Benefits and Challenges of Services Liberalization

1. Benefits and Challenges of Services Liberalization Martine Julsaint Kidane Trade Negotiations and Commericial Diplomacy Branch Division on International Trade and Commodities UNCTAD

2. Outline: • Potential Benefits of Liberalizing Trade in Services • Possible Challenges • Main Principles of Services Trade Agreements • Overview of the Various Services Negotiations in which Lesotho is Involved - GATS - SADC - SADC-EU EPA • SADC and EPA Negotiating Processes • Conclusions

3. Benefits of liberalizing trade in services • Trade theory suggests that services liberalization brings benefits by: - improving access to services - promoting the quality of services through foreign and domestic competition • These 2 benefits are particularly crucial given services’ social and welfare-enhancing role (access to essential services such as water, health, sanitation, education) and role in ensuring efficiency and competitiveness of an economy (transport, telecom, financial services) as well as smoothly run activities (legal services, accounting, urban planning) • The development of services and services trade contribute to economic diversification and are often at the heart of countries’ development strategies

4. Benefits of liberalizing trade in services According to trade theory, services trade occurs in function of: • Comparative advantages based on fundamental differences between countries • In response to consumers preference for variety and because of the gains from specialization • Fragmentation of productions into tasks that can be performed in different locations following technological revolution (in Global value chains) • The increasing importance the increasing importing of services in other sectors including manufacturing

5. Benefits of liberalizing trade in services Liberalization within regional integration • Bigger, regional markets may help attract investment due to bigger market size and lower transaction costs • Certain sensitive sectors or modes may be easier to liberalize within a smaller, more cohesive group • In certain sectors, liberalization will be facilitated by physical or cultural proximity Generally, regional integration creates an interdependent relationship between economic and political gains

6. Possible Challenges • The benefits of services opening can be accompanied by associated costs • Services liberalization requires the elimination of discriminatory barriers (affecting services and service providers) but may also affect measures aimed at other policy objectives (protection of health, consumers, the environment, etc.) • Liberalization of services requires much governmental coordination; no single ministry for services as for agriculture and industry

7. Possible Challenges • There are a number of pre-conditions that are required for benefits to occur (i.e. complementary reforms) • Determinants of success (other than liberalization) include: - human capital, - infrastructure (economy-wide and sector-specific) - FDI - private sector involvement (migrants, industry associations, etc.) • Reality check: not all countries can become a services hub

8. Main Principles of Services Trade Agreements • Broad definition of services and broad coverage of services agreements • Right to regulate • Most-Favoured-Nation Treatment • Transparency • Special and Differential Treatment • Exceptions • Market Access • National Treatment • Liberalization Process The basic concepts and rules are the almost the same in GATS, SADC Services Protocol and SADC-EU EPA

9. Main Principles Coverage of the GATS, of SADC Protocol on Trade in Services and probable coverage of the SADC-EU EPA • Measures affecting trade in services at all government levels • All services (except governmental services and measures affecting air traffic rights) • Four modes of supply - Cross-border supply - Consumption abroad - Commercial presence - Presence of nat. persons (N.B. in EPA, EU will seek to consider investment and related movement of persons separately from cross-border supply of services)

10. Main Principles Right to regulate • Regulations are the main policy tool for services • GATS recognize the right of Members to regulate, and to introduce new regulations on the supply of services in order to meet national policy objectives and emphasizes (given differences in the degree of development of services regulations) the particular need of DCs to exercise this right • GATS seeks however to ensure that regulations are administered in a reasonable, objective and impartial manner and are not used as impediments to trade • SADC Protocol contains similar provision with the requirement that regulations do not impair any rights and obligations under the Protocol

11. Main Principles MFN • The best access conditions granted to one country are automatically extended to all other parties to the agreement • Allows all parties to benefit from negotiated concessions • Under GATS there are some exceptions to this principle, including for economic integration agreements (Article V) and exemptions taken at the entry into force of the Agreement • Under the SADC Protocol “each State Party shall accord immediately and unconditionally to services and service suppliers of any other State Party treatment no less favourable than it accords to like services and service suppliers of any other State Party or third country”

12. Main Principles Exemptions to the SADC MFN principle: • Services preferences granted between SADC MS (4:2) • Future preferential agreements of SADC MS with third countries (4:3) • Existing preferential agreements of SADC MS with third countries (4:4) • Obligation to afford reasonable opportunity to other MS to negotiate the preferences on a reciprocal basis • MFN exemption lists (4:5)

13. Transparency Transparency and predictability are important features of trade agreements Countries are required to publish relevant measures affecting trade in services, and to inform partners of new or changed laws, regulations and administrative guidelines S&DT Flexibility afforded to all Members under the less developed partners to an agreement Can take various forms including more flexible conditions in the application of certain provisions, or provisions specifically targetting this group Main Principles

14. Main Principles Exceptions • Members to an agreement may in certain circumstance restrict services trade for serious balance-of-payments difficulties, health or other public policy concerns or to pursue essential security interests

15. Main Principles Market Access • Determines the conditions of markets entry and participation to a countrty’s market • Is normally described for specific sectors and servies as well as for all the modes concerned • Limitations may be attached to market access commitments to reserve the right to operate measures inconsistent with full market access

