Abstract
The economics of international trade agreements enjoys an established literature which has illuminated many features of trade agreements from the real-world scenarios. However, most of the insight has been developed in the context of international trade in goods until recently. The importance of trade in services has increased in the recent years as a response to the historical unimportance it has received. Consequently, the researchers and practitioners have started addressing the literature gap of the trade-in-service agreements at international level. The purpose of this assignment is to catalogue the differences between the goods trade and trade in services at international level in the context of the trade agreements provided by the World Trade Organization.
The terms-of-trade theory has been incorporated in this research work as an attempt to finding answers with the purpose of filling the research gap while spreading the normative message that the shallow-integration technique of the General Agreement on Tariffs and Trade can be lined in with the General Agreement on Trade in Services if the data is present. There is an increasing call of data on trade in services. The efforts to develop and collect such data by the World Trade Organization and other agencies are under way. The successful efforts in this regard will provide a valuable input in the process of deep-integration of the current structure of the General Agreement of Trade in Services.
Introduction
The World Trade Organization is a global international organization that deals with the rules of trade between the nations. Thus, it operates a system of trade rules. At large, the organization is aimed at facilitating the importers, exporters, and producers of goods and services to conduct their businesses at international level. Overall, it opens trade for the benefit of all. The organization provides the governments with the much-need forum for negotiation of trade agreements as well as gives them the place to address the conflicts arising between them during the process of trading of goods and services. Thus, it is the platform for them to address any problems arising between them over the international trade agreements. The organization is run by its member states. The membership takes all decisions as a whole either through the ministers or their delegates or ambassadors. As a matter of fact, the agreements of the World Trade Organization are complex and lengthy because it includes legal texts that covers a collection of various areas relevant to the subject matter. However, the documents are made under a number of simple, fundamental principles which are the foundation of the multilateral trading system.
The terms-of-trade theory has been incorporated in this research work as an attempt to finding answers with the purpose of filling the research gap. It is a theory that accounts for several features of the General Agreement on Tariffs and Trade (Bagwell & Staiger). This theory is motivated by salient features of service trade, augmented with a set of restrictions, on the trade data and policy instruments available to the governments. The General Agreement on Tariffs and Trade is the central World Trade Organization agreement that covers goods trade. On the other hand, the General Agreement on Trade in Services is the central agreement that covers trade in services. As the agreements are operated by the global organization, they work at the international level. Despite the fact that both of the agreements result in contract of sale, they operate strikingly differently from each other at various levels. The General Agreement on Tariffs and Trade has been successful in liberalizing the goods trade among its members. The General Agreement on Trade in Services, on the other hand, has been unsuccessful in achieving its target in this regard (Francois and Hoekman). Thus, there is a difference in the level of success achieved by each type of the international agreement.
The purpose of this assignment is to catalogue the differences between the goods trade and trade in services at international level in the context of the trade agreements provided by the World Trade Organization. The categories include structural differences, differences in basic approaches, different type of integration, different types of challenges, and the application of the international agreements and the terms-of-trade theory. The terms-of-trade theory has been incorporated in this research work as an attempt to finding answers with the purpose of filling the research gap while spreading the normative message that the shallow-integration technique of the General Agreement on Tariffs and Trade can be lined in with the General Agreement on Trade in Services.
Structural Differences
The first General Agreement on Tariffs and Trade was negotiated in 1947. Its disciplines were elaborated by several subsequent treaties within the system of the World Trade Organization. The agreement itself was further refined and its commitments deepened by numerous subsequent negotiating rounds. The General Agreement of Trade in Services, on the other hand, is a result of more recent developments. It dates back to 1994. Thus, its disciplines are much more elaborated and complete than that of the agreement of goods trade and the ones in the service sectors. Nevertheless, the legal structure of the agreement of trade of services is much more dramatic than that of the agreement of goods trade. It also contains the most modern disciplines of the World Trade Organization as well.
Moreover, the General Agreement on Tariffs and Trade came as a response to the post-World War II high tariff policies. They followed the Smoot-Hawley Tariff Act of 1930 in the United States and emerged globally. A product-to-product basis pursuant to the General Agreement on Tariffs and Trade Article II was adopted to negotiate the tariff ceiling or bindings. Under which, the member countries are under no pressure to reduce their tariff rates neither are the tariffs prohibited. Moreover, the member countries are given with the freedom of choosing the strategy of reciprocal tariff reductions with the purpose of opening their markets. Concurrently, the substitution of other forms of alternatives are prevented by the General Agreement on Tariffs and Trade.
