EU Services Demands in Free Trade Agreements

1. EU Services Demands in Free Trade Agreements IDEAS Workshop, Bangkok, 8-9 Dec, 2009 Shefali Sharma, Third World Network

2. Overview of Services trade and Inv • World Services Exports in 2007: 3.3 trillion USD (UNCTAD 08) • DCs share in world services exports unchanged at 25.4% • Asia 18.9% growth in services exports • But trade highly concentrated in select countries and regions (top five exporters = 50% of all DC services exports); Asia= 75% of DC exports • Concentrated sectors: travel and transport (2/3 of DC exports); business, info & communication and financial & insurance services (1/3 of DC exports)

3. Importance of South-South • 94% of Asian services exports in South-South trade • Intraregional exports extremely important (similar to trade in goods) • 45% of total DC trade to other DCs; • S-S comprises 11% of world services trade; • Shows enormous potential there; but also that industrialized countries dominate in Services and Investment transactions EU: ~¾ of EU GDP from Services trade

4. Inflow of FDI $1248 billion inflows to US, Uk, NL, Canada, EU Two thirds going to EU; Outward FDI $1692 bill outflow (top five countries account for 64% of outward FDI: US, UK, Fr, Germany, spain) Flows mainly b/w ICs DCs: $500 bill inflows; Outflows from DCs $253 bill (Asian TNCs) (UNCTAD WIR 2008) FDI to and from Ind Countries expected to fall—financial crisis and weaker econ. growth

5. Importance of Services for DCs • Important source of informal and growing formal sector jobs in Asia • Strategic for development, national security, public goods and social needs (i.e. Water and Sanitation, Education, Health Finance, Distribution, Energy, Power, Telecom, Transport, Postal)

6. Do services and investment lib. rules attract more FDI? • Those with BITS not more likely to receive FDI than other countries (World Bank 03) • No quantitative relationship b/w BITs and FDI flows (Lesher, Miroudot, OECD 2007) • Difficult to create causal link between Int Inv Agreements and increased FDI flows in services (WIR 04) • No empirical evidence of significant increase in FDI flows to DCs after conclusion of GATS (UNCTAD 2000) And does FDI lead to development outcomes?

7. Services Lib leads to Develop? • General consensus that ROBUST regulatory frameworks essential for trade in Services; • development outcomes depend on regulatory regime and end goal, not on liberalization • Pacing, sequencing essential; modification over time is often necessary of such regulations; complex tradeoffs involved • DCs in need of infrastructure services; but these are also the same services that face numerous disputes in investment agreements when opened (WIR 08); • multiple needs have to be met across all sectors of society (telecom, water and sanitation, roads, power)

8. EC FTAs and GATS • Both trade liberalization agreement (eliminating barriers to trade) • Similar in structure—framework agreement plus liberalization schedule • Common elements: “scope and coverage; specific and general obligations; exceptions; definitions; institutional provisions GATS: crafted by US and EU services lobbies, negotiated over several years; first multilateral agreement on trade in services (and investment since lg # of services transactions are investment oriented—2/3) EU FTAs: EU template---natural progression of EU interests (going beyond commitments in WTO)

9. GATS • GATS has four modes (M1:crossborder, M2:consumption abroad, M3: commercial presence, M4: temporary movement of natural persons) and positive list; negotiated multilaterally M1/Cross border: Service crosses border M2/Consumption abroad: Consumer crosses border to Service across border M3/Commercial Presence: Service provider sets up commercial presence across border (investment) M4/temporary movement: Service provider sends employees across border

10. EU FTAs • New structure (Cross border, Establishment, e commerce) FTA Cross border=Mode 1, 2 and limited Mode 4) • New way of scheduling (EU has three different schedules) • Must have “substantial coverage” (Art. V of GATS) in volume, # of sectors, modes of supply • Definitions taken from GATS but expanded in scope in many different ways (GATS+) and GATS- in terms of flexibilities for DCs • Includes Establishment (WTO plus): Investment rules for establishment and post-establishment of foreign investors (services and non-services) Imbalance of power b/w N-S: expertise, experience, bargaining power (lack of adequate and appropriate data a big handicap in Services transactions according to Modes)

11. Service Definition • any service in any sector except services supplied in exercise of governmental authority; and • supplied neither on a commercial basis, nor in competition with one or more service suppliers How many services in Asia not supplied on commercial basis or in competition with at least one supplier; how many under “pure” governmental authority? Not clear what “commercial basis is”—do user charges count? Public-private partnerships?

