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Regulatory Cooperation, Aid for Trade and the General Agreement on Trade in Services

Working paper by Hoekman, Bernard; Mattoo, Aaditya /World Bank, 2007

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This paper discusses what could be done to expand services trade and investment through a multilateral agreement in the World Trade Organization. A distinction is made between market access liberalization and the regulatory preconditions for benefiting from market opening. The authors argue that prospects for multilateral services liberalization would be enhanced by making national treatment the objective of World Trade Organization services negotiations, thereby clarifying the scope of World Trade Organization commitments for regulators. Moreover, liberalization by smaller and poorer members of the World Trade Organization would be facilitated by complementary actions to strengthen regulatory capacity. If pursued as part of the operationalization of the World Trade Organization's 2006 Aid for Trade taskforce report, the World Trade Organization could become more relevant in promoting not just services liberalization but, more importantly, domestic reforms of services policies.

Policy ReseaRch WoRking PaPeR 4451

Regulatory Cooperation, Aid for Trade
and the General Agreement on

Trade in Services

Bernard Hoekman
Aaditya Mattoo

The World Bank
Development Research Group
Trade Team
December 2007




























Produced by the Research Support Team


The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Policy ReseaRch WoRking PaPeR 4451

This paper discusses what could be done to expand
services trade and investment through a multilateral
agreement in the World Trade Organization. A
distinction is made between market access liberalization
and the regulatory preconditions for benefiting from
market opening. The authors argue that prospects for
multilateral services liberalization would be enhanced by
making national treatment the objective of World Trade
Organization services negotiations, thereby clarifying
the scope of World Trade Organization commitments

This paper—a product of the Trade Team, Development Research Group—is part of a larger effort in the department
to study the impact of trade in services on economic growth and development. Policy Research Working Papers are also
posted on the Web at http://econ.worldbank.org. The author may be contacted at bhoekman@worldbank.org.

for regulators. Moreover, liberalization by smaller and
poorer members of the World Trade Organization
would be facilitated by complementary actions to
strengthen regulatory capacity. If pursued as part of the
operationalization of the World Trade Organization’s
2006 Aid for Trade taskforce report, the World Trade
Organization could become more relevant in promoting
not just services liberalization but, more importantly,
domestic reforms of services policies.

Regulatory Cooperation, Aid for Trade
and the General Agreement on Trade in Services*

Bernard Hoekman
World Bank and CEPR

Aaditya Mattoo

World Bank

JEL codes: F13
Keywords: Trade in services, WTO, negotiations, Doha Round, aid for trade

* The authors are with the Development Research Group of the World Bank. We are grateful to
Rolf Adlung, Dominique Njinkeu and an anonymous referee for helpful comments on an earlier
version. The views expressed are personal and should not be attributed to the World Bank.


Recent literature surveys document that the potential gains from liberalization of trade in

communications, finance, transport, business and other services are large (Hoekman,

2006; Deardorff and Stern, 2007). For many countries the potential gains are significantly

larger than those that could be derived from further liberalization of goods trade.

Moreover, even exploiting the opportunities arising from goods trade liberalization will

require better services. For example, Indian horticultural producers receive only one-sixth

of the price that consumers pay because of inefficient storage, transport and distribution

(Mattoo, Mishra and Narain, 2007).

Notwithstanding the prospective gains from liberalization, WTO negotiations

under the General Agreement on Trade in Services (GATS) have been going nowhere.

The best market access offers made in the Doha Round do not even reflect the

liberalization that countries have already implemented (Adlung and Roy, 2005). As a

result, there is a serious risk of the GATS becoming irrelevant – increasingly lagging

behind developments in service technology, regulation and business practice.

After five years of fruitless negotiations on services, in 2006 WTO members

launched an effort to complement the bilateral request-offer process with a plurilateral or

“collective” approach. This involved subsets of the WTO membership seeking to agree to

a common “minimum” set of policy commitments for a given sector. While arguably a

step forward, we argue in this paper that for there to be a reasonable prospect of

achieving significant increases in the coverage and depth of services commitments by

WTO Members, more attention is needed for the regulatory context in which services

liberalization takes place. In particular, regulators must be reassured that GATS

commitments will not deprive them of the freedom to regulate; that liberalization will not

be prematurely thrust upon countries with weak regulatory institutions; and that

liberalization will be supported by international cooperation.

Providing credible assurances that GATS commitments will only deprive

regulators of the freedom to discriminate, and not limit their freedom in any other way, is

necessary but not sufficient for a significant expansion in GATS commitments to occur.

As, if not more, important is creating an effective multilateral mechanism to provide

regulatory assistance to countries that need it. Dedicated assistance to improve regulatory


capacity in developing countries would help reassure policymakers that regulatory

inadequacies that could undermine the benefits of liberalization will be diagnosed and

remedied before any market-opening commitments take effect. Such assistance is

arguably also critical for any significant liberalization of policies restraining temporary

entry of foreign services providers: host countries need to be assured that source

countries are willing and able to screen services providers, to accept and facilitate their

return, and to combat illegal migration.

An important step towards recognizing the importance of technical and financial

assistance as a necessary (but not sufficient) condition for liberalization of trade to

generate greater benefits in poor countries was made in 2006 with the report on the WTO

taskforce on Aid for Trade (WTO 2006). If services in general, and regulatory design and

enforcement capacity more specifically, are given greater attention by countries in the

operationalization of the recommendations of the taskforce, the prospects for mutually

beneficial multilateral liberalization of trade in services could be much enhanced. In this

paper we identify a number of areas in which regulatory cooperation and assistance

would both be beneficial to recipients and support multilateral liberalization.

The plan of the paper is as follows. Section 1 discusses the economic

fundamentals – why services and services trade and investment liberalization matter.

