World Trade Organization Negotiation on Trade in Services

Discussion Paper on Emergency Safeguard Mechanism

June 2001

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Introduction

Negotiations to further liberalise international trade in services are underway at the World Trade Organization (WTO) pursuant to the General Agreement on Trade in Services (GATS). The question of the possible development of an "Emergency Safeguard Mechanism" (ESM) to apply to trade in services is part of the negotiating agenda. This paper provides background information on this question and outlines a possible Canadian negotiating position with respect to the desirability of a safeguard for the services sector, and, to the extent that a safeguard is desirable, how it should be designed to support Canadian trade interests.

Comments and observations from Canadian services industries and other interested parties and stakeholders to help pursue Canada’s trade interests in the context of these negotiations on this matter are welcomed.

Address comments to:

Gilles Gauthier
Department of Finance
International Trade and Finance Branch
(613) 996-5466
Gauthier.Gilles@fin.gc.ca

"Emergency Safeguard" Negotiations and the GATS"

The General Agreement on Trade in Services (GATS) has been in effect since 1995 and represents the first multilateral framework of rules governing measures affecting international trade in services. The GATS does not currently provide for the use of an emergency safeguard mechanism. This question was debated at the time of the drafting of the GATS but the discussions were inconclusive and the matter was left for future work. The mandate to pursue negotiation on this question is provided for in Article X of the General Agreement on Trade in Services which states that:

While discussions have been engaged on this question over the past few years, no conclusion has been reached and the deadline has been repeatedly extended. During the last year and with the start of a new round of services trade negotiations in 2000, discussions have intensified and WTO Members have agreed to set a deadline of March 15, 2002, to conclude negotiations on this question. To date, Canada, as well as several other Members, has questioned the desirability and feasibility of a safeguard for trade in services given the structure of the GATS and the characteristics of services trade. Proponents of a safeguard, however, which are mainly developing countries, have argued that a safeguard mechanism is necessary because of the uncertainty regarding the potential implications for their domestic services suppliers of further liberalisation.

What is meant by an "Emergency Safeguard Mechanism"

An emergency safeguard mechanism is a form of "safety valve" to allow a government to provide relief to a domestic industry that is experiencing difficulties in coping with intensified international competition in the domestic market that has resulted from trade liberalisation obligations. In the context of trade in goods, it is typically a temporary measure that can be invoked under carefully prescribed conditions. It is generally applied following a complaint from a domestic industry and only after an investigation has concluded that the domestic industry was being seriously injured by increased imports. A safeguard measure usually takes the form of an import surcharge and/or a quantitative limitation imposed on imports of the subject product from all sources.

The WTO provides for the use of a safeguard measure on trade in goods pursuant to the Agreement on Safeguards^[1]. Canada, like most of its WTO trading partners, may impose safeguard measures on imports of goods based on its domestic legislation. Canada has not applied a safeguard measure since 1993 (trade in frozen beef case).

Despite its infrequent use, it is generally accepted that a safeguard clause is useful to the overall liberalisation process by providing policy flexibility to respond to unanticipated challenges of intensified competition from imports.

Trade Policy Context for an Emergency Safeguard Mechanism for Services Trade

The fact that a safeguard mechanism exists for trade in goods, and that it is generally considered useful, provides a starting point for considering the question of an emergency safeguard mechanism for services trade. Accordingly, an emergency safeguard mechanism could conceivably be considered necessary to provide temporary protection from unforeseen developments arising from service trade liberalisation commitments, and to strengthen domestic support in favour of pursuing further liberalisation commitments. Services trade, however, is by definition different than trade in goods. A safeguard provision designed for trade in goods cannot readily be transposed in a services trade context. For instance, there is a need to account for the intangible nature of services, the absence of well-developed statistical information on services trade and the fact that services are often delivered on the basis of a specific customer’s need.

The characteristics of services trade and the framework of the GATS also pose a number of conceptual challenges to the development of an ESM. For example, the GATS provides for a bottom up approach to liberalisation by enabling countries to decide which services sectors they are willing to accept binding liberalisation commitments (i.e., positive list). In other words, the GATS contains an inherent flexibility in its structure to exempt sensitive sectors from national treatment and market access commitments. In addition, trade in services can take the form of four different modes of delivery^[2]. Each mode has its own feature that reflects the conduct of business relevant to a particular service industry. The way international business takes place for the tourism industry is not the same as for engineering consultants, or financial services, or telecommunication, etc. As a result, in considering the possible development of an ESM under the GATS, particular attention needs to be paid to the diverse nature of services industries and how international trade operates in each specific sector.