12. GATS Definition of “Measures” affecting services: • Law, regulation, rule, procedure, decision, administrative action or any other form (breadth) Applies to measures “taken by”: • Central, regional or local governments and authorities and • Non-govt bodies in the exercise of powers delegated by central, regional or local govts(depth) (same definitions in EU FTAs and leads to enormous implications on governance based on commitments made)

13. “Measures Affecting Services” expanded in Korea-EU to Include: • Production, distribution, marketing, sale and delivery of a service (in GATS this is def. of “supply of service”) Implication: GATS referred to the supply up and down a value chain; EU-Korea talks about measures that can either directly or indirectly “affect” the value chain Considerably expands scope of challenges against domestic rules, laws, decisions etc • In the GATS, these “measures affecting services” refer to: • the purchase, payment or use of a service; • access to, use of, in connection with the supply of a service, networks or services offered to the public • Presence (incl. commercial presence) of a service supplier in the other party’s territory

14. Flexibilities: GATS Minus GATS: Art. XIX flexibilities(mutually advantageous basis, overall balance of rights and obligations, national policy objectives, flexibility for indiv DCs, fewer sectors, fewer types of transactions, dev situation, negotiating guidelines) FTAs: “Substantial sectoral coverage” as per GATS Art. V---no flexibilities, reciprocal behavior; expected to progressively liberalize What are tradeoffs with development and other social objectives; pace, sequencing; regulatory capabilities; capacity to understand scheduling implications for future?

15. Market Access • GATS Approach: limitations and conditions agreed in schedule (positive list—list where you give access) • FTA also applies to “establishment”—services and non-services (EU pushed for this in WTO but denied, denied also in MAI) • Korea-EU excludes “inputs” into the supply of cross border services (same as GATS) • But not excluded in CARIFORUM EPA and some African EPAs

16. Cannot limit # of service supplies (quotas, monopolies, exclusive service supplies or Econ. Needs Tests) • Cannot limit total value of service transactions, assets (numerical quotas or require ENTs) • Cannot limit # of service operations, quantity of service output (i.e. num value or quotas), no ENTs Establishment: No limits on # of establishments, operations, value of transactions, quantity of output, participation of foreign capital or max % of shareholding, on specific type of legal entity or joint venture, # of natural persons needed (No ENTs)

17. National Treatment • To all measures affecting the supply of cross-border services; and establishment • Treatment no less favourable than that it accords to its own likeservices and service suppliers, like establishments and investors • NT = a negative list (must put limitations and conditions where this does not apply) Implications: GATS is “technology neutral”; so how do we understand “like” services? Scope extremely broad, covers all kinds of investments (must know what to list as exemptions)

18. Progressive Liberalization • Stand still clause (in Korea-EU, interim EPAs i.e. SADC) • No “new or more discriminatory measures” may be adopted once commitments made • GATS allows review; option of removal of commitment though must provide equivalent mkt access in another service (quite cumbersome) • Review of investment legal framework to progressively liberalize after 3 years

19. List of Commitments • EC has three separate schedules Cross-Border; establishment; Key personnel graduate trainees and business service seller • Korea has a 72 pg. list including all modes and limitations

20. Classification and Scheduling: Apples and Oranges? • EC used ISEC Rev 3 (International Standard Industrial Classification of all Economic Activities ‘02), CPC (91) and CPC ver 1.0 (98) • Korea used CPC code (91) for classifying services sectors and sub-sectors in one list and ISEC Rev 3; • Margin for Error (did we schedule the correct sectors and sub-sectors? Adequately prepared limitations and conditions? Taking into account future services industries? Multiple governance concerns?) • WTO Sec noted that 1740 out of 7040 market access commitments scheduled incorrectly in GATS (‘99) • US Gambling Case: Online gambling ban challenged. US didn’t realize that online gambling is part of recreational services How do countries reconcile measures “affecting” production, distribution, marketing, sale and delivery when they schedule their services sectors?