Section 2 turns to the WTO and asks why such limited progress has been made

multilaterally in delivering greater openness of services markets. Section 3 focuses on

what could be done through ‘aid for trade’ to complement WTO disciplines by helping

smaller and poorer members – the majority of the WTO membership – put in place both

the regulatory mechanisms needed to achieve efficiency and equity objectives and assist

in addressing some of the adjustment costs that will be generated by liberalization.

Section 4 concludes.

1. Gains from Trade in Services

It is only relatively recently that technological change and policy reforms allowed an

increasing number of services to be traded internationally through telecommunications

networks. These developments have allowed an increasing number of services markets

to be contested internationally through cross-border trade (mode 1 of the GATS) and FDI


(mode 3).1 The average annual growth rate of business service exports for Brazil and

China during 1995-2005 was 15 percent, for India it was 25 percent.2 As a result, the

share of traditional services such as transport and tourism in world trade has been falling

steadily, although in absolute terms these activities have been growing at similar rates as

world trade in goods, driven by improvements in technologies and reductions in the unit

costs of transporting both containers and people across the globe.

Policy reforms – liberalization, privatization – have complemented changes in

technology in supporting the expansion of trade in services. These policy reforms have

mostly been implemented by governments autonomously. There are powerful economic

reasons to pursue policies to increase the contestability of services markets. An efficient,

competitive financial sector is critical in ensuring that capital is deployed where it has the

highest returns. Lower cost and higher quality telecommunications will generate

economy-wide benefits, as this service is both an intermediate input and a “transport”

mechanism for information services and other products that can be digitized. Similarly,

transport services contribute to the efficient distribution of goods within and between

countries and are the means through which services providers move to the location of

clients (and vice versa). Business services such as accounting and legal services reduce

transaction costs associated with the operation of financial markets and the enforcement

of contracts. Retail and wholesale distribution services are a vital link between producers

and consumers, with the margins that apply in the provision of such services influencing

the competitiveness of firms on both the local and international market.

Even in the poorest countries, services account for 40-50 percent of GDP and a

significant share of employment. Not only would improved performance in services

produce significant direct benefits, large indirect benefits would come from domestic

farmers, households and firms obtaining access to better and cheaper services than they

have today. Similarly, while the opportunity to export more agricultural and

manufactured products is important, actions to improve the efficiency of the services

sectors are vital to exploiting these opportunities.

1 Four ways or “modes” of engaging in trade in services are distinguished in the GATS: cross-border (mode
1); through movement of the consumer to the location of the provider (mode 2); through longer-term cross
border movement of the provider – i.e., establishment of FDI (mode 3); and temporary movement of
providers (natural persons) (mode 4).
2 The leader in this area was Ireland, with an annual rate of business services export growth of 31.6 percent.


Mattoo, Rathindran and Subramanian (2006) analyze the effects of trade and

investment openness for the financial and telecommunications sector on growth in a

cross-sectional analysis. Controlling for other determinants of growth, they find that

countries that fully liberalized the financial services sector grew, on average, about 1

percentage point faster than other countries. Fully liberalizing both the

telecommunications and the financial services sectors was associated with an average

growth rate 1.5 percentage points above that of other countries. Focusing on a sample of

transition economies, Eschenbach and Hoekman (2006) find that services-related policies

play an important role in attracting FDI. They explore the impact of financial and

infrastructure services policy reforms on per capita income growth using time-series data

covering the 1990-2004 period. Controlling for other potential explanatory variables, they

find that improvements in services policies – infrastructure and finance – have a large and

statistically significant positive impact on per-capita growth.

The positive association between more efficient service sectors and overall

economic performance implies that services policy reforms will help reduce poverty – as

sustained economic growth is the most powerful instrument to reduce poverty.

Underlying this aggregate, indirect relationship are many channels through which better

services can directly improve economic outcomes for poor households, for example, by

enhanced consumption of health and education. Another channel is by enhancing the

benefits of trade reforms. Numerous country studies have concluded that greater trade

opportunities can raise incomes but only if poor households produce products for the

market. This may require active intervention to help households switch from subsistence

to cash crops and improve productivity—through extension services, better access to

credit and transportation services, and investments in infrastructure.3 Domestic supply

constraints are the main reason for the lack of trade growth and diversification in many of

the poorest developing countries. Without action to improve supply capacity, reduce

transport costs from remote areas, increase farm productivity and more generally improve

the investment climate, trade opportunities cannot be fully exploited and the potential

gains from trade will not be maximized. The needed reforms span numerous areas, but

3 See, e.g., the country studies in Hertel and Winters (2006) and Hoekman and Olarreaga (2007).


many of them are services-related.

In addition to the “import dimension” stressed above, developing countries also

have an export interest in services. Their exports of services have grown nearly four-fold

in the last decade, to attain a share of the global marketplace of 18 percent. In large part

this reflects growth in so-called business process outsourcing (BPO) services. This

activity arises from the outsourcing (and out-location through FDI) of non-core business

processes throughout the value chains of both manufacturing and services industries.

Within BPO activities, the more advanced developing countries, such as India, are

moving from providing only low-end back-office services (data entry, etc.) to more

integrated and higher-end service bundles in fields such as customer care, human

resource management, and product development. This move – reflected in a rising index

of revealed comparative advantage in business services (Figure 1) – is creating space for

other developing countries, from China to Senegal, to step into the more standardized

segments of the market.

