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WDM is a UK-based organisation with some 13,000 supporters campaigning to change UK, European and International policies to tackle the root causes of poverty.
WDM has been working on the development implications of the General Agreement on Trade in Services (the GATS) for almost four years as part of its broader and longer-term work on transforming international trade rules. So I guess we have a pretty intimate knowledge of the agreement and of the EU’s GATS agenda.
I have been asked to address three topics in relation to the GATS. First, an introduction to the GATS – what is it and how does it work. Second, an overview of the problems with GATS – how it undermines development. And third, an outline of the European Union’s role in the GATS talks – how the EU is seeking to open up developing country markets to European service companies.
Before I begin, I would just like to point out that I will not be covering every single technical detail of the GATS, every single rule and every single potential impact. This is for two reasons:
Â· First, I don’t know them all.
Â· And second, if I did, and I tried to explain them, we would be here all day – and you would all be asleep after the first half an hour.
So I will only attempt to get across some key issues that provide a basic understanding of GATS and its impacts.
So first, what is the GATS?
The GATS consists of 30 pages of dense legal text. So I make no apologies for the fact that the following explanation is a bit technical and boring. Believe me, a few minutes listening to me will seem like a party compared to hours spent wading through the GATS trying to understand what it means.
The aim of the GATS is to increase trade in services through progressive liberalisation. In other words its aim is the removal of barriers to trade in services.
The Agreement covers all forms of trade in services.
Critically, this includes services supplied by a company of one WTO Member, through a commercial presence in the territory of any other Member (for example, a UK owned retail company setting up and operating in Vietnam). In other words, the GATS is principally about the rights of service companies to set up operations around the world.
As for who GATS rules apply to, the agreement applies to all national, state, regional and local government measures affecting services. GATS even applies to non governmental bodies that have been delegated powers by central, regional or local government.
The GATS uses a list to define the service sectors it covers. This includes: business services, educational services, environmental services, transport services, financial services, health and related social services, and tourism and travel related services.
The agreement covers all provision of services in the listed sectors except services supplied in the exercise of governmental authority. These are defined as services supplied neither on a commercial basis, nor in competition with one or more service suppliers.
The heart of the GATS concerns rules that apply to sectors in which Governments make specific commitments. There are two main aspects to this.
First, governments can commit to providing market access for all WTO members in a particular service sector. Once committed the Government is then not allowed to implement measures that affect the level of access foreign companies have to sell services, or to invest in the country.
Second Governments can commit to treating all foreign companies the same as it treats its own companies. The Government is then prohibited from implementing measures that are either intended to, or have the effect of, favouring its own companies.
A few other important points about the GATS.
Governments are allowed to list specific exemptions from these two rules. Critically, though, they must list these exemptions at the time of making the commitment. A Government cannot go back and add extra exemptions at a later date.
The GATS does have a procedure for Governments to withdraw commitments but this requires the consent of all affected WTO members and requires compensation, normally in the form of some other kind of liberalisation. This makes it very difficult – if not impossible – for governments to withdraw commitments. The WTO has claimed that GATS commitments are ‘effectively irreversible’.
The GATS includes a commitment to further rounds of negotiations aimed at progressive liberalisation. The current talks are part of fulfilling this requirement to keep on liberalising.
The GATS also contains a few nasty surprises that are still waiting to happen. For example, WTO members have committed to developing more detailed rules on domestic regulation during the current talks. These are aimed at ensuring domestic regulations applied to service companies do not constitute ‘unnecessary barriers to trade’ in services. This is a dangerous expansion of trade rules into areas of government policy never before touched by the WTO.
Governments have also committed to developing detailed rules covering government procurement of services and government subsidies for service suppliers.
The negotiations on these general rules are conducted multilaterally. Theoretically all WTO members will be involved in developing more detailed rules on domestic regulation, government procurement and subsidies during the current talks.
In contrast, the negotiations on each country’s specific commitments are conducted bilaterally through a process known as request-offer.
Countries submit liberalisation requests to each other. They then make liberalisation offers and then they negotiate.
This process does of course take place across the whole WTO membership - except those countries that neither make nor receive any requests – so it is a great deal more complex.
In 2002 and 2003, WTO members submitted their initial requests and made their initial offers. However, to date only 42 countries have tabled offers, and the major trading powers like the EU are not satisfied with those offers that have been made. This is why the latest WTO text agreed in July includes a demand that all WTO members submit offers and those countries that have already submitted should make better offers by May 2005.
So that, I hope, is a bit of background on the GATS. If you are feeling slightly confused at this point, don’t worry. It is a normal symptom displayed by those exposed to the GATS for the first time.
Hopefully, it will become clearer as I move on to talking about how GATS affects development policy.
So what is wrong with the GATS? Why should anyone care about this obscure piece of international trade law?