21. MFN: Implications for S-S? • Concept framed for multilateral arrangements; has certain exceptions, exemptions • MFN clauses can vary—cond; unconditional; binding or best endeavour; intra or extra regional In GATS: immediate and unconditional; but allows list of exemptions; applies to “like services” EU FTA (Korea): also immediate and unconditional; applies to Mode 1 and 2 and establishment; allows for list of exemptions and exceptions; applies to “like services “

22. MFN in Korea-EU No less favourablethan that it accords to like services and service suppliers of any third country in the context of an economic integration agreement signed after the entry into force of this Agreement Could MFN clause violate Art V GATS (flexibilities for DCs, accordance with level of development for sectors and sub-sectors)? Enabling Clause of the GATT? Hamper South-South Trade, what happens to S-S agreements? Reduce bargaining power in future agreements? First Mover syndrome? Exclusive relationship w EU?

23. MFN Excludes • measures providing for recognition of qualifications, licenses or prudential measures in accordance with Article VII of GATS or its Annex on Financial Services; • Taxation agreements • Does not “prevent any Party from conferring or according advantages to adjacent countries in order to facilitate exchanges limited to contiguous frontier zone of services that are both locally produced and consumed

24. EC lists 14 pages of MFN exemptions; Korea lists 3 pgs • Carveout for EC’s deep regional integration agreements within Europe (Annex 7B); common internal market

25. GATS vs EU FTAS GATS Plus: Establishment; Regulatory Chapters; “Substantial” Coverage GATS Minus: Flexibilities for DCs (reciprocal), Mode 4 constrained Makes sense for EC; but does it for DCs, even so-called advanced Asian economies?

26. Mode 4 (section D EU-Korea) • Applies to “key personnel”, graduate trainees, business services seller, contractual service suppliers, indep prof • Key personnel: setting up establishment, intra-corporate transfers (senior positions), managers, specialists • 3 years for intra-corporate transferees; Business services 90 days in a year; 1 yr for graduate trainee • Korea-EU will apply GATS commitments on contractual service suppliers and indep. professionals; will update 2 years after Doha comes into force • Cannot designate specific nationality or residency requirements for Sr. positions unless specified in schedule

27. Right to Regulate “each Party retains the right to regulate and to introduce new regulations to meet legitimate policy objectives.” What is considered “Legitimate?” More onerous qualification--GATS does not include reference to “legitimate policy objectives”; refers to national policy objectives

28. Regulatory Framework • General obligations (MRA, transparency, DR, governance) and specific sectors (EU had pushed hard for prior comment in WTO discussions on transparency in DR) • Mutual Recognition: Joint bodies to submit recommendations to the Trade Committee created by agreement • with a view to implementing that recommendation, negotiate, through their competent authorities, an MRA of requirements, qualifications, licenses etc • Working Group on MRA under Trade Committee formed as an institutional structure for the FTA

29. Onerous Provisions for Transparency for Mkt Access • Tell applicant why rejected; what status; within 120 days etc.; make available requirements for applications Domestic Reg • Updated after DR neg in GATS completed • institute or maintain judicial, arbitral or administrative tribunals or procedures • at the request of an affected investor or service supplier, • prompt review • appropriate remedies for, • administrative decisions affecting establishment, cross-border supply of services or temporary presence of natural persons for business purpose

30. What Internationally Agreed Standards? • regulation and supervision in the financial services sector and for the fight against tax evasion • (OECD standards and those of interest to EU financial lobbies)

31. Financial Services • EU DEMANDS: a Conglomeration of Fin Services Annex and Understanding on Commitments in Financial Services • GATS plus: FS pushed for aggressively by financial sector lobbies in EU and US. Parties to the Understanding some 33 countries, OECD. No Asian country has signed up to the Understanding (SL for insurance) Applies to cross-border, establishment and Mode 4; broad range of instruments • Insurance and insurance-related services (life and non-life i.e. HEALTH) • Reinsurance; brokerage and agency; services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services

32. EU negotiated additional commitments for regulatory oversight by a Fin. Services Commission (FSC) on insurance underwriting activities of Korean postal service (NT) • Within 3 years of FTA, solvency matters related to the sale of insurance by the National Agricultural Cooperative Federation, the National Federation of Fisheries Cooperatives, the Korea Federation of Community Credit Cooperatives and the National Credit Union be subject to regulations of FSC