Figure 1: Shifting Comparative Advantage -- India's RCA for Services Exports









1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


Transport services Travel services Business services

As noted above, the increase in global trade in business services reflects a mix of

technological changes that allow more services to be traded cross-border and policy

reforms. However, numerous barriers to trade and investment continue to prevail in most

countries. The consensus view is that the tariff equivalents of these barriers are a multiple


of those affecting merchandise trade.4 Studies that use available information on

prevailing policies conclude that further services liberalization would have much greater

positive effects on national welfare than the removal of trade barriers – see e.g., Konan

and Maskus (2006) on Tunisia and Jensen, Rutherford and Tarr (2006) on Russia. Instead

of the “standard” 1 percent increase in welfare from goods liberalization, introducing

greater competition on services markets raises the gains to the 5-10 percent range or

more. These large potential effects of services liberalization reflect both the importance

of services in the economy and the extent to which many of them continue to be

protected. Insofar as such protection reflects standard political economy factors – a desire

by domestic incumbents and workers to retain rents, fears by policymakers regarding

adjustment costs – there appears to be great scope to use the WTO as a mechanism to

implement additional liberalization.

2. The GATS: Asymmetric Interests and Regulatory Constraints

One of the major results of the Uruguay Round was the creation of the General

Agreement on Trade in Services (GATS). By establishing rules and disciplines on

policies affecting access to service markets, the GATS greatly extended the coverage of

the multilateral trading system. The original GATT-1947 did not cover services for the

simple reason that at the time the GATT was negotiated, services were mostly

nontradable. A key question from the perspective of international cooperation is what

role trade agreements can/should play in supporting domestic regulatory reform efforts

and enhancing access to foreign services markets. In principle, trade agreements can

provide not only a mechanism for enhancing access to export markets and overcoming

resistance by domestic interests to liberalization, but also may be a vehicle for agreement

on policy reforms (“good regulatory practices”). The stylized fact that looms large here is

that while some progress has been made to date in using the GATS framework to lock-in

unilateral reforms that have already been implemented, the GATS has played virtually no

role in inducing new liberalization. Indeed, it is fair to say that to date the GATS has been

a disappointment.

4 See Hoekman (2006) and Mattoo, Stern and Zannini (2007). No comprehensive, cross-country,
comparable datasets exist that allow a summary assessment of the prevailing levels of services trade and
investment barriers.


Adlung and Roy (2005) have assessed both the current coverage of specific

commitments of WTO members in the GATS and the offers that were on the table as of

2006, when negotiations were suspended. For many countries the coverage of specific

commitments is well below 50 percent of all services and modes of supply. Adlung and

Roy conclude that not only do the requests and offers made in the 6 years following the

launch of negotiations on services in 2000 imply little if any liberalization of policies;

most countries were not even willing to use the GATS as a vehicle to “lock in” existing

levels of openness.5

The lack of progress on services matters for several reasons. First, as mentioned

in the Introduction, the extant research concludes that the potential direct gains from

reform of services trade for most WTO members are likely to be large. Second, services

reform is needed to enable developing countries to take advantage of the new

opportunities that arise from goods trade liberalization. For example, Sub-Saharan

African exporters today pay transport costs that are at least five times greater than the

tariffs they face in industrial country markets, but neither international maritime nor air

transport services figure seriously on the WTO agenda. Third, the WTO negotiating

process requires countries that seek better market access to offer improved access to their

own markets. In particular, attaining global liberalization of agriculture – a key objective

of many developing countries – will require them to offer a quid pro quo. Greater

opening in services, an area of export interest to many of the countries that protect their

agriculture sectors is one obvious quid pro quo. For example, services exports are of key

importance for the EU and India, two WTO members that confront serious political

resistance to reducing barriers to trade in agriculture.

A number of possible explanations for the lack of headway can be identified. As

is well known, the WTO is driven by mercantilism: the desire by members to improve

their access to the markets of other members. One explanation for the limited progress is

that the standard mechanisms of reciprocity as developed over 50 years of GATT practice

5 A number of studies have shown that there is often a major gap between the actual level of openness of
sectors and the level of commitments in the GATS. For example, Barth et al. (2006) compare data on
specific GATS commitments for financial services with measures of actual policy in this sector for 123
countries. They conclude that in practice applied policy is much more liberal than what was committed to
in the GATS.


do not readily apply to services. There are at least two possible reasons for this: (i) the

export interests that have been harnessed to allow the reciprocal liberalization of trade in

goods do not prevail sufficiently in the services context; and (ii) regulatory concerns

impede the ability (willingness) of WTO Members to engage in what Jagdish Bhagwati

has termed “first difference” reciprocity (Hoekman, Mattoo, and Sapir, 2007).6

Asymmetric interests

In the case of merchandise trade all WTO members have clear interests in improving

access to export markets. Some countries are more diversified than others and all have

differential specific interests – but all countries are exporters of goods that are subject to

trade barriers in partner country markets. Thus they have exporters that see potential

benefits from multilateral negotiations. This is less the case for services. While many

developing countries – the majority of the WTO membership – are significant exporters

of services, often the associated foreign exchange earnings are derived from activities

where the relevant policies are under the control of the government as opposed to trading

partners. The most important such “service” is tourism, where the export revenue

generated depends primarily on measures that the tourism destination country puts in

place itself.

As far as cross-border trade in services via telecommunications networks is

concerned, developing countries have export interests, but this channel for trade is often

not constrained by policy in the importing country (with the exception of services such

as gambling where importing countries may reserves the activity to the State or ban it

altogether). Most of the business process outsourcing, call centers, etc. that are growth

areas for many countries are not constrained by trade policy measures in the destination

or importing country. While there is certainly increasing opposition against such trade in

high-income countries, outside of government contracts there is little that is currently

done to restrict such activities from being “offshored.”

Turning to FDI (mode 3, or establishment), most developing countries do not

6 These issues were identified early on in the literature on trade in services. On the problem of asymmetric
interests, first difference reciprocity and limited and concentrated export interests, see e.g., Hoekman
(1994, 1997). On the importance of sectoral regulation and the interests of regulators was identified by
economists early in the process of multilateral negotiations on services – see e.g., Feketekuty (1988) and
Messerlin (1990).


have significant “offensive” interests – they do not have indigenous multinational service

providers seeking better access to foreign markets. This is a mode that is primarily of

interest to firms based in high-income countries and large emerging economies.