Canada’s Services Sector: Domestic and Export Interests in a "Safeguard Mechanism"

The services sector is an important component of the Canadian economy. Trade in services^[3] represents approximately 20% of world trade. For Canada, export of services amounted to over $56.3 billion in 2000, representing around 12% of our total exports. Given the labour-intensity of most services exports, services trade supports a sizeable level of jobs. The Canadian economy has traditionally imported more services than it has exported, although the gap is narrowing due to the strong international trade performance recorded in recent years on several knowledge-based commercial services sector (e.g., communication, computer and information services, R&D, engineering).

Commercial services^[4] represent nearly half of all services exports and imports, and have registered the fastest growth. While the U.S. is the dominant market for Canadian services exports, accounting for roughly 60% of total services exports, our exports base is slightly more diversified than for goods and many of our fastest growing export markets for commercial services include developing countries in Latin America and South East Asia. In terms of imports of services, the US also accounts for more than 60%, although once again the fastest growing suppliers of commercial services are from Western Europe and a few developing countries.

Services trade also bears an indirect impact on trade in goods, as domestic service inputs are important for the production of goods destined for export. Services, therefore, play a more important role in international trade than what is indicated in services trade statistics alone.

(i) Domestic Interests

Canada has a relatively open trade regime for services. With liberalisation commitments in 352 out of a possible 620 sectors listed in the GATS, Canada’s commitments compare favourably to its key trading partners in terms of sectoral coverage and also in terms of the limitations on liberalisation included in its commitments (i.e.. number of reservations taken). Reservations generally represent restrictions on foreign ownership, residency or citizenship requirements and limitations on the type of legal entity that may supply a service. Given the already high exposure to international trade through the GATS and NAFTA, these domestic service industries are already accustomed to an international environment and it is not apparent that they would need to be further shielded from unforeseen development in international competition.

For sectors benefiting from some protection, either in the form of limitations or reservations in Canada’s trade commitments, or for sectors for which Canada has not made any commitment yet, the issue is whether the creation of an ESM would be of interest in the event that the sector would become covered by the GATS obligations. In other words, would a safeguard mechanism allow Canada to pursue further liberalisation by providing the ability to implement some form of" temporary protection" to support a domestic industry experiencing difficulties in coping with intensified foreign competition?

Canada has already made it clear that it will not negotiate trade commitments in the areas of health, public education, social services and culture. The creation of an ESM is therefore not relevant for these sectors. For other sectors where defensive interest predominates, the availability of an ESM is not likely to exert much influence on the degree of liberalisation that Canada may be prepared to accept. Typically, concerns over further liberalisation can be better dealt with at the time of making commitments with providing features such as phase-ins or transition mechanism rather than relying on the possible use of a safeguard measure.

Therefore, on the domestic side, the issue of ESM appears to be of limited interest, and only relevant to the very few sectors for which new sectoral trade liberalisation commitments might be contemplated and where these sectors have not yet experienced meaningful exposure to international competition. And, even for these sectors, alternative ways may exist, to deal with the particular concerns, for instance via phase-ins or transition periods. A safeguard would be relevant only for truly residual circumstances, unforeseen at the time of making the commitment. No such circumstance has surfaced to date after six years of entry into force of commitments made as part of the Uruguay Round.

(ii) Export Interests

At issue, from an export interest perspective, is how an ESM would impact on efforts to expand services trade. Many Canadian service providers are rapidly expanding their presence in international markets. In the last 15 years, exports of commercial services have grown at an annual average of l2.9%. Knowledge-based services represent one of the fastest-growing export areas. This has been accompanied by intensified efforts on trade promotion, including those of Team Canada Inc. In light of the growing significance of services exports to the Canadian economy, the eventual creation of an ESM could end-up working at cross-purposes with efforts to expand Canadian services exports if it were to become widely used.

It is difficult to predict the potential vulnerability of Canadian services exports to the use of an ESM by our trading partners. Clearly, Canadian exporters have a genuine interest to minimise risk of exposure to measures that could curtail their export markets. Based on the experience of trade in goods, it would appear that should an ESM be envisaged, it would be in Canada’s interests that it be carefully circumscribed and that its application be governed by high standards of transparency and due process.