33. Banking and Financial Services • Deposits, lending of all types, financial leasing, money transmission services (credit cards, travelers checks) • Guarantees, money mkt instruments, for ex, • Derivatives, futures trading, xchange and interest rate instruments—swaps, transferrable securities • underwriting, money broking, asset and portfolio management, financial data processing • Dispute Settlement Applicable to this chapter through the Trade Committee (15 indiv.—5 from each party and 5 from neither party)

34. Allow “New Financial services” into the other territory (more nuanced than the Understanding—don’t have to change existing laws), but opens door for more risky instruments—”authorization refused only for prudential reasons” and decision reached w/in “reasonable time” FS commitments import risky instruments, behavior; lead to deregulation of financial sector Pro-FS lib would say, does not de-regulate but HOW you regulate; But purpose of FS lib is to facilitate FS transactions Could many EU and US efforts at bailouts and re-regulations begin to be subject to GATS challenges because of their actions taken during the Financial Crisis? Are their choices restricted by their commitments in the GATS? (Ban on certain types of products, limits on how big?, firewalls b/w transactions etc)

35. Prudential Carveout • protection of investors, depositors, policy-holders or persons to whom a fiduciary duty is owed by a financial service supplier; and • ensuring the integrity and stability of the Party’s financial system. • not be more burdensome than necessary to achieve their aim • But if violating provisions of the FTA, then should not be used as a way to avoid commitments “necessity test”

36. Korea-EU footnotes on carveout • Carve-out (ALSO? Or ONLY?) pertains to financial services “not regulated and supervised by the financial supervisory authority of that Party”, and must abide by rules of the “carveout” article • “prudential reasons” may include the maintenance of the safety, soundness, integrity or financial responsibility of individual financial service suppliers

37. Pensions and Social security • Excluded unless state allows it to be in competition with one or more public or private entity, then subject to Fin Services Regulatory Chapter and the FTA rules • And if scheduled and as per domestic regulations

38. Payments and Capital Movement Chapter Payments: No restrictions on payments and transfers from current account; free convertible currency Capital Movement: Free Movement of capital (in accordance with host country laws for direct investment); for commitments in S&E chapter; “host laws” reference likely not apply to repatriation and liquidation of profits or those commitments in S&E chapter Mvmt of capital from host country also applies to credits on fin. transactions, financial loans and credit, capital participation No new restrictions on capital and making existing arrangements more restrictive (prevention of crisis?) Consultations for further movement of capital

39. Exceptions and safeguards? Exceptions: In order to secure laws and reg (as long as they are in line with this chapter and not “unjustifiable” discrimination or “disguised” restriction on capital) –for public safety, morals etc; measures on futures, derivatives, securities, defaults Safeguards: 4 footnotes with conditions on when and how safeguards can be applied and how to interpret • not applied to FDI; only for six months • “do not otherwise interfere with investors’ ability to earn a market rate of return” • Seems you cannot use to prevent a crisis; only when crisis is there

40. Reg Chapters on other Sectors • Telecom • Postal and Courier (in Korea-EU, after 3 years of entry into force) • Computer Services • Int. Maritime Export Services NOTE: Chapter on Trade and Sustainable Development” –Govt consultations, Panel of Experts (some from non-parties)—Not Dispute Settlement, lot of best endeavor language

41. Overall Exceptions of S&E chptr • necessary to protect public security or public morals or to maintain public order (invoked only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society) • necessary to protect human, animal or plant life or health etc.

42. Implications for Asia? • EU matched concessions with US (from US-Korea deal) and got more in 1-2 sectors, Maritime services • Korea has more negotiating power relative to EU’s other Southern partners; but still faces unequal terrain in Services and Investment • EU services and establishment chapter—ambitious, far reaching, legal minefield for governance, key lens is market access for service providers and investors • All other social, cultural, political, env., gender, dev. interests secondary

43. Implications Services and Investment highly concentrated—mergers and acquisitions dominated by ICs; anti-competitive behavior FTA includes entry of investors in both goods and services DR rules still being negotiated in WTO; No clear link that such agreements bring the investment and trade wanted—can do so without binding These concessions in addition to BITs, TRIMs, GATS Technological neutrality forecloses options for governments in the future once commitments are made What role of local, state governments? (India has state, centre, concurrent subjects) What lessons from current financial and food crises?