By Alicia Nicholls
Services providers – whether lawyers, accountants or IT professionals – know all too well the non-negligible costs and high regulatory barriers encountered when seeking authorization to ply their trade in a foreign land. It is with this reality in mind that on December 2, 2021, 67 members of the 164-member World Trade Organization (WTO) announced their successful conclusion of a uniform set of regulatory disciplines to make services trade less costly and regulatory environments more transparent, open and predictable for service providers.
The WTO Services Domestic Regulation was concluded by countries which collectively account for over 90% of global services trade, including the United States and China. While not yet a multilateral agreement, it is being hailed as a win for keeping the WTO relevant. Notwithstanding, the participant countries were mainly developed countries and no Caribbean Community (CARICOM) was among the participants.
Therefore, this first SRC Trading Thoughts for 2022 discusses this new agreement and examines some of the pros and cons CARICOM Member States may have to weigh should they decide to sign on.
Importance of services trade
Trade is often classified as either merchandise (goods) trade (visible trade) or services trade (invisible trade). Examples of services trade include telecommunications, transport, tourism and travel, among others. According to the WTO, services trade on average accounts for 50% of global trade in value-added terms. Often referred to as ‘intangible’ trade, services grease the wheels of the global economic engine and have been described by the WTO as the most dynamic aspect of global trade. Tourism/travel services, and to a lesser extent financial services, are the principal exports of most Caribbean countries.
The WTO’s most recent World Trade Report (2021) reveals that unlike goods trade, services trade in 2021 had not yet recovered to pre-crisis levels. It, however, outlines the role services trade can play in helping countries prepare for and cope with shocks (World Trade Report 2021). However, domestic regulation of services diverges among countries and they generally regulate services quite heavily for public policy reasons, such as consumer protection. For instance, a doctor from a foreign country is usually barred from legally practising medicine in another country unless his or her qualifications are recognized in that country. The problem comes where regulatory requirements are not transparent and are overly burdensome. Even where market access and national treatment commitments exist, differences among countries’ regulatory requirements and opaque procedures make the costs of trading services about double the cost of trading goods (WTO 2019).
The General Agreement on Trade in Services (GATS), one of the outcomes of the Uruguay Round, is the primary WTO agreement disciplining trade in services. GATS Article VI speaks directly to domestic regulation and tasking Members to ensure they administer any measures of general application affecting trade in services in a “reasonable, objective and impartial manner’. Paragraph 4 of that Article mandates the Council for Trade in Services to develop any necessary disciplines to ensure measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services.
Discussions on crafting disciplines on domestic regulations have been on-going at the WTO for some time, but with limited progress. As such, a subset of WTO members established the Joint Statement Initiative on Services Domestic Regulation on the margins of the WTO’s 11th Ministerial Conference (MC11) in 2017 with the aim of concluding by the (now postponed) MC12. Negotiations were open to all WTO Members to participate. While an agreement was reached in December 2021, Members are free to sign on after the fact, with the hope of the agreement reaching enough critical mass to be considered a multilateral agreement.
What is the SDRA?
The outcome is contained in a document called the Reference Paper on Services Domestic Regulation dated November 26, 2021. The disciplines apply to measures relating to licensing and qualifications requirements and procedures, qualification requirements and procedures, and technical standards affecting trade in services. The document is divided into three sections with the first section outlining sectoral coverage and scheduling modalities and special and differential treatment provisions. The second and third sections outline disciplines on services domestic regulation and alternative disciplines on services domestic regulation for financial services, respectively.
The disciplines do not prohibit countries from maintaining these requirements or procedures nor do they detract from away countries’ ability to regulate in the public interest. Rather, the signatory countries commit to ensuring their measures are transparent and ensure legal certainty and predictability and regulatory quality and facilitation.
For example, in order to promote transparency, they agree to establish appropriate mechanisms for responding to enquiries from service providers. Similarly, in order the promote regulatory quality and facilitation, parties undertake to, for example, limit applicants to having to approach only one competent authority to obtain authorization, to ensure fees are reasonable and transparent, and to accept electronic applications and authenticated copies of documents. These measures help to reduce waiting times and costs, resulting in ease of doing business, especially for small and medium sized enterprises (SMEs) which would be more disproportionately affected by regulatory barriers.
Pros and cons of joining for CARICOM countries
Although only those WTO Members which have signed on the agreement are bound by its disciplines, they have agreed to multilateralise the benefits. This means that non-participating countries like those in CARICOM do not necessarily have to sign on to the agreement for their service exporters to benefit from the easier regulatory conditions in those countries. A joint OECD/WTO (2021) study found that implementing the outcome would do four things: improve the business climate, lower trade costs to about US $150 billion annually, facilitate services trade and generate gains to all WTO members, including non-participating countries. However, it is worth highlighting some pros and cons joining the agreement might entail for CARICOM Members.
First, the economic devastation COVID-19 inflicted on tourism-dependent Caribbean economies, in particular, has further reiterated the perennial need to place our economies on a more diversified and competitive footing. Increasing the export of high value-added services is one of the line items in most CARICOM countries’ post-COVID-19 economic recovery and diversification strategies. However, the development of these sectors requires supportive business environments. Despite some notable improvements, and accelerated by the COVID-19 situation, CARICOM countries generally lag on global ease of doing business indices. Moreover, governments’ unilateral reforms could be more easily rolled back than reform commitments made at the multilateral level. One value-added of signing on to the agreement could be to lock-in existing reforms and accelerate the pace of reforms which would benefit both domestic and foreign service providers. However, commitments such as the opportunity for comment and information before entry into force might be onerous for smaller governments to honour.
Second, those WTO members which have signed on to the agreement will incorporate the agreed disciplines as “additional commitments” under Article XVIII of the GATS under their GATS schedules. One concern which CARICOM countries may have is signing on to additional WTO commitments at a time when they are still grappling with implementing commitments under the WTO Trade Facilitation Agreement, for example. Granted however, the agreement allows developing country members transitional periods of up to seven years following the disciplines’ entry into force, while also allowing those in need of an extended transitional period to make a request in accordance with the relevant procedures. It also encourages developed countries and developing country Members in a position to do so to encourage specific technical assistance and capacity building to developing countries, particularly least-developed countries. These can be done on the latter’s request or on mutually agreed terms and conditions. Therefore, in theory, this agreement provides another avenue by which CARICOM countries could obtain technical assistance for their business environment reform programmes. Additionally, and perhaps advantageously, the agreement does not contain reference to it being within the scope of the Dispute Settlement Understanding and therefore does not appear subject to dispute settlement.
Third, there is the possible signalling effect that signing this agreement could have to investors of the country’s commitment to encouraging a business-friendly environment. A country’s receptiveness to encouraging business activity and the ease of its business climate rank among important factors in investors’ business decisions.
The conclusion, albeit on a plurilateral basis, of uniform principles on services domestic regulation is a positive development for the WTO at a time when there is increased skepticism about the organisation’s relevance. Joining the agreement, however, brings both pros and cons. CARICOM countries considering joining after the fact would have to weigh whether doing so advances their regulatory reforms further than unilateral reforms would and whether the benefits of adopting multilateral commitments outweigh the possible burdens of implementation.
Alicia D. Nicholls, B.Sc, M.Sc., LL.B. is Junior Research Fellow with the Shridath Ramphal Centre for International Trade Law, Policy & Services of The University of the West Indies, Cave Hill. Learn more about the SRC at www.shridathramphalcentre.com.