However, there are the prohibitions on quantitative restrictions, regulations discriminating against imported goods, and domestic taxation. The discrimination is targeted by the ‘most favorite nation’ obligation of the international agreement. The final factor creating incompleteness of the international agreement concerning goods trade was recognized by inclusion of the provision allowing member countries to seek redress if the domestic policy has been changed in some way by the importing government. Although it is not particularly prohibited by the General Agreement on Tariffs and Trade but it curtails the trade. It upsets the expectation associated with tariff commitments in the context of reasonable market access. It is the non-violent doctrine.
The General Agreement of Trade in Services, on the other hand, maintains a profoundly different structure. It defines four modes of trade. Firstly, there is Mode 1 trade which includes a cross border transaction of a service by the exporting countries to the consumers in the importing countries. For instance, A Swiss national buys an insurance policy from an America and receives the insurance policy by wire transfer or mail. These cross-border transactions are the closet replicas of the traditional trade in services. However, these is a difference between the two, i.e., the transactions are often remained unobserved by the importing government due to the fact that they do not come into the attention of the customs inspectors and do not pass through port facilities. Therefore, Mode 1 trade transactions are not much taxed or regulated otherwise.
Mode 2 trade in services includes consumption of a service by a national of another importing country residing or living in the exporting country. For example, a tourist gets haircut in France. Mode 2 trades are also not much taxed and regulated by the governments. Therefore, both of the first two modes of trade in services are de facto free trade. They are not much affected by the General Agreement of Trade in Services. There are no formal commitments on these two modes by the governments as well; and if there are, they are no more than just promises for not interfering with such trade transactions. Therefore, the free trade policy is preserved which had been practiced for most part before the General Agreement of Trade in Services.
Mode 3 trade in services includes establishment of a commercial presence by a foreign service provider in the importing nation. For instance, a domestic branch is opened by a foreign law firm or bank. The importing governments are in rule in these situations. They can largely regulate services or restrict trade especially in the scenario of establishment of domestic offices by foreign businesses or organizations. Such restrictions are commonplace. Mode 4 trade includes employment of foreign nationals in the domestic offices of foreign business after establishment of a commercial presence in the importing nations. For example, the foreign law firm or bank does not only open a local branch in the importing country but also hires nationals of their home countries as well. The importing counties regulate these transactions extensively because they touch immigration policy.
Differences in Basic Approaches
The basic approach of the General Agreement on Tariffs and Trade is termed as tariffication. It reduces tariffs and precludes using other policy instruments for protectionist objectives. In doing so, tariffication channels all remaining trade protection into tariffs which are published and imposed at the borders. Thus, the protection becomes more transparent. Eventually, the number of instruments in play are reduced which reduces the cost of trade negotiations (Bagwell and Sykes, 2004). They also minimize the deadweight cost of production (Schwartz and Sykes, 1996).
It may also be termed as shallow integration which indicate detailed product-by-product negotiations on tariff – the single border instrument. It also means that the integration is limited in its scope and does not expand beyond the border transactions and measures such as domestic regulations and taxation which are subject to the cross-border rules. These rules are applied in all markets of goods. Also, these rules are applied without differentiating the goods subject to tariff binding and the ones that are not. There are several additional treaty instruments such as problems concerning technical or regulatory barriers to trade, the use of government subsidies, and countervailing duties and antidumping practices, that have evolved the goods market obligations.
Nevertheless, shallow integration remains at the heart of the general approach of the General Agreement on Tariffs and Trade in the goods market. For instance, the Agreement on Sanitary and Phytosanitary Measures by the World Trade Organization requires the measures of limiting application of domestic regulations be based on scientific risk assessment. Another example in this regard is that of the Agreement on Technical Barriers to Trade by the World Trade Organization requires obedience of some principles by the product regulations such as keeping the regulations trade restrictive only to the limit where they are efficient in achieving the legitimate regulatory objectives. Moreover, the Antidumping and Subsidies Agreements of the international organization requires certain procedural and substantive rules to be satisfied; they must be satisfied before imposition of countervailing duties and antidumping practices by a member on any imported product.
The General Agreement of Trade in Services, on the other hand, maintains a profoundly different approach. The barriers in international agreements of trade in services largely arise from the restrictions on the Mode 3 and Mode 4 trade. Thus, the focal point of the General Agreement of Trade in Services primarily remains on such transactions with special focus of sectoral commitments on the Mode 3 services. Based on this discussion, it can be argued that the dimension of the General Agreement of Trade in Services remains different from that of tariffication. By definition, tariffs are taxes imposed on cross-border transactions. Thus, they play a negligible role in the services sector. For this reason, in contrast to the General Agreement of Trade in Tariffs and Trade, tariffs are unavailable by definition for the Mode 3 trade. Same applies on Mode 4 trade transactions as well.