16. Main Principles Examples of Market access limitations • Number of suppliers (a) • The number of licenses for schools is limited to 48 • Value of transactions or assets (b) • Foreign banks limited to 30 % of total domestic assets of all banks • Number of operations or quantity of output (c) • Restrictions on broadcasting time available for foreign films • Number of persons employed (d) • In any artistic production, the proportion of national performers shall not be less than 80 % • Specific types of legal entity (e) • Foreign companies are required to establish subsidiaries • Participation of foreign capital (f) • Foreign investors can hold up to 51 % of the capital

17. Main Principles National Treatment • When full national treatment is provided this implies that the foreign services and services providers are treated in the « same » way • Only applies to services in which Members have taken specific commitments and can be subject to any conditions that may be inscribed in Members schedules • National treatment can be ensured “either formally identical or formally different treatment” … • The relevant benchmark: no modification of “the conditions of competition” in favour of own like services or service suppliers

18. Main Principles Examples of National Treatment Limitations • Discriminatory subsidies and other fiscal measures • Nationality and residency requirements ( mode 3) • Discriminatory licensing/registration/qualification/ training requirements • Technology transfer requirements • Prohibitions on foreign land/property ownership • Local content requirements

19. Main Principles • Services cover a very broad range of activities which can be trade through various means Defining Trade in Services: • From the territory of one Member into the territory of any other Member (Mode 1); • In the territory of one Member to the service consumer of any other Member (Mode 2); • By a service supplier of one Member, through commercial presence in the territory of any other Member (Mode 3); • By a service supplier of one Member, through presence of natural persons of a Member in the territory of any other Member (Mode 4).

20. Main PrinciplesThe Scope of Services in Trade Negotiations • Business services • Communication services • Construction services • Distribution services • Educational services • Environmental services • Financial services • Health-related and social services • Tourism and travel-related services • Recreational, cultural, and sporting services • Transport services • Other services not elsewhere included

21. Recording Countries’ Liberalization Commitments

22. Main Principles Liberalization Process • Generally liberalization is not considered a one-off exercise but rather something that is achieved progressively • Countries are committing themselves to a long-term process but they maintain some control over the pace, extent and scope of liberalization commitment • GATS provides for successive rounds to begin 5 yrs after entry into force of WTO Agreement and « periodically thereafter » • SADC Protocol states that Parties shall enter successive rounds of negotiations 3 years after completion of the previous round

23. Main Principles Liberalization process (ctnd) • GATS provides additional flexibility for DCs and LDCs in opening fewer sectors and liberalizing fewer transactions • GATS however indicates that economic integration agreements should have substantial sectoral coverage, and should provides for the absence or elimination of substantially all discrimination either at the entry into force of that agreement or on the basis of a reasonable time-frame • Does this mean progressive liberalization is not possible in EIA? • Agreement states further that where DCs are parties to an EIA flexibility shall be provided for regarding these conditions

24. GATS Negotiations • Initiated in 2000 and later integrated in the broader Doha Round • Cover liberalization negotiations but also other areas such as GATS Rules (Subsidies, Emergency Safeguard Measures, Government Procurement), and Domestic Regulation • Have been largely affected by negotiations in other sectors (Agriculture and NAMA) • The market access offers are generally considered to reflect low ambition from WTO Members • Since the Doha negotiations are considered to be blocked a group of counties has decided to consider a plurilateral agreement outside of the WTO

25. SADC Services Negotiations • Work on trade in services started in 2000 with the development of a framework agreement • The “Protocol on Trade in Services” was adopted by Ministers of Trade in July 2009 • Protocol to be approved by the Summit on the recommendation of the Council, further to clearance by Ministers of Justice -> August 2012 • Note: Several other SADC Protocols address issues related to trade in Services: i) Finance and Investment (M3), ii) raft Protocol on Movement of Persons (M4), iii) Sector-specific protocols (e.g. covering transport, communications, finance etc.)

26. SADC-EU Economic Partnership Agreement • The EU is negotiating EPAs with ACP countries • The EPAs mark a shift from asymmetrical to more reciprocal trade relations between the partners • SADC Member States are negotiating EPAs under different configurations (EAC, CEMAC, ESA, SADC) • Not all configurations are currently services in the negotiations but SADC participating countries are doing so

27. SADC Services Negotiating Process • The services negotiations commenced in April 2012 • Negotiations to focus initially on 6 priority sectors (communication, construction, energy-related, finance, tourism, transport) • 1st phase: Communication Services, Financial Services, Transport Services, Tourism Services in sequence requests in at least 2 of the 4 followed by offers in at least 2 of the 4, etc. (R-end Aug. 2012, end-Nov. 2012, R-end March 2013, O-end June 2013) • 2nd phase: Energy-related and Construction services (R-end August 2013, O-end Nov. 2013)

28. SADC-EPA Negotiating Process • Several SADC participating countries have signed the Interim EPA on goods • Services text is still being negotiated • EU presented a template text and SADC has now presented its own text – agreement still needs to be reached on the framework and then on the negotiated commitments • The timelines have been postponed on several occasions • Links with the regional integration process are to be considered

29. Conclusions Key factors that may guide the country in negotiating further liberalization under SADC and SADC EPA trade in services • Aim should be to tailor negotiating positions to that trade potential translates into achievement of Lesotho’s development objectives • Account will certainly be taken of Lesotho’s liberal GATS commitments and of its LDC status These negotiations are an opportunity for the GOL and all the stakeholders to review the situation of the domestic economy (reforms, policy, regulatory and institutional frameworks) Various actors will have a role to play in ensuring development benefits from services trade liberalization

30. THANK YOU