate the inconsistency of the measure and its duration, must outline the conditions that created the exemption, and indicate those countries to which the exemption applies.
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