The one mode where developing countries confront particularly high barriers and

that is therefore of great relevance to potential exporters is mode 4. However, mode 4 is

politically extremely sensitive. Insofar as there are no serious prospects for mode 4

liberalization in the GATS framework, most of the potential export interests in many

developing countries are disengaged from the process.

These considerations imply that a key driver of the reciprocity mechanism –

services exporters – is either missing or much weaker in many WTO members than is

true for goods. The exception are large service firms that are based in high-income

economies, which have clear interests in selling more services to both OECD and to

developing countries. This is mostly a mode 3 (FDI) agenda. The implication is that if

access negotiations are to be restricted within the services arena, deals are likely to be

limited to mode 3 exchanges (largely an intra-OECD/large emerging markets affair) or

better access for developing countries through mode 4 to OECD markets in return for

mode 3 liberalization by developing countries. As argued below, a precondition for

making headway in the liberalization of mode 4 is regulatory cooperation between host

and source countries – limiting the focus to “trade policy” concessions by potential host

countries (e.g., seeking to negotiate market access quotas) is only likely to be feasible if

complemented by a commitment by source countries to manage such trade.

Regulatory constraints

The intangible nature of most services makes it hard for buyers of services to investigate

or test their quality prior to purchase. The extent of asymmetric information often creates

a necessity to regulate services in order to protect consumers. Regulating services may

also be desirable in order to remedy other types of market failures, including imperfect

competition, which is often present in network services such as telecommunications

where the number of providers is limited, and externalities. Externalities may cause a

problem if there is also imperfect information – e.g., in the case of financial services,

where the failure of one institution may cause problems to the entire sector. For all these


reasons, activities tend to be highly regulated.

Although consumers should in principle favor reforms that increase the number of

suppliers and, in principle, lower prices and/or increase the range of services offered, they

may in fact oppose them for fear that reforms will lower service quality and/or increase

the market power of (foreign) firms. Regulators may be concerned that trade

liberalization will impede their ability to enforce domestic regulatory standards. Trade

will bring with it regulatory competition if services suppliers are only subject to the

norms and standards that apply in their home markets. This is particularly likely to be the

case for mode 1 trade. As case in point was the dispute between Antigua and Barbuda

and the US on gambling services. The WTO Panel and Appellate Body ruled that the US

prohibition of internet gambling was inconsistent with the specific commitments the US

had made on market access, even though the US prohibition applied equally to foreign

and US providers. The inconsistency arose because specific commitments on market

access preclude even non-discriminatory (regulatory) prohibitions. Similarly, if mode 4

trade is permitted to occur on the basis of the qualifications and certifications obtained in

the home country of providers, there may be concerns regarding whether host country

norms are met. A critical – and difficult – question then is how to differentiate between

legitimate concerns relating to quality and performance, and regulatory requirements that

simply constitute barriers to entry, creating rents for incumbents by raising prices.

In addition to concerns about the ability to enforce national regulatory standards,

in developing countries liberalization may raise an additional regulation-related issue:

achieving social equity objectives. The impacts of more competitive market structures

following liberalization on access to services by poorer households in developing

countries have been mixed. In cases like mobile telecommunications, a positive

relationship has been observed in many developing countries because initial conditions

were bad – few households had access. However, in other areas, like financial services,

unless improved regulatory measures are put in place, liberalization may have an adverse

effect on access to credit for rural areas and the poor. Putting in place mechanisms to

ensure better access to services post-liberalization is important from an equity

perspective. It is also important from a political economy perspective to bolster support

for implementing efficiency enhancing policy reforms and sustaining them over time.


Absent actions to address regulatory weaknesses, countries may not be in a position to

fully realize the potential benefits of trade reforms in services (or goods).

The prevalence of regulation further complicates and constrains use of the

traditional GATT reciprocity mechanism for services because it is very difficult to design

multilateral rules and national commitments in a way that clearly separates or

distinguishes between measures that are protectionist and measures that have good

domestic efficiency or social equity rationales. As the focus of WTO negotiations is not

on the welfare of members or on the identification of “good” policy, regulators may

therefore be concerned that market access negotiating dynamics could adversely affect

their ability to design and implement regulatory norms that maximize national welfare.7

Emerging Multilateral Responses

Between 2000, when as specified in the GATS new multilateral services negotiations

were launched, and the end of 2005, WTO Members pursued a bilateral approach to

negotiations, submitting requests to others and responding to requests with (conditional)

offers. Requests tended to be highly ambitious and offers mostly minimalist. The large

asymmetries in interests across the membership impeded progress, with most small and

poor countries not perceiving much of an incentive to offer significant commitments.

A different tack was introduced at the December 2005 WTO ministerial meeting

in Hong Kong. Annex C of the 2005 WTO ministerial declaration endorsed a shift

towards plurilateral or collective negotiations among subsets of members. Plurilateral

requests were to be made by end February 2006, followed by bilateral/plurilateral

negotiations leading to submission of revised offers by July 2006. The idea was to limit

talks to a critical mass of countries, so as to reduce transactions costs while still ensuring

that most of the gains from agreement would be internalized among those participating.

The pursuit of what Schelling (1978) has called a “k-group strategy” – the minimum

number of countries (‘K”) out of a larger set (“N”) that internalizes enough of the total

potential gains from cooperation to make free riding by the remaining N-K players

feasible – is easier to implement in the WTO setting for services than it is for goods trade

7 One potential explanation for the steadily expanding number of bilateral or regional trade agreements that
include services is that cooperation on services policies is easier to achieve in a small numbers context.


because of the way the GATS is structured.8 The positive list approach to define the

country coverage of specific commitments on a sector-by-sector basis already requires

that negotiations be sectoral.

