December 2005
Economy & Policy

Service Trade Liberalization under WTO
How Could Nepal Benefit ?

The service sector has become the most dominant sector of economic activity for countries, regardless of their level of development. It accounts for an increasing share of production and employment globally whether it is a developed, developing or least developed country. On average, services account for more than 70 percent of the GDP in developed and 50 percent in developing countries. Similarly, global service export stands at US $ 1.6 trillion and its share in global exports grew from 15 percent to nearly 25 percent over the last two decades. Its contribution to GDP and trade has been significantly increased in Nepal too (it contributed nearly 40 percent of the GDP and 35 percent of the total foreign exchange earnings in FY 2003/04).

It is argued that freer trade in services enables countries to better enjoy the benefits of globalisation and improves economic efficiency just as freer trade in goods does. It contributes to job creation, higher incomes, more consumer choice, downward pressure on inflation, and a better quality of life. Moreover, imports of services and foreign investment in services production stimulate the competition that improves the efficiency of domestic service industries. They add to the overall availability of services and to the variety from which individual and corporate consumers can choose. And they contribute to technological advancement. In short, freer trade leads to more, better and lower-cost services. Therefore, there is no alternative for a country than to liberalise services trade.

However, critics cite instances where service liberalisation (especially when coupled with privatisation), has in fact led to job losses, increases in prices and discontinuation of service provision to the poor where suppliers choose to focus on the more profitable segments of society. This can be especially contentious where public services such as water, electricity and health care are involved. Similarly, it is also argued that many service sectors should be regulated to ensure a certain level of quality, to protect consumers or the environment, and in financial services sector, to ensure a country's financial stability. But, such regulation, whether for economic or social purposes, can be designed, implemented, or enforced in more transparent and efficient ways with positive overall effects.

In this context, it can be said that a comprehensive, well-designed strategy for services liberalisation that maximises the gains and minimise the adjustment costs is crucial. A successful strategy depends on three key factors: preparing the institutional foundations for liberalisation; the sequencing and timing of liberalisation; and managing the liberalisation process. An important part of the institutional foundations for liberalisation is an effective and well-oiled trade negotiating machinery, which facilitates the flow of general and specific trade negotiating strategies.

Role of the services sector in Nepal's economy and trade

Contribution of the services sector to the GDP and trade has been significantly increased throughout the world over the past two decades. Available data also shows that developing countries are highly specialised in exports of services and have comparative advantage in many services sectors. The importance of services in Nepal's economy has also been increasing (see table 1 and 2).

The table shows that contribution of agriculture in Nepal's GDP was 52 percent in 1990, which declined to 41 percent in 2003, whereas share of services sector in GDP increased from 32 percent to 38 percent during the same period. The share of services in GDP is comparatively low for Nepal (in 2003 its share is only 38 percent, whereas it is more than 50 percent in all other cases, except China in the table). But its growth rate is comparatively high. This indicates that in future, service sector will emerge as a largest source of income for Nepal's economy too.

Table (2) shows that export of commercial services as percent of GDP grew for all countries/groups of countries, except for Bangladesh and Pakistan. Nepal's export of commercial services as percent of GDP is second highest (Sri Lanka is the highest). The growth rate is comparatively fast for India (from 1.45 percent to 4.17 percent) and China (from 1.62 percent to 3.27 percent). In 2003, the commercial services export was less than 1 percent of GDP for Bangladesh, 2.96 percent for low income, 4.46 percent for middle income, and 4.87 for high income countries, whereas it was 5.16 percent for Nepal. It clearly reflects Nepal's comparative strength in commercial services export.

As shown by table (3), computer, information, communications and other commercial services are emerging as the most dynamic sector of services at the global level. The share of transport sector declined from 26.6 percent in 1990 to 22.5 percent in 2003, and travel from 35.2 percent to 30.2 percent during the same period. Share of financial and insurance services has slightly increased from 6.6 percent to 8.7 percent and computer, information, communications and other commercial services recorded highest growth from 32.1 percent to 38.8 percent in the same period at the global level. However, in Nepal's case share of travel is highest, which reflects higher importance of Mode 2 - consumption abroad (see next section for details in mode of supply) for Nepal.

Services trade under WTO

Recognising the growing importance of services and the various constraints impeding the globalisation of this sector, the Uruguay Round broadened the scope of multilateral trade negotiations to include services for the first time in the history of trade negotiations. General Agreement on Trade in Services (GATS) is the final result of negotiations under Uruguay Round. GATS intended to establish a framework within which liberalisation commitments in the area of services are to be undertaken and implemented.

The GATS agreement contains 29 Articles. The agreement as a whole has six parts. The opening section, Part I (contains only one article) sets out the scope and definition of the agreement. Part II (Article II to Article XV) is the longest part of the agreement. It deals with general obligations and disciplines: that is, with rules that apply, for the most part, to all services and all members. Part III (Article XVI to Article XVIII) sets out rules governing the specific commitments in schedules. Part IV (Article XIX to Article XXI) concerns future negotiations and the schedules themselves. Part V (Article XXII to Article XXVI) and Part VI (Article XXVII to Article XXIX) cover institutional and final provisions.

