Global Policy Forum

How GATS (General Agreement on Trade in Services)

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By Nancy C. Alexander and Timothy Kessler

Citizen's Network on Essential Services
July 2003

There are six ways in which the General Agreement on Trade in Services (GATS) of the World Trade Organization jeopardizes the universal provision of essential services. Not only health care, education and water services are affected, but democratic processes as well.


Introduction

Until the GATS was born (January 1, 1995) the rules of the trading system pertained to trade in goods, not services. Whereas tariffs are the principal barriers to trade in goods, domestic laws and regulations are the barriers to trade in services.

The scope of GATS is breathtaking. It applies to any measure (e.g., law, regulation) taken by government at any level, from central to local, which affects specified services. At present, the GATS is one of several agreements being negotiated in the current (2000 to 2005) round of WTO negotiations. The purpose of the GATS is to progressively liberalize trade in 160 service sectors, such as financial, sales, legal, telecommunications, accountancy, and construction services as well as essential services including health care, education, water, and electricity.

Proponents of the GATS argue that the Agreement will promote economic growth by enhancing competition and efficiency. They stress that the sectors subject to the GATS rules will attract foreign direct investment (FDI), three fifths of which now goes toward services. (About 80% of FDI comes from multinational companies located in North America, Europe and Japan.) However, UNCTAD declares that "There is no empirical evidence to link any significant increase in FDI flows to developing countries with the conclusion of GATS."1 GATS supporters also claim that developing countries will benefit from GATS provisions that liberalize temporary immigration of "natural persons" who perform jobs in service sectors. However, such benefits will not materialize without consent from industrialized countries, none of which have yet made significant commitments.

Liberalization of services poses serious dangers for policy autonomy, development as well as the quality and access of services, especially for the poor.

Here are some of the risks:

1) Exclusion for public services?
WTO leaders dismiss, and even ridicule, claims that GATS will lead to the privatization of government services. They point to a provision stating that services are excluded from GATS jurisdiction if they are "supplied in the exercise of governmental authority." Yet services meet this criterion only when "supplied neither on a commercial basis, nor in competition with one or more service suppliers." This is rarely the case. Proponents also cite the Preamble of GATS, which recognizes the "right to regulate." However, this language is non-binding. Actual GATS provisions make it clear that regulations are allowed only as long as they are consistent with the Agreement. This judgment will be made not by governments but by appointed WTO dispute settlement panelists. Finally, despite WTO assurance that "we're not after your public services," many countries have already made extensive commitments to liberalize hospital, medical and dental services, health insurance, and higher education under GATS. Moreover, the European Union has requested that 72 countries liberalize their water distribution systems. Thus, assurances that the Agreement protects government services have already been proven false.

2) Irreversibility.
Where GATS has jurisdiction over a service, it "locks in" sectors as they are liberalized, thereby making liberalization practically irreversible. While reversing commitments is technically permitted, governments can only do so by negotiating "compensation" for all affected partners – a prohibitively costly undertaking. Indeed, the WTO states that "because unbinding is difficult, [government] commitments [to a sector] are virtually guaranteed . . ."2 This means that if subsequent events reveal serious negative social or economic effects, it may be too late to take corrective action.

3) Development impact.
Historically, governments have insisted that foreign investors take steps that ensure benefits to local economies, such as establishing joint ventures with domestic partners; equity ceilings on foreign capital; or performance requirements in areas such as technology transfer, public service provision; employment or training of local staff. Also, governments have sometimes used human rights, labor or environmental standards as criteria for entry by a foreign company. Under GATS, governments could be barred from employing such means to promote local development.

Furthermore, if performance requirements (or other conditions on investment) are waived for one foreign investor, they must be waived for all investors under the most favored nation (MFN) rule, which requires governments to treat service providers from all other member countries in the same manner.

GATS rules could adversely affect local interests in two ways. First, under the national treatment rule, foreign corporations must be treated at least as favorably as domestic companies, which may prevent governments from promoting local service businesses. Under this rule, governments that subsidize the provision of essential services (as most do) may be compelled to subsidize provision by multinational corporations as well. Second, under the market access rule, foreign service providers must be granted virtually unrestricted entry into the sector. They can set up as many operations as they want, which may undercut environmental and social goals. For instance, the environment may be degraded if too many tourism operators exploit a delicate ecosystem.

4) Constraining state autonomy.
Under proposed rules on "domestic regulations," member countries might have to prove to trade dispute tribunals that their regulations (e.g., technical standards, licensing, and qualifications) are not "not more burdensome than necessary." That is, burdensome regulations will be deemed "trade restrictive." One expert says that health care licensing requirements that restrict health care fees for poor patients may be viewed as trade restrictive, since it impedes profit-making and could repel foreign investors.3 If implemented, rules on domestic regulations could have a "chilling effect" on the passage and enforcement of environmental, labor and public health regulations. (See Box 1.) The European Union proposes that when a WTO member brings a claim to the dispute panel body against another government, that panel could apply a "necessity test" to regulations under challenge. The WTO said that the purpose of a necessity test is to "balance …two potentially conflicting priorities: promoting trade expansion versus protecting the regulatory rights of governments."