The decision to move to negotiations among subsets of countries and focus on

agreeing to a set of “minimum standards” for liberalizing commitments— thus shifting

the burden on a Member to justify its refusal to concede the threshold level rather than on

other Members to extract the minimum concessions – implies a move away from the type

of first difference reciprocity that is the bread and butter of GATT negotiations. Instead,

the focus becomes achieving a common set of policies that apply to all signatories, while

allowing for de facto differentiation between WTO members in terms of participation.

Countries that have little to offer for a specific sector or mode are effectively exempted

from participation – they can “free ride” on the outcome of negotiations between the

“principal stakeholders”.

Plurilateral talks were pursued among some 30-40 countries starting in early

2006.9 Requests were tabled for legal; architecture/ engineering; computer-related;

postal/courier; telecommunications; audiovisual; construction; distribution; education;

environmental; financial; maritime; air transport; and energy services, as well as cross-

border trade (modes 1/2); mode 3; mode 4; and MFN Exemptions (general, financial and

audiovisual) (Chaudhuri, 2006). The negotiations involved mostly OECD members and

large emerging economies. Requests were generally less ambitious than those made

bilaterally, which often called for full market access and national treatment in sectors of

export interest to the demandeur. Two rounds of talks were held before the Doha round

was suspended in July 2006. A third set of meetings occurred in April 2007 after

negotiations resumed. News reports suggest that although progress was made as a result

of the shift to the new negotiating modalities, the inability to move forward on agriculture

and nonagricultural market access dominated the efforts of negotiators. At the time of

writing it is not possible to assess what the ultimate outcome of the plurilateral approach

will be (might have been).

8 Article XIX GATS mentions plurilateral negotiations as modality that could be used by Members.
9 Past practice suggests that for sectoral liberalization agreements to be applied on a MFN basis the
“internalization” ratio needs to be on the order of 90 percent of total trade. This was the figure used in the
negotiations on the Information Technology Agreement.


Although WTO members clearly recognized a change in tack was needed to deal

with the problem of asymmetric interests, the shift towards small(er) group negotiations

does not address the regulatory constraints identified above: worries about regulatory

autonomy (which apply as much to the large players involved in the plurilateral talks as

to the countries that are permitted to free ride) and limitations in the capacity of poor

countries to put in place and enforce regulatory measures to complement liberalization.

Indeed, by effectively excluding the majority of the WTO membership from negotiations,

the plurilateral approach creates a new problem: exempted countries may not be

confronted with a need to liberalize, but they also are excluded from the potential gains

associated with undertaking domestic policy reforms themselves. Moreover, insofar as

such reforms are needed to exploit export opportunities, they may also lose out on that

front. The first problem can be resolved through explicit measures that guarantee to

regulators that their autonomy will not be constrained by the GATS. Mattoo (2005) and

Hoekman, Mattoo and Sapir (2007) argue that making national treatment the primary

objective of negotiations would do much to provide such assurances. The second problem

requires actions to assist developing countries to improve domestic regulatory capacities.

Despite increasing recognition among WTO members that more needs to be done to

provide assistance to developing countries to bolster trade capacity – exemplified by the

creation in Hong Kong of an “Aid for Trade” taskforce – to date services have not

attracted much attention in aid for trade deliberations.

3. Supporting Services Reforms in Developing Countries

In the WTO services negotiation, many developing countries have pursued three goals:

retaining flexibility in making liberalizing commitments; securing commitments from

other countries in sectors and modes of export interest to them; and obtaining assistance

to enhance the capacity of their services sectors. To date they have succeeded in

achieving only the first goal. Over the last decade, the international trading community

has moved towards progressively less demanding positions vis-à-vis the poorest

developing countries. GATS Article IV on the Increasing Participation of Developing

Countries notes that “Particular account shall be taken of the serious difficulty of the

least-developed countries [LDCs] in accepting negotiated specific commitments in view


of their special economic situation and their development, trade and financial needs.”

The December 2005 Hong Kong Ministerial Declaration went even further, stating, “We

recognize the particular economic situation of LDCs, including the difficulties they face,

and acknowledge that they are not expected to undertake new commitments.”

With respect to the other two goals, the LDCs have had less success. Beginning

with GATS (in Articles IV and XIX), and continuing through the Hong Kong Ministerial

Declaration, there have been exhortations that WTO Members “give special priority to

providing effective market access in sectors and modes of supply of export interest to

LDCs, through negotiated specific commitments …” (Article XIX GATS). As already

noted, little has been offered in the area of greatest export interest for the LDCs: mode 4,

especially the provision of services through the movement of unskilled workers.

Assistance to develop services sectors has also not been very forthcoming in the

WTO context, although calls to mobilize additional aid resources to support trade

capacity-building in developing countries have proliferated in recent years.10 The focus

of the WTO is on market access. Policy advice and assistance for regulatory reform an

public investments in services infrastructure are provided by international financial

institutions and specialized agencies. There is virtually no link between the two

processes. This disconnect persists even though improved regulation – ranging from

prudential regulation in financial services to pro-competitive regulation in a variety of

network-based services – will be critical to realizing the benefits of services liberalization

in many sectors. Policy intervention will also be necessary to ensure universal service

because liberalization per se will not always deliver adequate access to the poor. There

may be good reasons to defer liberalization and/or not to make binding commitments if

there are weaknesses in prudential or pro-competitive regulation, adjustment costs are

likely to be severe and affect the feasibility/sustainability of reform.


At the 2005 WTO ministerial in Hong Kong a number of specific commitments

were made by high-income countries to expand allocations for trade assistance. The

10 An important first step towards mobilizing additional resources was the commitment by the G-8 Heads of
Government at Gleneagles in 2005 to increase aid to developing countries to build physical, human, and
institutional capacity to trade, and to grant additional support for trade capacity building. At the September
2005 IMF/World Bank annual meetings, Ministers endorsed the need to expand aid resources to bolster
trade capacity in developing countries.