Moreover, the General Agreement of Trade in Services does not support any particular policy instrument and thus, does not channel trade protection. Thus, there is no applicable analogous between the international agreements concerning services and the General Agreement of Trade and Tariffs Article IX and Article III. The former prohibits quantitative measures whereas the latter deals in domestic regulations and taxation. Instead, the member of the General Agreement of Trade in Services can use any of these instruments for negotiating tariff binding under the General Agreement on Trade and Tariffs Article II. Thus, the member government are given the capacity to make or do not make any commitments. The members must recognize the restrictive policies if the commitments are made. These commitments are divided into schedules of national treatment exceptions and schedules of market access restrictions. Any commitment that is not memorized in the schedules is waived off and cannot be employed on the transactions in the future.
A national treatment obligation is imposed for the sectors under the General Agreement of Trade in Services where market access commitments are made between countries. These obligations are subject of sector by sector negotiation. Therefore, the complete freedom of action is retained by the members of the General Agreement of Trade in Services except for the principle of most favorite nation. Transparency is the fundamental obligation in the service sectors where the commitments are made. Thus, the members have to face a wide array of regulatory policy instruments, tax, and quantitative restrictions for protective purposes. Over time, further changes may be made through negotiations.
Different Type of Integrations
The difference in the level of success achieved by each type of agreement raises the question that which factors are playing the role in this context. First of all, both of the agreements have attempted different types of integrations despite the fact that both of them seek to expand market access. The agreement of goods trade has been designed with shallow integration in minds of the researcher and practitioners whereas the design of the agreement of trade in services was developed with an orientation towards deep integration. The former achieves market expansion through negotiating reductions in the amounts of tariffs whereas the latter seeks expansion through negotiating removal or change of domestic regulation in the service-sector of the countries involved in the agreement.
Different Types of Challenges
Due to the difference in orientation of the two international agreements, the agreement of trade in services faces challenges for negotiations which the other agreement does not have to face. It has been provided in literature that tariff and non-tariff barriers are distinguished to trade (Copeland and Mattoo). Tariffs are the discriminatory taxes on trade; they are very transparent and tend to be measured easily. Thus, making agreements aimed at liberalization of tariffs in order to ease the process of transactions are very commonly found in the context of international trade. The only limitation arises from the government who, at times, would not be open towards the policy of liberalizing their tariffs for one reason or another (Copeland and Mattoo).
The non-tariff barriers, on the other end of the discussion, are complex. They are pervasive which indicates that negotiations in this sector are not easy. One of the many reasons of the pervasiveness in the sector is the presence of market imperfections. Most of these barriers come into existence as a side-effect of the domestic regulations. For instance, insurance companies are regulated to ensure their solvency, engineers are certified to ensure that the bridges they build will not collapse, and doctors are certified to ensure safety of the patient; all because of the issues in asymmetric information. However, the local suppliers can be given as edge by the authorities as they can manipulate these rules. For example, if a regulation requires that an engineer has to be certified from a domestic university instead of attaining education at an international university will ensure strength of the bridge made by that engineer but it will prevent consumers to enjoy the work of an engineer qualified from a high-class foreign university. Therefore, the trade policy must be able to differentiate between the beneficial effects and protective effects of a regulation and suggest rules for liberalization while achieving the other legitimate policy objectives (Copeland and Mattoo, p 104).
The International Agreements and the Terms-of-Trade Theory
The terms-of-trade theory will help interpreting the deep-integration focus of the General Agreement on Trade in Services as well as clarifying the underlying problems in such international trade. Solving these problems will help the researchers and practitioners in considering alternative design approaches for the international agreements. It raises the question that if the shallow-integration technique of the General Agreement on Tariffs and Trade can be lined in with the agreements in services.
To answer this question, the logic of shallow integration must first be reviewed. It stems from the interaction between the General Agreement on Tariffs and Trade and the terms-of-trade theory. An international inefficiency existing under non-cooperative policy choices (Nash equilibrium) must be addressed through a trade agreement. It is later noted that Nash equilibrium does not provide a solution. The international inefficiencies arise because of the terms-of-trade manipulations which are the result of the trade taxes, i.e., import and export tariffs. Thus, the Nash Equilibrium is distorted in this context. It results in high Nash equilibrium trade taxes. Consequently, the trade values are made low. However, it consequently eliminates the policy distortions from an international perspective. Thus, the overall focus of the international trade revolves around expanding trade values and market access to efficient levels by lowering the tariffs. This logic fits nicely with the shallow integration approach of the General Agreement on Tariffs and Trade.