As I have just explained, the GATS is primarily about the gradual expansion of rights for service companies to invest overseas.
Its rules are designed to place limits on the kind of regulations governments can impose on foreign investors.
Â· For example, the GATS is designed to prohibit governments requiring foreign investors to employ and train local people;
Â· it is designed to prohibit governments requiring foreign investors to use local suppliers;
Â· prohibit governments requiring foreign investors to transfer technology or production processes;
Â· prohibit governments requiring foreign investors to pay specific taxes or to give domestic firms tax breaks;
Â· prohibit governments providing contracts or concessions on a favourable basis to domestic companies;
Â· and prohibit governments requiring foreign investors to export a proportion of their output.
The GATS rules on so-called ‘national treatment’ are designed to eliminate all of these government regulations.
The GATS is also designed to eliminate so-called barriers to ‘market access’.
This includes requirements that foreign investors form joint-ventures with domestic companies to help in technology and skills transfer.
It includes restrictions on foreign ownership of companies. For example, India has a foreign equity ceiling of 51 per cent in its hotel sector. This will come under attack through the GATS.
And it includes limitations on numbers of suppliers in a sector. For example, Egypt uses an economic needs test policy when companies seek permission to set up hotels and restaurants. It assesses market needs and the location of different categories of hotel. This will come under attack through the GATS.
In general, it is impossible to say that one, some, or all of the measures that I have just listed is critical to the development of all services in all countries. Different measures are useful in different circumstances and most, if not all of these policies will have been both successfully and unsuccessfully used at some stage. The key point concerns whether governments should maintain the option, both for themselves or for future governments, to use these measures.
The key point that I would like to get across to you, is that the GATS limits the policy options open to governments to achieve development.
Any look at the history of how the industrialised world has developed shows that rich countries did it through a wide range of government interventions.
No country is like another. No development process is exactly the same as another.
Developing countries need the flexibility to use the kinds of policies that rich countries used during their development. Fundamentally, developing countries should have the ability to implement policies that favour their domestic businesses and build-up the effective provision of services.
The increasing number of examples of botched attempts at commercial provision of basic services to the poor highlights the need for effective and accountable public services, and effective government regulation.
The GATS is hindering rather than helping this process by promoting private rights and deregulation over the interests of poor communities.
This argument is, of course, in stark contrast to the proponents of the GATS, who tend to claim that the GATS is not a problem because it is a flexible agreement. It allows developing countries to pick and choose what to liberalise and when, and it allows them to make exemptions from their commitments.
There are several problems with the argument that the GATS is flexible and poor countries can choose what they want to do. In order to engage in the GATS debate, it is useful to understand the ‘myth of flexibility’.
The first, problem I would like to highlight, is that all is not fair in trade negotiations. The rich and powerful countries have a great deal of leverage in trade talks, and act in the interests of their companies rather than in the interests of the poor.
Although much has been made of the supposed flexibility of GATS - that poor countries don’t have to sign on the dotted line if they don’t want to – it asking the public to suspend a great deal of disbelief if we expect them to think that the bilateral talks simply involve a cosy chat between an EU negotiator and one from a developing country talking about the relative development benefits of making GATS commitments.
The EU has massive political and economic clout. Anecdotal reports from Geneva describe how a single developing country delegate – who has to cover a broad range of negotiating topics - is going into a bilateral meeting with twelve service sector specialists from the EU.
Also, rich countries can and do wield the big stick of aid. In Ghana, in 2002 it was reported that the UK government was withholding $10 million dollars of aid for a water project, because of apparent ‘slow progress’ in privatising Ghana’s water supply. Such pressure is not unknown when it comes to doing trade deals.
The second problem with the “GATS is flexible” argument, is that GATS negotiators are supposed to be blessed with magic powers.
It is true that the GATS allows Governments to list what are called ‘limitations’ or exceptions to their specific commitments.
For example, Italy, Spain, Portugal, and Greece have all listed an exception, which ensures that they can regulate the establishment of hotels and restaurants, “in order to protect areas of particular historic and artistic interest.”
This all sounds fine. But the problem – especially for developing countries – is that you are supposed to come up with a list of all the possible regulations that you might want to use in the future at the time you make the commitment. How can any government official know in advance all the possible regulations that future governments might want to use?
This ridiculous restriction denies the opportunity for governments to learn from mistakes and change policies that are not working. No Government gets it right first time all the time. Yet in the fantasy world of the GATS, Government officials seemingly have the power to see far into the future.
A third problem with the mythical GATS flexibility is what we call ‘lock-in’ or irreversibility.
As I have already mentioned, once you make a GATS commitment, there’s effectively no turning back.
For developing countries, its part of a pincer movement. On one side you’ve got the IMF and World Bank with their loan conditions requiring privatisation of basic services, on the other you’ve got pressure to sign up to the GATS in order to lock-in these policies forever.