Ministerial Declaration requires Members to provide “targeted and effective technical

assistance and capacity building for LDCs ... to strengthen their domestic services

capacity, build institutional and human capacity, and enable them to undertake

appropriate regulatory reforms.” The challenge is to operationalize this commitment and

to extend it to a broader set of developing countries.

The ministerial meeting agreed to create a task force with the mandate to make

specific proposals on moving forward on aid for trade to the WTO General Council in

July 2006. In its July report – one of the few instances where a deadline established in the

Doha round was met – the taskforce stressed the central role of country ownership and of

mainstreaming trade into countries’ development strategies, and called on donors to

provide additional funding on a predictable basis. The report defined aid for trade as

covering assistance for trade policy (including training, analysis, and institutional and

technical support), trade development activities (including trade and investment

promotion, business support services, trade finance and other activities), development of

trade-related physical infrastructure, building productive capacity, and support for trade-

related adjustment. This wide definition of aid for trade implies that many services will

be covered, although where the boundaries may lie in practice remains to be determined.

The report proposed that WTO members explore the necessity of establishing a

mechanism similar to the Integrated Framework for Trade-related technical Assistance

(IF) – a joint venture involving the IMF, ITC, UNCTAD, UNDP, WTO and the World

Bank that assists LDCs in identifying trade priorities and designing project proposals to

address them – to assess priorities in non-LDCs; calls for donors to make funds available

for building infrastructure and removing supply-side constraints – over and above

capacity building and technical assistance – including in the form of co-financing with

multilateral development bank; urged donors and agencies, together with regional banks

and organizations, to step up their efforts to identify regional, sub-regional and cross-

border trade projects; proposed an annual review of Aid for Trade by a monitoring body

in the WTO to be discussed in the WTO General Council, and suggested that an

assessment of aid for trade be included in WTO Trade Policy Reviews.11

11 See Prowse (2006) and Njinkeu and Cameron (2007) for in-depth discussions of “aid for trade,”
including the genesis and functioning of the IF and options for moving forward.


The taskforce does not provide specific proposals in its report to operationalize its

recommendations. Numerous questions remain to be resolved, including how resources

should be managed and allocated, what countries will be eligible, and what the role of the

WTO and the various development institutions should be. Whatever is agreed on the

allocation mechanisms and modalities, much of the aid for trade agenda at the country

level in our view revolves around improving the quality and cost of services. The agenda

goes far beyond technical assistance to help countries make market access commitments

– the focus of much current assistance (as illustrated for example by the language on

technical assistance for services negotiations in the Hong Kong ministerial declaration). It

spans helping countries overcome the political economy factors that impede

liberalization; improving domestic regulation; adopting measures that spread the benefits

of liberalization to poor and disadvantaged households; support for the pursuit of regional

cooperation; and measures that are preconditions for obtaining and exploiting better

market access in export markets. What follows briefly discusses each of these areas.

Political economy: redistributing rents and dealing with adjustment costs

Poor policies in many countries often reflect standard political economy forces: those

who gain (or are not hurt) from current policies are more economically and politically

powerful than those who lose. In the case of telecommunications, for example, the

incumbent provider may confront an administered price structure (with artificially high

international prices and artificially low local prices). Liberalization will require tariff

rebalancing to allow the incumbent to compete on the international segment. The

resultant increase in local call prices is likely to be resisted by the politically vocal urban

consumers, though the prospect of more competitive mobile telephony may dilute such

opposition. Putting in place transparent and credible compensatory measures (e.g.

voluntary retirement schemes, access to cheaper mobile telephony) could help persuade

the incumbent’s employees and urban consumers to accept reform.

Similar forces play out in other sectors. In Zambia,12 a country that being

landlocked confronts higher transportation costs than many coastal countries, high costs

are partly due to restrictions that Zambia imposes on air and road transport. While these

12 What follows draws on detailed analyses in Mattoo and Payton (2007).


are detrimental to exporters, they benefit import competing interests and domestic

transport service providers.13 In accounting, local professionals in Zambia are geared

almost entirely towards the lucrative large firm market and the use of international

accounting and auditing standards. Although these are recognized to be excessively

burdensome (costly) for SMEs, the accounting profession has an interest generating the

revenue associated with audits.

Identifying the magnitude and incidence of the costs and benefits of prevailing

policies that inhibit competition from foreign providers and developing mechanisms to

assist losers is one area where aid for trade resources can make a difference in helping

governments deal with vested interests that resist changes to the status quo.

Implementing appropriate domestic regulation

As noted previously, regulation is often needed in services sectors to achieve efficiency

and equity objectives. Designing appropriate regulatory standards and institutions takes

time, as they often must be tailored to national circumstances to be effective and attain

the desired objective. An increasing body of evidence has shown that a “one size fits all”

approach – including international “best practice” norms – may not be appropriate.

Reverting to the example of Zambia, in addition to the accounting example just

mentioned, burdensome regulatory requirements for banks relating to documentation,

collateral, and money laundering restrict access to credit for small enterprises and the

rural poor, while not affecting much large firms or the urban rich. A fear of being

blacklisted generates a chilling effect on the incentives for banks to explore or propose

less burdensome alternatives to regulatory requirements.

The Zambia case illustrates the types of complementary measures that will have

the most effect in increasing the gains from liberalization will not be uniform across

countries. Barth, Caprio and Levine (2006), in the first comprehensive cross-country

assessment of the impact of the Basel Committee's influential approach to bank

regulation, conclude that there is no evidence that any single set of “best practices” is

appropriate for promoting well-functioning banks. There is need, therefore, for a high

13 E.g., foreign entry in cabotage activities is prohibited and international transporters may move products
between two foreign countries only if they pass through their own country.


degree of country specificity in both diagnosis and remedial action. This is more time-

and labor-intensive – i.e., expensive – than is the adoption of (international) norms “off

the shelf.”

