International Trade Policy: A Critical Analysis Of General Agreement On Trade In Services (GATS)

Analysis

Write an essay on “International Trade Policy”. 

The fundamental purpose of this paper to develop the essay is based on critically investigating the characteristics of the international trade in services by looking at the involvement of “General Agreement on Trade in Services (GATS)” framework. The structure is designed by the World Trade Organization (WTO) for regulating the international trade in the service domain. The primary application of GATS leads to the further liberalisation of the trade services associated with the developing countries. The same can be observed by the example of “WTO Doha Development Agenda” (Bacchetta 2012). This particular fact holds many potential benefits by underpinning the liberalisation of the specific goods involved in the trading process. However, multiple debates have also emerged due to some significant drawbacks that are not covered by the different processes initiated by the international trade in services. These debates primarily suggest that the involvement of GATS to regulate the international trade in services is not fruitful enough to promote the global welfare (Bajec and Eder 2012). On the other hand, one of the major drawbacks is the presence of different barriers in the international trade due to the ineffectiveness in the adjustment of potential costs.

By understanding the challenges and benefits, this particular topic is undertaken significantly for the development of this paper. Apart from that, the subject is provided the fundamental importance out of the other policies involved with the international market because of two vital implications of international trade in services to the activities of International Monetary Fund (IMF). These effects are examined to be providing coherence between the three major international economic institutions and organising the different regulatory reforms through the macroeconomic equilibrium. The importance of GATS can be observed in the process of international trade in services, as the factor has evolved for more than two decades in the past to become the most dynamic segment of the world trade (Bowen, Hollander, and Viaene 2012). As compared with the growth of trade in goods, the significant increase in the trade in services can be observed critically. The particular set of preliminary understanding suggests that increasingly important role is played by the transition in the economies, mainly found in the developing countries worldwide. As a result, the scenario leads these countries to increase their shares in the exporting process associated with the services in the international trade over the recent period.

Trading of Services

Therefore, the principal purpose of this essay is investigating and analysing the validity of the identified debates stating the ineffectiveness of the international rules in promoting the global welfare through the trade in services. To achieve the aim, the critical analysis will be done by considering the relevant theoretical underpinnings in some specific areas driving the formation of a useful conclusion about the chosen topic. 

The enforcement of the “General Agreement on Trade in Services (GATS)” designed by the WTO is done in 1995. GATS is composed of the different sets of multilateral rules and guidelines dedicated to governing the international trade in services. The central focus of the proposed agreement can be determined by the investigation, which is based on transferring the responsibilities related to the services of the government-owned suppliers and the private sectors. The overall process aims to increase the potential of the trade in services, which is necessary for the advancement of information and communication technology (Czinkota 2012). With the involvement of GATS, four different methods or modes of supplying the services can be informed, as it dictates that proximity is required between many suppliers and consumers for trading the particular services. Here, it is necessary to mention that the services covered by the agreement are not automatically exposed to the increasing competition in the global trade. In this case, the members of WTO guarantee the access to the particular market belonging from the identified sectors or modes of supply except the specific cases like the “schedules of commitments, and limitations in the process of maintenance. It is observed that “most favoured nation or MFN” is the only obligation imposed in across all the services covered by GATS (Ghori 2012). MFN is considered as the set of principles, which ensures all the suppliers from the different countries are treated in the fair and equal basis. In the case of the service coverings by GATS, it is observed that all the services dedicated to the international trade are covered adequately by the regulation excluding the services that provided within the exercise of the governmental authority. Apart from that, the combination of the air transport services is also excluded from the coverage of GATS.

As mentioned earlier that different services are traded in four different modes, which are needed to be analysed and discussed in this section to gain superior knowledge about the chosen topic.

First Mode:

The first mode is based on transferring of services between two different countries. For an example, the call centre services, which can often be seen integrated amongst the various services provided by a given country. This particular mode is referred as the cross-border trade involving the collaboration of one territory with another.

Second Mode:

With the help of the second mode, the firms or consumers are allowed to make use of service of another country. The example can be produced by the different instances of international tourism, as the dynamic shift in focus is currently provided by the global trading processes followed by various countries (Guzman and Pauwelyn 2012). This particular mode is defined as the consumption abroad method, where the resident of one country has moved overseas as a patient, student, or tourist to consume the services of such country.

Third Mode:

The third mode enables the involvement of the foreign companies in the particularly identified industries of another country for supporting the development different branches or subsidiaries to provide services accordingly. The particular example can be seen by the instances of the global banking institutions providing banking services to another country. The third mode is denoted as the commercial presence, as the locally established subsidiary or representative office of the foreign owned and controlled company provides services to the certain country.

