Services in Regional Trade Agreements: Implications for India

Abstract

Service sector has emerged as the largest and fastest-growing sector in the global economy in the last two decades, providing more than 60 per cent of global output and, in many countries, an even larger share of employment. The growth in services has also been accompanied by the rising share of services in world transactions. In fact trade in services has grown as fast as trade in goods in the period 1990- 2003 (6% per annum). In recent years the number of international agreements aiming to liberalize and promote trade in services has increased dramatically. The General Agreement on Trade in Services (GATS), negotiated as part of the Uruguay Round and followed up in Doha round has propelled the process of services negotiation but till date has limited success. In contrast to this, much of the recent and current international treaty addressing trade in services has occurred at the regional and bilateral levels. Traditionally, Regional Trade Agreements (RTAs) have focused on the liberalization of merchandise trade among members but new trends show inclusion of services. Examples include the Chile, Singapore Free Trade Agreements (FTAs) with the US, and the North America Free Trade Agreement (NAFTA), which have provisions allowing temporary entry of business professionals into member countries to facilitate trade in services. Among the roughly 153 RTAs operational in the world today, 43 are economic integration agreements notified under the GATS Article V.2 Between 2001 and 2006, 35 RTAs with services, constituting approximately 20% of all notifications, were notified to the WTO. Some of the important agreements in Asia Pacific region which included services are Australia and New Zealand Closer Economic Relations Trade Agreements (ANCERTA), ASEAN Framework Agreement on Services (AFAS), etc. These efforts were followed by a proliferation of similar agreements such as that between Singapore and Australia in 2001, and Singapore and the US in 2002. As of 2006, the US has concluded more than 10 RTAs with strong services chapters. The EU has also entered into RTAs with services chapters with countries such as South Africa, Mexico and Chile. While the preceding examples are drawn from North-South RTAs, even the South-South RTAs are seen to be conforming to the trend.

The growth of output in the service sector in India has been spectacular in recent times which got reflected in a higher contribution in the GDP. As a consequence of this, along with its move in the GATS negotiation, India has also plunged into Comprehensive Economic Cooperation Agreement (CECA) through signing the India-Singapore CECA. Of late, its attempt to convert India-Sri Lanka FTA into another CECA and negotiation attempts with partners like EU, Malaysia, etc. clearly shows its inclination to include services in the new agreements. Services are intangible, mostly indivisible and can’t be stored. Its developmental impact though quite overwhelming is difficult to measure. The data on service sector is also difficult to capture. Due to all these, it is problematic for a developing country to develop its offers and commitments in a structured fashion in case of trade negotiation for services sector. At the same time, many service sectors are under tight control even in developed countries. Licensing, quota, regulatory structure, citizenship criteria, local content, subsidies etc are quite common in service sectors. Since services trade often requires (temporary) movement of provider or consumer, restrictions on services mostly arises from regulations and discriminating requirements regarding this movement. Therefore barriers to trade in services are particularly difficult to identify. Also, most of these barriers do not occur at the border. Developing countries are apprehensive in case of north-south services negotiation due to lack of transparency and information about the developed country service sector. Service sector commitments are riddled with lots of market access limitations and MFN exemptions which is common even in case of regional negotiation. Depending upon the sensitivity as well as technological levels, several components of different services are generally kept unbound.

Sometimes, some modes of services (such as mode 4) have been kept unbound even for sub-component of a sector. Developmental impact of any services agreement needs to be judged from the commitment as well as negotiation strategy. This is important as several countries are pursuing GATS Plus commitments. The CECA has progressed beyond GATS understanding the current business environment. Negotiations on domestic regulation in GATS have progressed to the level of framing a text for adoption while in case of regional agreements more ambitious approaches are observed. The present paper focuses on India’s attempt to integrate with the world economy with service sector liberalistaion and understanding its strategy in services negotiation.

The structure of the paper is as follows: Initial section will focus on introduction and an overview of some select RTAs having special attention towards service sectors. Section 2 provides a brief overview of India’s performance in the services sector, followed by a more detailed examination of the contribution of the service sector to growth, and the composition of services trade in Section 3. In particular, we’ll discuss the change in pattern of trade from the traditional goods sector to services. Section 4 examines India’s involvement in regional trade blocs keeping an eye on services sector. Several potential RTAs with services focus will also be discussed. The paper will make an attempt to develop a negotiating format for some of the important services understanding the current status of services in the partner countries as well as in India. While doing so, it will make an attempt to identify major barriers faced by India in some of the exportable services.These issues will be discussed in section 5. Section 6 will provide conclusion and induction from the major findings.

Keywords: regional trade agreement, services, India

JEL Classification: F13, F15