Improving domestic access to better services

For the poorest countries in particular, the desired investment response to liberalization

(entry by foreign providers) may be muted and take long to materialize.14 Structural

factors such as economic size or location may imply that some countries or parts of

countries will not be attractive enough to induce entry by private firms, whether foreign

or domestic. Or, the market may be too small to allow vigorous competition. Such

situations will result in limited access, if any, for many poor households or rural

communities. Improving the distribution of access to services could be achieved by

targeting aid for trade on service providers to encourage them to provide services in

remote and disadvantaged regions in poor countries and/or to lower the prices of such

services below what would be needed to cover costs. In our view this could be an

important dimension of an effective “aid for trade” strategy to complement and support

multilateral trade reforms. Here we are not thinking of fiscal investment or entry

incentives of the type offered by virtually all developing countries to foreign investors.

These are costly and of dubious value. Instead, the idea is to use development aid funds

to induce services firms – foreign or nationally owned – to provide specific services to

households that otherwise would not be served.

The experience of a number of countries in the last decade has improved our

understanding of how universal access policies can be used to complement market-based

reforms to improve access for the poor to infrastructure services. In network industries

such as telecommunications or electricity private providers could compete for

performance-based subsidies related to providing services to the poor.15 This would

ensure that the poor to reap some of the benefits of competition, and while minimizing

outlays for the government – the “reverse auction” process allows it to discover the true

14 What follows draws in part on Hoekman and Mattoo (2007).
15 The picture is less clear for other, especially social, services. We do not know whether this is because
these services are inherently different, e.g. because performance is so much more difficult to measure, or
because governments have been less willing to experiment with new policies in these areas.


cost of service provision. Countries such as Chile, Peru and Uganda have put in place

such mechanisms, which have helped to expand services to areas that otherwise would

not have access. Based on the Chilean experience,16 Kenny and Keremane (2007)

estimate that an upper bound on the amount needed for achieving universal access to

basic telecommunications using competitively awarded subsidies to private providers in

developing countries is some $5.7 billion. Of this amount, $1.8 billion could not be

supplied by a reasonable tax on existing providers, and would need to be generated from

outside the sector. Most of this – some $1.5 billion –would be needed in Africa.

An international arrangement that replicates the key elements of successful

national schemes may be one way to use additional aid for trade resources to increase

support for pro-competitive reforms. This could involve countries (or regions) that are

willing to eliminate barriers to investment being given assistance to put in place both the

necessary regulatory reforms and granted access to a “universal service provision fund”

in instances where the investment response from domestic and foreign firms had been

inadequate. Funds would be made available to provide a subsidy to firms to create

infrastructure and/or provide services in the relevant region or country at pre-specified

terms. Along the lines of the policies put in place in Chile, the Dominican Republic, Peru,

and Uganda, these terms could be established as the result of an reverse auction or

bidding process under which firms would indicate the minimum level of subsidy they

would require to fulfill the mandate set out by the government. Note that this form of

assistance does not target specific industries or firms, as would industrial policies or trade

preferences. Rather the objective would be to improve the availability and quality of

services for all firms, farms and households in areas that would otherwise be


16 The subsidy needed to provide universal access in Chile varied across sub-regions, with poor, sparsely
populated areas requiring a larger per capita subsidy. Income density explains over 60 percent in the
variation of subsidy cost. Kenny and Keremane (2007) therefore use income density data for other
countries to estimate what would be needed to achieve universal access.
17 In the case of trade preferences proposals have been made to shift towards financial instruments, on both
efficiency and systemic grounds, and as a mechanism to compensate beneficiary countries for the erosion
of the value of preferences as MFN barriers are lowered. The services “aid for trade” proposals made in this
paper could also be part of an effort to address preferences erosion losses, but they are primarily focused on
the set of countries that have not been able to utilize preferences as a result of supply constraints. See e.g.,
Hoekman and Prowse (2005) for a discussion of preferences and aid for trade.


Supporting regional cooperation on services

The potential benefits of regional cooperation in addressing supply side constraints for

small and land-locked countries can be large. Regional cooperation can lower costs and

enhance global competitiveness of exporters by removing duplicative regulatory controls,

and allowing firms and governments to realize economies of scale by spreading the fixed

costs of services provision and regulation over a larger area. The establishment of

transport and trade facilitation corridors linking two or more countries can be a

mechanism that reduces trade costs both directly and indirectly – by increasing the

incentives of all countries involved to monitor “performance” of the corridor.

For smaller countries, regulatory cooperation may allow the substantial fixed

costs associated with regulatory bodies to be shared. For example, in basic

telecommunications, apart from spectrum monitoring equipment, computers and

programs, there is the cost of professional assistance for activities such as

interconnection, cost estimation and spectrum management. An example is the Eastern

Caribbean Telecommunications Authority (ECTEL), the first regional

telecommunications authority in the world. Although the member countries retain their

sovereign power over licensing and regulation, ECTEL provides technical expertise,

advice and support for national regulations. Apart from the economies of scale in

establishing a common regulator, there are at least three other advantages. It will

promote the development of harmonized and transparent regulation in the region, allow

for a greater degree of independence (and hence credibility) in regulatory advice, and

enhance bargaining power in negotiations with incumbents and potential entrants.

Technical assistance to determine “what, where and how much” is particularly

important in the regional context. For example, should regulations in say, professional

services be harmonized first within a subset of, say, COMESA countries, on a COMESA-

wide basis, or directly vis-à-vis the EU (in the context of the future Economic Partnership

Agreement), or not at all? To some extent the needs confronting governments with

respect to regional cooperation are similar to those that arise in the GATS context:

whether to bind (in some or all dimensions) immediate or gradual market opening, or not

to bind at all. But much of the agenda at a regional level will span issues that are not

relevant to a multilateral context – e.g., “local” cross-border spillovers or club goods such


as roads and shared ports, joint tourism marketing, development of regional infrastructure

hubs, etc.