This has massive implications for democracy and the right of future governments to change the direction of economic policy.
The final problem I want to highlight, is what I call the ‘eternity clause’
The GATS enshrines a commitment to keep on liberalising. It requires that there must be successive rounds of talks aimed at ever more progressive liberalisation. This means that exemptions made in the last round of negotiations become the targets for liberalisation in the next round. This exerts a long-term deregulatory pressure on governments.
Yet, nobody actually knows what so-called ‘free trade’ in services looks like? How much deregulation is enough? How long is a piece of string?
So as you can see, the GATS is far from being a flexible development friendly agreement.
In the final part of my presentation, I would like to outline the EU’s agenda and the EU’s role in the current GATS talks.
The EU’s GATS agenda is dominated by European service companies. The European commission – which negotiates on behalf of the European Union – has very close ties with a range of industry bodies.
In particular, the European financial services industry has a major voice and, consequently, liberalisation of sectors such as banking and insurance is a major objective of the EU.
Research by the Corporate Europe Observatory uncovered a very cosy relationship between European Commission officials and European multinational water companies and, as a result, the EU is proposing that ‘water supply’ be included in the GATS.
As the EU has stated before, the GATS is, and I quote, “first and foremost an instrument for the benefit of business”.
Despite this blatant corporate influence, the EU claims to be promoting a ‘development agenda’. But this is just empty rhetoric. The reality is that the EU is pushing for major liberalisation commitments in poor countries.
In early 2003, a leak of the EU’s GATS negotiating requests was posted on the internet. This leak demonstrated the scale and depth of the EU’s GATS agenda.
109 countries were targeted in total – including 94 classified as developing countries or economies in transition. Each country received between three and twelve sector-specific liberalisation requests. Over 200 of these requests were made of the 41 countries defined as low-income countries by the World Bank – in other words, the world’s poorest.
These requests targeted liberalisation across a range of sectors, including financial services, telecommunications, water, energy, transport, retail and construction.
The sheer number of requests made of developing countries demonstrates a major push for market opening by the EU.
The leaked requests also demonstrate that the EU has been through developing country regulations with a fine-tooth comb – and they are proposing to eliminate a range of development policies.
For example, the EU wants to eliminate a law in Cameroon that requires investors to create at least one job per 10,000 dollars of investment.
The EU wants to eliminate Brazilian laws, which restrict profit repatriation by multinationals in order to maintain investment in the country. The EU wants to eliminate similar capital controls in Chile.
In India, the Government has introduced rules in its tourism sector obliging foreign companies to work through a local counterpart. These rules can be important, both in helping to transfer technology and skills to domestic companies and in helping ensure that, in the event of corporate wrong-doing, the offending company can be more easily held accountable.
Needless to say, these Indian Government rules have been targeted for removal by the European Union as part of the GATS negotiations.
The final point to highlight in relation to the EU’s agenda is the ‘grand bargain’. Many of you are probably asking yourselves, why would my government make such commitments? Why would my government agree to the EU’s demands?
Aside from the political pressure the EU can exert on poor countries, it is also using the promise of agricultural reform to encourage developing countries to make GATS commitments. In other words, the EU is saying, ‘we will reform our agricultural policy if you make binding commitments to opening up your service sectors to our companies’.
Even if the EU was offering meaningful agricultural reform – which many people doubt – it is a bad idea to give up your future policy flexibility in return. As one Harvard economist (Dani Rodrick) concludes, and I quote, “The exchange of reduced policy autonomy in the South for improved market access in the North is a bad bargain where development is concerned.”
So, before I finish, I would just like to recap the main points of my presentation.
Â· The GATS affects the rights of governments to regulate investment in ways that benefit people and the environment.
Â· The GATS limits the policy options open to governments to achieve development.
Â· The GATS is not ‘flexible’, as its proponents argue, because:
Countries must keep on liberalising
GATS commitments are ‘effectively irreversible’
No government can have the foresight to know what regulations future governments might want to use
The request-offer process allows bilateral pressure to be exerted on poor countries
Â· The EU’s agenda is defined by service companies, not EU citizens.
Â· The EU is pushing for extensive market access all over the world and is targeting specific regulations in developing countries for removal.
Â· And the EU is offering agricultural reform in return for services liberalisation. This is a bad deal for development.
So, finally, thank you for listening and I hope that I have been able to give you a broad understanding of what is a very complex but also critical issue that I think exemplifies how globalisation is being shaped in the corporate interest, rather than the public interest.
Presentation by Peter Hardstaff, World Development Movement(UK) for the workshop on GATS: Challenges to National Sovereignty and Peoples’ Security during ASEM people's forum5, 6-9 Sept 2004
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