Fourth Mode:

The last mode reflects the potential supports given to the individuals travelling from one country to another for developing and transferring services. For an example, a special IT consultant migrating in another country and providing IT services can be categorised as such type of service contributing to the international trade. This mode is described by the movement of natural persons, where the service providing process makes the foreign national to act as an independent supplier.

Based on the different debates, there are various issues involved in the process of trading the services as part of the international market. Regarding commitments made by the WTO, the second mode is known to be the most liberalised method amongst the others (Guzman and Pauwelyn 2012). The particular reason for this fact is caused by the less restriction in the movements of the citizens outside the country by the government. Based on the analysis, it can be further determined that the first mode is not often committed to the trading of services, as the services are required to be supplied remotely. The example of the construction services also falls into the category of the first mood. The result of the analysis further suggests that the third mood is most influential among the other ones to promote the supply of services in the international trading process, as the particular mood is more open (Hamanaka 2013). Therefore, the absolute mode is limited regarding restrictions on transferring the improving the capacity of the economies by facilitating the transfer of know-how as part of participating in the global value chains. However, in a case of the last or fourth mode, the less involvement of commitment can be observed, which is caused by the number of sensitivity issues associated with the movement of foreign individuals or workers.

In the case of determining the useful contribution of the international trade in services, the necessary comparison of the process naturally come with the amount contributed by the international trade in goods. Based on the record of 2014, it can be acknowledged that the combination of world trade in goods and services contributed USD 4,800 billion, where 21% is funded by the trade in services (Heydon and Woolcock 2012). In this case, the third mode represents the majority of the sum generated by the involvement of international trade in services, which is observed to 55%.   

A large number of debates regarding the ineffective design of international trading of services dissatisfying the global economic welfare are produced majorly due to the different issues and weaknesses associated with the process. Based on the characteristics of the services, the application of different kinds of instruments into the trade policies can be observed. The involvement of tariffs or quantitative restrictions can be found to be imposed on the broader context. However, the implication of different types of quantitative restrictions provides lower influences the trade in services, as the result of the process is hindered mainly due to the direct control associated with the market access or the less favourable activities initiated by the foreign service providers than the national providers (Hisali 2012). Apart from the involvement of the foreign service providers weakening the outcomes of international trade in services, the involvement of domestic regulations can reduce the application of international trade regarding services in the particular country. In this particular scenario, the necessary study developed by Stern (2000) provided some useful classifications for categorising the identified barriers. Based on the analysis of such study, it is observed that the obstacles can be distinguished in four different areas. Firstly, the weakness can be seen from the involvement of quantitative restrictions or prohibitions for providing provisions to the services utilised by the foreign residents. Secondly, the outcomes of the international trade from the service context are hampered by the involvement of different taxes and additional charges. To maintain a price-based measure, it is necessary for the imposition of differential taxes on the transactions carried out by the foreign service providers (Hoekman 2012). In the case of the additional charges, these are imposed by the regulatory bodies of the domestic country where the operations of the company are engaged. Therefore, the combination of these factors provides a burden to achieve the positive outcomes by the international trade activities. Thirdly, there is the involvement of different regulatory requirements like certification or licensing of the business related to the service providers, which often observed as highly sophisticated to the development of these professional services. Lastly, lack of access to the communication and distribution networks provides some critical barriers often leading towards the insufficient enforcement to ensure the maintenance of national competition standards.

The term liberalisation is significantly entangled with the development of international trade as well as services. The fact supports yielding a substantial amount of benefits from the context of overall growth and welfare. The government or the regulatory body of a country can promote the national welfare by reducing the difference regarding the margin between the domestic and foreign services (Irwin 2012). The process is highly similar to the liberalisation of goods in the international trade. In addition, the benefit can be observed regarding the reduction of taxes in the downstream sectors, as various services are representing the intermediate inputs in the product process of goods or some other services (Lianos and Odudu 2012). For an example, the different exporters involving in the exporting business with many developing countries may experience the higher cost of services mainly due to the extended protection provided to the national cargo and carriers. However, it is observed that some of the barriers to the services trade are based on the price unlike the case of goods trade. Due to that, the process of liberalisation does not engage with the loss of fiscal revenue. On the other hand, different adverse impacts can be produced by the trade effects, where these cannot influence the small countries (Lipsey 2011). Apart from the identified scenarios, the additional benefits can be extracted from the commitments of different commercial establishments, which have resulted from the movements of various firms or individuals.

