Trade and services

READING TIME 15 mins
Trade and services

Overview: how trade rules affect services

From the end of WWII to the 1980s, trade agreements covered only the trade of physical goods that crossed borders. But during the Uruguay Round of negotiations which created the World Trade Organisation in 1995, a new agreement was created to liberalise global trade in service industries, called the Global Agreement on Trade in Services (GATS). Since then, other trade agreements, such as TTIP, CETA, TiSA and the many bilateral investment treaties, further extend the GATS rules or seek to do so once ratified.

Including service industries in trade agreements has tended to make life easier for corporations who want to run or outsource services overseas in areas like tourism, banking, transport, energy and education. Agreements include rules that guarantee market access for foreign companies, ban the favouring of local businesses, and limit the ways in which national governments can apply regulations. ‘Standstill’ and ‘ratchet’ clauses often mean that the direction of change is one-way, so once an industry has been opened up, a later government will find it difficult to renationalise it or to apply more stringent regulations.

It is rich countries, backed by their major corporations, that have pushed for the inclusion of services in free trade agreements and the WTO. There has been consistent resistance from most developing countries and global civil society, who see the service trade agreements as corporate protection at the expense of the poor. From the introduction of GATS onwards, developing countries and civil society groups have demanded amendments as well as alternative trade agreements and organisations that will represent the interests of people and use trade as a tool to serve people and planet.

In Depth: impacts of trade liberalisation on services

What does it mean to ‘liberalise’ a service industry? The main impacts of GATS

Rules about local services, including which kinds of company can run them and how they are regulated, had previously been decided entirely at the national or local level. GATS introduced international rules, enforceable through trade sanctions, which opened up service industries to be run by (or outsourced to) global corporations with fewer restrictions as to how they could operate.

Some aspects of GATS liberalisation are relatively non-controversial. Article III requests that national regulations are transparent so that companies from overseas can see what the rules are. Article VII encourages countries to recognise each other’s professional qualifications and experience. Article IX discourages anti-competitive business practices by service companies.

Much more controversial are the clauses that aim to secure opportunities for transnational corporations to supply (and profit from) local services: Market Access (Article XVI), National Treatment (Article XVII), and Most-Favoured Nation (Article II).

Market Access rules state that a government cannot limit the size of service companies or their market share, even on the basis of an economics needs test. Regulations like the proposed limits on banks getting ‘too big to fail’ therefore become very difficult to implement without challenge. Countries also cannot decide that only certain company types can run services, so a government cannot insist that only not-for-profit companies take part in healthcare, for instance. National treatment rules ensure that domestic companies – even small local businesses and publicly-owned public service companies like the NHS – cannot be treated any more favourably than for-profit foreign corporations.

The impacts of these two provisions in GATS are limited however, as GATS allows a ‘positive list’ system for Market Access and National Treatment, whereby only those industries that countries agreed to include on the list are covered under the rules (see Articles XVI and XVII). Most Favoured Nation rules mean that regardless of ‘special relationships’ or historic ties, companies from any country must be treated the same. GATS did allow countries to list derogations for certain service industries, but otherwise this applied to all services. Together, these rules give transnational corporations better access to run local services, opening up services markets to global competition and outsourcing.

Some further articles of GATS have the potential to limit government ‘policy space’. Article VI on Domestic Regulation requires that any national laws or regulations that relate to service industries on the positive list must be ‘administered in a reasonable, objective and impartial manner.” Although this appears relatively benign, it opens up a new front for challenge to national rules and choices: no longer are politicians answerable only to their electorates; their law-making must also satisfy their trading partners’ versions of ‘reasonableness’.

Article XI on Payments and Transfers states that members will not restrict transfers of money, while Article XII softens this slightly by allowing limited exceptions in the case of a balance-of-payments crisis. However, historically many countries have legislated to stop money from their industries from leaving the country, including during non-emergency periods, as local spending of company profits can help to create local jobs and generate economic multiplier effects. Limits to the repatriation of profits and exporting of capital have been used by many countries to help facilitate development, to the extent that during South Korea’s industrial development phase, violation of foreign exchange controls could be punishable by death. Article XI restrictions could limit policy space in this area and may prevent developing countries from using the same strategies.

Meanwhile, Article XV on subsidies – traditionally a touchy issues for rich countries who often subsidise their industries – has some of the weakest phrasing of the entire document, committing countries only to, “enter into negotiations with a view to developing the necessary multilateral disciplines.” 

Although this appears relatively benign, it opens up a new front for challenge to national rules and choices: no longer are politicians answerable only to their electorates; their law-making must also satisfy their trading partners’ versions of ‘reasonableness’.

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Are public services exempt from services liberalisation rules in GATS?