However, application of this logic on the agreements of trade in services raises several issues concerning the kinds of services that remain the focal point of the General Agreement of Trade in Services, the establishment of the foreign service providers of the importing countries, and the specific topic of this discussion, i.e., to catalogue the differences between the goods trade and trade in services at international level in the context of the trade agreements provided by the World Trade Organization. These are the Mode 3 services for which the tariffs and border taxes are not available because the import of these services does not cross the international border. However, the effects of trade taxes can in principle be replicated by other policy instruments but these alternatives are unavailable to the governments.
Such unavailability has two implications. Firstly, many of the Nash policies of the importing countries are contaminated with internationally inefficient terms-of-trade motives if an import tariff to manipulate the services terms of trade is lacking due to which protective distortions for wielding in the service sector are spread by the importing governments. Secondly, a potentially new international inefficiency in the Nash equilibrium is introduced in the absence of an export tax or subsidy due to the fact that this absence make the exporting country to rely, as it wishes to increase the income of the service-sector exporters, on the policy adjustments by the importing government. These two implications can go a long way to account for the broad structural differences between the General Agreement on Tariffs and Trade and the General Agreement of Trade in Services.
Applying the Shallow Integration Approach on the General Agreement of Trade and Tariffs
The two agreements are different in their structures, basic approaches, integrations, challenges, and application of terms-of-trade theory. The discussion on the normative message that the shallow-integration technique of the General Agreement on Tariffs and Trade can be lined in with the General Agreement on Trade in Services is important. Shallow integration means that the integration is limited in its scope and does not expand beyond the border transactions and measures such as domestic regulations and taxation which are subject to the cross-border rules. Although it remains at the heart of the general approach of the General Agreement on Tariffs and Trade in the goods market, the focal point of the General Agreement of Trade in Services primarily remains on such transactions with special focus of sectoral commitments on the Mode 3 services.
(Maurer et al.), explains that there is an increasing call of data on trade in services. The efforts to develop and collect such data by the World Trade Organization and other agencies are under way. The successful efforts in this regard will provide a valuable input in the process of deep-integration of the current structure of the General Agreement of Trade in Services. However, it has been found from the discussion that the approach of shallow integration for liberalizing services trade is significantly road-blocked by the Mode 3 service trade flows which include establishment of a commercial presence by a foreign service provider in the importing nation. It occurs beyond the challenges faced by the goods trade. The difference in the approach is primarily defined by the differences in the basic approaches of the General Agreement of Trade and Tariffs and the General Agreement of Trade in Services.
Conclusion
The General Agreement on Tariffs and Trade came as a response to the post-World War II high tariff policies in 1947. By definition, tariffs are taxes imposed on cross-border transactions. Thus, they play a negligible role in the services sector. A product-to-product basis pursuant to the General Agreement on Tariffs and Trade Article II was adopted to negotiate the tariff ceiling or bindings. They also include prohibitions on quantitative restrictions, regulations discriminating against imported goods, and domestic taxation. The General Agreement of Trade in Services, on the other hand, has four modes of trade and was recently developed in 1992. Both of the first two modes of trade in services are de facto free trade. They are not much affected by the General Agreement of Trade in Services and there are no formal commitments on these two modes by the governments as well. Mode 3 trade in services includes establishment of a commercial presence by a foreign service provider in the importing nation whereas Mode 4 trade includes employment of foreign nationals in the domestic offices of foreign business after establishment of a commercial presence in the importing nations. Therefore, the importing counties regulate these transactions extensively because they touch immigration policy.
This assignment has been focused on cataloging the differences between the goods trade and trade in services at international level in the context of the trade agreements provided by the World Trade Organization. The two agreements are different in their structures, basic approaches, integrations, challenges, and application of terms-of-trade theory. The discussion is carried out while spreading the normative message that the shallow-integration technique of the General Agreement on Tariffs and Trade can be lined in with the General Agreement on Trade in Services. It has been found from the discussion that the approach of shallow integration for liberalizing services trade is significantly road-blocked by the Mode 3 service trade flows. It occurs beyond the challenges faced by the goods trade. The difference in the approach is primarily defined by the differences in the basic approaches of the General Agreement of Trade and Tariffs and the General Agreement of Trade in Services. Moreover, complete and comprehensive data is required for successful application of the shallow integration approach on the international agreements. The successful efforts in this regard will provide a valuable input in the process of deep-integration of the current structure of the General Agreement of Trade in Services.