Systemic Considerations

One of Canada’s objectives in the present GATS negotiations is to increase the participation of developing countries. It is generally considered that an ESM could contribute to the broad objective of achieving further liberalisation if it provides policy comfort to Members to expand the scope and content of their commitments. Indeed proponents of an ESM are several developing countries which see merits in an ESM as a tool to give them policy flexibility and to secure greater support from their domestic industry in pursuing their liberalisation efforts. As such, Canada’s attitude towards developing countries’ demand for an ESM will need to take into account our interests in securing greater participation of developing countries.

However, the link between liberalisation and the development of an eventual ESM is difficult to measure objectively. Under the GATS countries control the pace at which they liberalise via their schedule of commitments because liberalisation commitments are based on "positive" undertakings. The policy underpinning of an ESM depends more on the degree of desirability of such a trade defence instrument — i.e., assessed on its own merits - rather than its potential usefulness as a trade liberalisation tool.

In considering the creation of any ESM, careful examination will need to be paid to the policy implications of instituting a mechanism that would restrict, at least temporarily, access for exporters. In addition to ensuring that substantive standards provide clear guidance and predictability, the eventual creation of an ESM would need to rest on well-defined procedural requirements that minimise administrative discretion and ensure transparency, fairness and due process.

Summary of Key Issues

• Canada’s position in the negotiations regarding the possible creation of an ESM must be guided by our substantial trade interests.
• On the domestic side, the desirability of an ESM is not readily apparent. The Canadian services industry has already achieved a high degree of liberalisation. The existing structure of the GATS provides the necessary policy flexibility to deal with concerns of specific sectors where new liberalisation may be envisaged.
• On the export side, Canadian exporters could potentially be adversely affected by the use of an ESM by our trading partners, and therefore it will be essential to ensure that any such ESM is subject to rigorous standards and provide due process.
• From a systemic standpoint, Canada must remain mindful of the importance attached by developing countries to creating an ESM which they consider might facilitate their progressive liberalisation in the GATS.
• Should an ESM be envisaged, particular attention will need to be paid to the development of substantial standards and procedural requirements which would ensure that the use of this mechanism is carefully circumscribed and not prone to abuse.
• Overall, Canada’s participation in the discussions over an ESM will be guided by our overarching negotiating objectives for the GATS negotiations as laid out in Canada’s initial negotiating position of March 14, 2001.

Your Comments and Input

Please do not hesitate to provide your comments and input on the content of this paper and issues you consider to be relevant to the WTO negotiation of an "Emergency Safeguard Mechanism". Negotiations are at an early stage and your input will help to ensure that Canada’s negotiating position reflects the views of all stakeholders having an interest in services trade and the GATS.

Contact:

Gilles Gauthier
Department of Finance
International Trade and Finance Branch
(613) 996-5466
Gauthier.Gilles@fin.gc.ca

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¹  There are also "special safeguard" provisions in the WTO Agriculture Agreement and the WTO Agreement on Textiles and Clothing. [Return]

²  GATS Article 1 defines trade in services in terms of modes of supply. Trade in services may arise through: 1) mode 1: cross-border supply (i.e., supply of a service from the territory of a Member to the territory of another Member); 2) mode 2: consumption abroad (i.e., supply of a service in the territory of one Member to the service consumer of any other Member); 3) mode 3: commercial presence (i.e., the supply of a service by a service supplier on one Member through commercial presence in the territory of any other Member); 4) mode 4: presence of natural persons (i.e., the supply of a service by a service supplier of a Member, through presence of natural persons of a Member in the territory of any other Member). [Return]

³ Trade in services applies to international transactions involving fields as diverse as distribution, tourism, banking, insurance, transport, telecommunication, audio-visual and professional services such as accounting, architecture, and engineering. The term also applies to the international movement of capital, particularly direct investment and to the international movement of people when involved in the delivery of a service. [Return]

⁴ Commercial services include professional services such as financial services and legal services. They are divided in 26 categories, under 15 groupings. They account for about half of trade in services and comprise services components, further to Statistics Canada (Catalogue No. 67-203-XPB, 1999), such as communications, construction, insurance, computer and information, ‘financial, royalties and licence fees, non-financial commissions, equipment rentals, management, advertising, and related research and development, architectural, engineering & other technical, miscellaneous services to business, and audio-visual. It does not include transportation, tourism, and government services. [Return]