Considering this particular scenario, different empirical studies have been analysed and reviewed, and it is observed that these benefits from the liberalisation are validated by these studies from the perspective of the developing countries. According to Mattoo et al. (2001), it is suggested that the growth rate representing the telecom and financial sectors expected to increase up to 1.5% due to the significant of the international trade in services. It is determined that the effects of global welfare cause the liberalisation, which eliminated different trade barriers previously hindering the growth of agricultural and manufacturing goods (Lipsey 2010). Considering the pervasive stretch of the services in both the developing and developed countries and the comparatively high presence of trade barriers, the identified benefits are intuitive. Therefore, the benefits related to the welfare can be promoted in the developing countries, which is observed to two or three times larger in proportion as compared to their national income. In this particular case, it is noted that the applicable benefits are highly achieved by the developing countries than the industrialised countries (Mansfield and Milner 2012). An accurate study developed concerning the general equilibrium model of Tunisia reveals that the gains yielded by liberalising some number of the major service sectors represented 7% of the GDP of the country.

On the other hand, debates can be raised from the perspective of risks generated from the further liberalisation of services. One of the key concerns is provided to the capital account liberalisation and its implications related to the commitments. Another important concern is based on the significant effects of poverty. The process of liberalisation drives the exposure of the domestic service market to the foreign completion through the involvement of privatisation. The process naturally raises the price level of different services rather than lowering the same (Manual on Statistics of International Trade in Services 2010 (MSITS 2010) 2012). Therefore, it can be observed that liberalising the service sectors in order to promote the international trade in services provides a substantial amount of adverse impacts on the household expenditures. The same can be observed especially in some specific areas like infrastructure or utilities. The market entry of foreign service providers or the new domestic competitors can have the capability to displace the unskilled labour or the putting the universal provision of the utility services at risk. Therefore, proper strategies should need to be in the right place to mitigate these risks. The careful organizing and pacing of the services liberalisation are one of the active steps required for developing the mitigation strategy (Masudur Rahman and Kim 2012). More clearly, the broader regulatory, social, and financial reformation process are necessary for the service liberalisation.

Considering the existing legal framework of the GATS, the increasing concerns are provided to the exposure of individual services to the foreign competition by the multilateral context, and such concerns are addressed by the framework. In the case of GATS, some number of provisions is there to provide reliefs from the adjustment needs followed by the involvement of market liberalisation. In this case, different statistics and reports of WTO confirmed the service industry as the fastest growing area of the global market and economy. The particular industry is accounted for the two-third of global output and one-third of the current global employment by covering around 40% of the overall occupation. According to the estimation of 2013, the significant growth of the world commercial service can be measured at $4.6 trillion and the developed countries are the main participants by consistently engaging in the import and export of services in the international level (Oseni 2013). Concerning this particular understanding, several debates and arguments were raised regarding the accepted position in the MTS policy, which had left the service industry and international trading processes unregulated prior to 1994. Here, it is ascertained that the dynamic growth in the service economy led the MTS to be opened to the different trade agreements associated with the service industry. On the other hand, the deregulation of capital flows and increasing awareness in the developed economies driving the snowballing competitive advantage are also responsible for the market to become open to the various service trade agreements (Rafiqul Islam, Alam and Mukhopadhaya 2012).

Goals and Assumptions of Primary Policies of GATS

The key policies and guidelines related to GATS are based on achieving the key goal and developing some critical assumption. It is ascertained by the way of discussion that the international trade in services is experiencing some key impediments stemming from the initiatives and approaches of the government and non-government authorities and institutions in the developing and developed economies (Zhang 2012). Therefore, the primary principles of GATS are observed to reduce such barriers with the assumption of extending the maximum possible trade in services similar to the approaches associated with the trade in goods. By disseminating the goals, it can be assumed that the liberalisation of services has provided some benefits to the global economics perspectives. Investigating and determining the factors of such benefit, the underlying interest is provided to the topic. Some of the reasons as identified are the increasing global competitiveness of the international trade, increasing savings of the customers, and driving faster innovation in the goods and services.  

Conclusion

By looking at the overall analysis and discussion, it is notified that the policies of GATS related to the promotion of international trade in services are stated in a simple fashion favouring the liberalisation of any sectors involving the import and export of services. These segments are allowed to determine the extent and mode of such liberalisation by specifying their exemptions and shaping up their national schedules. In conclusion, the proclaimed objective of GATS is solely dedicated to regulating the trade in services, while fostering the global expansion fairly in the global service industry (Zimmermann 2012). With the help of the transparent set of rules, the procedures of the government and enterprises are provided the proper recourse to eliminate the unfair discrimination in one or the other service sector. 

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