As stated in the preamble of GATS - its main objective is to establish a multilateral framework of principles and rules, aimed at progressively opening up trade in services in order to expand and to contribute to economic development worldwide. The agreement also maintains that developing countries should be helped to take on a fuller part in world trade in services, particularly through strengthening the capacity, efficiency and competitiveness of their own domestic services.

Article I of the GATS defines the scope and coverage of the GATS. It also sets out a comprehensive definition of trade in services in terms of four different modes of supply: (1) cross-border supply (usually known as Mode 1)- services supplied from the territory of one member into the territory of another, an example is software services supplied by a supplier in one country through mail or electronic means to consumers in another country, (2) consumption abroad (usually known as Mode 2)- services supplied in the territory of one member to the consumers of another, examples are consumer of one country moves to consume tourism or education services in another country), (3) commercial presence (usually known as Mode 3)- services supplied through any type of business or professional establishment of one member in the territory of another, an example is a bank owned by citizens of one country establishing a branch in another country, and (4) presence of natural persons (usually known as Mode 4)- services supplied by nationals of one member in another's territory, examples are a doctor of one country supplying through his physical presence services in another country, or the foreign employees of a foreign bank.

Ongoing WTO negotiations on services

The current multilateral trade negotiations launched in Doha in 2001 (commonly known as Doha Development Agenda- DDA) have highlighted the need for trade liberalisation in areas of export interest for developing countries. Paragraph 15 of the Doha Ministerial Declaration provides for negotiations on trade in services to be conducted with a view of promoting the economic growth of all trading partners and the development of developing and least developed countries. The Doha Declaration also reaffirms the Guidelines and Procedures for Negotiations (WTO document, S/L/93, 29 March 2001) as the basis for continuing the negotiations with a view of achieving the objectives of the GATS, as stipulated in its Preamble, Article IV (Increasing Participation of Developing Countries) and Part IV (Progressive Liberalisation).

The Paragraph 15 also stated that participants shall submit initial requests for specific commitments by 30 June 2002 and initial offers by 31 March 2003. However, the deadlines for proposed negotiations were missed without significant achievements.

To make alive the mandate of Doha Declaration, the General Council of WTO came forward with a decision (commonly known as 'July Package') emphasising to complete the Doha Work Programme fully and to conclude successfully the negotiations launched at Doha. The 'July Package (JP)', largely reaffirms the Doha mandate and pre-Doha negotiating guidelines. Recommendations of the special session of the Council for Trade in Services are presented in Annex C of JP. The JP stated to ensure a high quality of offers, particularly in sectors and modes of supply of export interest to developing countries, with special attention to be given to least-developed countries. It further mentioned to note the interest of developing countries, as well as other members, in Mode 4. It also amended the date of submission of revised offers to May 2005. However, only 68 initial offers were presented (representing 92 members- European Communities' offer is counted as representing 25 member states) and only 24 revised offers were tabled (WTO document, TN/S/20, 11 July 2005).

Issues of Nepal's interest

In the area of services, a key issue for developing and least developed countries, including Nepal is the temporary movement of people across borders to supply services (Mode 4 liberalisation). For many developing countries, sending people abroad to work temporarily is seen as the most promising export interest in services. Therefore, commercially meaningful Mode 4 liberalisation is a litmus test for the development content of the Doha Work Programme and its claim to being called the Doha Development Agenda. However, the initial offers show limited ambition in terms of both their depth and their coverage, for example in mode 4, with the exception of the EU, virtually no developed country has offered new liberalisation. Additionally, as reflected by table (3), travel related activities that constitute nearly two-thirds of Nepal's commercial export (usually associated with Mode 2 - consumption abroad) are also important for Nepal. Therefore, Mode 2 and tourism related negotiation proposals should also be seriously considered.

How could Nepal benefit?

Many efforts are needed to seize the opportunities created by Nepal's WTO membership, particularly from services liberalisation. First of all, identification of services sectors and mode of supply of Nepal's export interest (or comparative advantage) and market access opportunities created by the membership should be analysed. Secondly, communication among trade negotiators and broad and diverse community of domestic regulators and other stakeholders is also needed. Unfortunately, in Nepal, institutional arrangement supporting the development of an effective negotiating strategy is inadequate to deal with an ever-expanding negotiating agenda. Thirdly, capacity building of sectoral regulatory agencies (telecommunication, health, education, financial etc.) is needed. Fourthly, capacity building of the Ministry of Industry, Commerce and Supplies, responsible authority for trade negotiation is also required. Frequent transfer of officials is also badly affecting the activities of the Ministry. Fifth and most importantly, incentives to the private sector to increase their involvement in services trade are needed. Last but not the least, skilful participation in the ongoing negotiations to utilise the benefits of market access and alignment with LDC group in WTO forums is necessary to seize benefits.