The WTO has global, binding enforcement powers that have profound political implications for the sovereignty of nations. The WTO's dispute settlement mechanism functions as a judiciary that hears complaints and establishes binding judgments. When it finds a government in violation of its rules, a tribunal can compel a member nation to strike down its own laws and enact WTO-compliant rules. Its power to enforce economic sanctions may cause governments to back away from implementing even potentially non-compliant regulation, regardless of its social or economic utility. As well, the history of WTO rulings in trade disputes shows a marked bias towards interpreting the balance between regulation and trade expansion to the benefit of business.

5. Undermining Transparency and Democracy.
Byzantine negotiation processes are used to achieve a progressively higher level of liberalization. Each of the WTO's 147 members can make requests to other governments for liberalization of specific sectors; in response to these requests, member governments make offers to liberalize selected sectors. These negotiations occur in secret, bilateral meetings where the weakest countries are often pitted against the strongest. Moreover, the US and European trade negotiators make their requests based on pressure from corporate service lobbies seeking expanded markets, not development goals.

Frequently, governments fail to disclose draft or final copies of requests and offers, which effectively excludes the public and many elected officials at state and local levels from participation in decision-making. The EU's requests were leaked to the public, revealing their request for liberalization of water distribution systems.

6. Imposing Liberalization.
GATS architecture is often said to be 'development-friendly'. Technically speaking, it is true that each WTO Member can choose which sectors to liberalize and what limitations to put on the liberalization process. It is also true that certain articles of the GATS (articles IV and XIX:2) are intended to accommodate the needs of developing countries. However, in reality, developing countries are often subject to unyielding pressure to liberalize.

Donors and creditors, such as the International Monetary Fund (IMF) and World Bank, are increasingly promoting sector liberalization and privatization. The IMF often exerts pressure by choking off subsidies for public services.4 In many instances, the donor and creditor communities agree to starve public sector services of external support.5 The World Bank and the regional development banks have adopted Private Sector Development (PSD) Strategies that introduce a third generation of structural adjustment programs (SAPs) to promote liberalization of investment regimes and the privatization of basic services.

In each service sector, the donor and creditor communities, often led by the World Bank, are promoting competition for provision at commercial rates. If governments fail to comply, they could lose critical financing, trade credits, and debt relief. Donor and creditor communities are laying the foundation for subjecting each service sector to GATS disciplines. Sometimes industrialized countries exert direct pressure on developing countries, as when the EU stipulated that unless developing countries liberalize their banking and insurance markets, the EU will not enlarge market access for developing countries' agricultural, textile and clothing products.6

Conclusion

The GATS expands the rights and protections of corporate investors. By expanding the reach of global institutions with legally binding authority over national policy decisions, transnational corporations seek to replace the complex role of the state with a single goal: pursuit of profit. The European Commission acknowledged that GATS is "first and foremost an instrument for the benefit of business, and not only for business in general, but for individual service companies wishing to export services or to invest and operate abroad." The main organizations representing these firms include the European Service Network, and the U.S. Coalition of Service Industries, a 67-member lobby organization whose top 12 members had combined revenues of about $700 billion in 2000. (See www.corpwatch.org and www.polarisinstitute.org)

Developing countries need services, particularly to meet the Millennium Development Goals (MDGs), such as reducing the number of people living in poverty by half by the year 2015. Reaching these goals involves massive scaling up of health care, education and water services. However, the MDGs should not be a pretext for privatizing essential services, especially if the privatization occurs without the consent of citizens and their elected officials.

What can be done?

WTO member governments must be persuaded to take – "carve out" – essential services from the negotiations. State or provincial and local governments should be clearly exempted from the jurisdiction of the GATS.

Governments must make the negotiating process transparent. Part of that effort will require even-handed analyses of the impact of liberalization in different sectors, particularly social and sovereignty impact assessments of the application of GATS rules.

Public service commitments made under GATS must not be irreversible. Governments should insist on safeguards that enable them to measure negative social impacts from liberalization, specify a "trigger level" for applying safeguards, and respond with regulatory and subsidy actions that may not be WTO-consistent .


End Notes

1. UNCTAD, "A Positive Agenda for Developing Countries: Issues for Future Trade Negotiations," 2000.

2. WTO, "Trading Into the Future," on-line guide to the WTO Agreements, 1999. Quoted in S. Sinclair and J. Grieshaber-Otto, Facing the Facts, Canadian Centre for Policy Alternatives, 2002, p. 34.

3. Gould, Ellen, "Trans Atlantic Consumer Dialogue (TACD) Background Paper on Trade in Services," October 2002. This paper cites the judgment of Professor David Luff at a World Bank/OECD Conference in March 2002, p. 13.

4. Nellis, John, "Privatization in Africa: What has happened? What is to be done?" Center for Global Development, Working Paper Number 25, February 2003.

5. Dubash, Navroz K., Daniel Bouille, Alix Clark, et al., Power Politics: Equity and Environment in Electricity Reform, World Resources Institute, 2002.

6. UNDP, Heinrich Boell Foundation, Rockefeller Brothers Fund et al., "Making Global Trade Work for People," Earthscan, 2003.


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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.