There is some controversy as to whether or not GATS rules apply to public services such as healthcare and education, and public utilities such as water, energy and public transport.

The first section of GATS (Article I-3) appears to exempt, “services supplied in the exercise of governmental authority.” However, it defines this as, “any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers,” which in fact excludes a great many public services. Utilities like water, energy and public transport are ‘supplied on a commercial basis’ as people pay to use them, while state provision of healthcare, education, social care and most other public services tends to be in competition with private suppliers. The only service likely to actually qualify for exemption via Article I-3 is the fire brigade. Article XIII also provides some exceptions for ‘government procurement’, and there are other exemptions relating to security, human health and other factors, but the precise meanings and scope are open to challenge. One study found that of 44 attempts by countries trying to defend their public services from liberalisation rules using these exemptions, only one was successful. It therefore seems highly unlikely that public services, including healthcare and state schools, are reliably exempt from the requirements of GATS.

Another means by which public services may be protected from some elements of liberalisation is by being included or excluded from certain lists or Schedules. As GATS used a positive list system, countries were able to choose which service industries to subject to the market access and national treatment rules. The EC (now EU) committed in 1994 to apply full GATS rules to most services, including healthcare, education and public transport, but did add certain conditions and provisos for many of these. It therefore seems unlikely that public services in EU countries like the UK are protected from GATS rules. Many other countries made extensive commitments too, and those that were more cautious are under pressure to do so, as the WTO explains, “The Uruguay Round was only the beginning... The goal is to take the liberalization process further by increasing the level of commitments in schedules.”

On the horizon – TiSA and regional trade agreements TTIP, CETA and more

Although service industries were opened up significantly by GATS, the agreement didn’t go far enough for some. Since the very first Ministerial Conference in Singapore in 1996, industrialised countries have been pushing to broaden the trade agenda yet further, and many attempts have been made to push forward further liberalisation of service industries. These attempts have been met with significant resistance by most developing countries, who managed to re-frame the WTO agenda in 2001 to become the Doha ‘Development’ Round and shift the focus away from further liberalisations. These differing priorities have created deadlock, so the richer countries – under pressure from corporations – are now attempting to circumvent the need to secure developing countries’ agreement, by developing the plurilateral trade agreement TiSA, and inserting extensive service liberalisation measures into regional trade agreements such as TTIP and CETA. 

TiSA and the regional trade agreements include a much deeper application of market access and national treatment rules, often using a ‘negative list’ system that would mean that all services must be opened up to full global competition unless they have been specifically excluded via a negotiated list of exceptions when the agreement was signed. Services cannot be added to this list later, so any services not yet invented such as new developments in IT and e-commerce, or services that we may someday wish to take out of the global marketplace such as privatised railways, will nevertheless be subjected to strict liberalisation provisions and will be difficult to protect through new national regulations.

Furthermore, the agreements may end up including a much more stringent ‘necessity test’ on domestic regulation to ensure it is ‘no more burdensome than necessary’. This poses a serious threat to democracy and especially to the precautionary principle, as politicians may struggle to respond to the demands of citizens for decent regulation unless they can find watertight evidence to support it. Measures applied to businesses in order to address climate change, reduce poverty, or support disadvantaged groups may not be able to meet the standard of evidence necessary.

Through plurilateral and regional trade agreements, rich country governments and global services corporations are attempting to establish a clear direction-of-travel for international services rules. Certain TiSA participants, such as the EU, have even stated publicly that they hope the agreement will one day become part of WTO rules, effectively binding a significant proportion of the globe to terms designed by- and for- well-off countries. 

Resistance to services liberalisation

Developing country governments and global civil society are working hard to resist further liberalisation of services, aiming to instead pursue an agenda where justice and development objectives drive trade policy.

Soon after the creation of the WTO, developing countries began working to roll back the most problematic aspects of its agreements, and succeeded in securing a new focus for negotiations in what became known as the 2001 Doha ‘Development’ Round. However, their concerns have largely gone unanswered and most developing country voices have been marginalised through the launch of regional and plurilateral negotiations that exclude them.

Citizens and civil society organisations, including those based within the rich countries that promote the liberalisation of services, have played a growing role in resisting harmful trade agreements. Major protests at the 1999 WTO Ministerial Conference in Seattle led to the collapse of negotiations, as anger erupted over the unfair treatment of developing countries. Campaigns have continued ever since, including considerable mobilisations against regional trade deals TTIP and TPP, partly because of their potential impacts on public services. These campaigns have gone beyond opposition, and have developed alternative proposals for international trade rules. The Alternative Trade Mandate, developed by fifty trade unions and civil society organisations within the EU in 2013-14, calls for international trade rules that protect public services, carefully regulate finance industries, and allow countries everywhere the policy space to regulate in the public interest. 

Further information