Facilitating market access through broader cooperation, particularly on Mode 4

Facilitating regulatory cooperation could help deal with apprehensions about

liberalization on all modes. For example, in financial services, confidence in cooperation

by the home country regulator of suppliers could facilitate greater openness to both

commercial presence and cross-border trade by host countries. Similarly, in international

transport services, confidence in the enforcement of home-country competition law may

increase the willingness to liberalize in importing countries.

The area that is probably of greatest interest to many developing countries –

whether large emerging markets or the LDCs – in direct trade terms is to achieve

progress on mode 4. To date, mode 4 has been (another) millstone for the services

negotiations. To support a positive outcome on mode 4, Members need to recognize that

simply asserting that mode 4 is about trade in services and not about migration cannot

dispel the deep-rooted fears raised by the entry of foreign providers in many countries.

Whatever one’s views of the legitimacy of those fears, to make progress they have to be

acknowledged and addressed.

Immigration authorities in host economies must be assured that source countries

will cooperate to screen services providers, to accept and facilitate their return, and to

combat illegal migration. The approach pursued to date in the WTO by developing

countries has been to request that potential host countries make binding commitments on

an MFN basis, regardless of the conditions that prevail in source countries or measures

that governments in such countries should implement in order to manage mode 4 trade.

One way to take a more cooperative and less antagonistic approach to mode 4 is to draw

upon the experience of a few relatively successful bilateral and regional trade

agreements. Greater progress might be feasible if more is done to also impose obligations

on source countries. This is a key element of regional agreements (e.g. APEC) that have

facilitated mobility of skilled workers and bilateral labor agreements (e.g. between Spain

and Ecuador, Canada and the Caribbean, Germany and Eastern Europe) that have to a

limited extent improved access for the unskilled. Source country obligations in these


agreements include pre-movement screening and selection, accepting and facilitating

return of workers, and commitments to combat illegal migration. Cooperation by the

source can help address security concerns, ensure temporariness and prevent illegal labor

flows in a way that the host country is incapable of accomplishing alone. In effect, such

cooperation constitutes a service for which the host may be willing to “pay” by allowing

increased access.

How might such elements be incorporated in a multilateral agreement? One

possibility is that host countries commit under the GATS to allow access to any source

country that fulfills certain pre-specified conditions – along the lines of mutual

recognition agreements in other areas. Even if these conditions were unilaterally specified

and compliance determined unilaterally, it would still be a huge improvement over the

arbitrariness and lack of transparency in existing visa schemes. Although negotiating

these conditions multilaterally and establishing a mechanism to certify their fulfillment

would be an improvement over the unequal, non-transparent and potentially labor-

diverting bilateral context, this is simply not feasible in the short run. Given the large

differences in the ability of source countries to satisfy whatever conditions are put in

place there is a clear case for high-income countries also providing assistance to poorer

countries to attain them. This is an area where regulatory cooperation between host and

home countries, supported by development assistance from rich countries, could do much

to assuage fears on the part of voters and governments in the North that mode 4 is simply

another form of long-term migration.

4. Concluding Remarks

Little progress has been made in WTO services negotiations since these were launched in

2000. In part this is because liberalization of trade in goods has been central to discussion

to date – there has been less interest in, and thus attention given to, the services agenda.

The neglect matters. Greater trade in services can do much to improve consumer welfare

and the productivity of firms and farms in WTO members by providing a greater variety

of quality services at lower prices.

WTO members have begun to recognize some of the constraints affecting

multilateral cooperation on services trade policies. The shift to a small group, plurilateral


set of negotiations in 2006 reflected recognition that many developing countries have

little incentive to participate in mercantilist bargaining over market access. The

increasing prominence of “aid for trade” reflects increasing acceptance of the idea that

market access negotiations need to be complemented by measures to help developing

countries benefit from liberalization.

A precondition for achieving greater ambition in the services negotiations is to put

in place mechanisms that will bolster pro-competitive regulation and strengthen

regulatory authorities in developing countries. Many countries need assistance to put in

place the regulatory mechanisms that can help ensure the potential benefits from

liberalization are realized. There is great potential for donor countries to both do good –

assist developing countries to benefit from services-related reforms – while also doing

well in terms of obtaining better access to developing country markets.

Accommodating the interests of the small and poor countries by providing them

with “aid for trade” in services is desirable in itself, but also necessary to ensure smooth

and expeditious progress in the WTO. Aid is a necessary complement, not a substitute for

the core role of the WTO: to provide a mechanism to make binding policy commitments.

All countries, including the poorest, can benefit from making reform more credible and

certain through legally binding international commitments that are costly to revoke. Even

in instances where there is reason to defer market opening, for example, to give the

incumbent and/or regulator time to prepare for competition, there is still a good rationale

for governments to make reform objectives credible through binding commitments to

future liberalization. Such commitments avoid the danger of perpetual infancy and hence

perpetual protection by confronting incumbents and regulators with a credible deadline

by when they must be equipped to deal with openness.

The comparative advantage of the WTO in the aid-for-trade context is to act as a

focal point for the trade-related capacity building agenda – providing “space” and a

mandate for trade interests in developing country members to defend trade projects as

priorities for national action and support by donors and international agencies. We have

argued in this paper that addressing national trade needs and priorities must span the

services sectors. Doing so may over time bolster support in developing countries for

making multilateral liberalization commitments. But even if it does not result in such an


outcome, a much greater emphasis on services in the operationalization of aid for trade

will be beneficial in itself.

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