Services trade: The unresolved dilemma of Mode 4
• Part IV text of the GATS talks about the Progressive Liberalization and the associated text talks of achieving “a progressively higher level of liberalization” through successive rounds of negotiations.
• Mode 3 accounts for about 55% of world trade in services, compared to 30% for cross-border supply (which is mode 1), 10% for consumption abroad i.e. mode 2, and 5% for movement of persons i.e. mode 4.
• Estimated development gains for developing countries from opening the OECD labour markets by 3% will be over US$ 150 billion. A strong, commercially meaningful outcome in mode 4 will have huge potential spill-over benefits for both developed and developing countries and LDCs.
• With 93% of global migrant stock being economic migrants, including suppliers of services, liberalizing mode 4 can be a win-win situation for both developed and developing countries.
The services sector is the most imperative economic sector for a majority of countries when measured as a share of overall production, and is the single largest source of employment. The World Trade Organization’s (WTO) General Agreement on Trade in Services (GATS), adopted in January 1995, represented the first attempt at the multilateral level to lay the groundwork for services trade liberalization. The GATS mandates WTO members to progressively open up trade in services through successive rounds of negotiations. Part IV text of the GATS talks about the Progressive Liberalization and the associated text talks of achieving “a progressively higher level of liberalization” through successive rounds of negotiations. However, the level of liberalization achieved or committed to is quite modest so far.
At the same time, since the entry into force of the GATS on January 1, 1995, WTO members around the world have concluded more than 150 regional and sub-regional arrangements containing disciplines on trade in services. A critical question that must obviously be asked is whether the daunting issues associated with services trade and investment liberalisation actually had any impact in causing this shift. Moreover, what are the potential implications for the multilateral trading system, GATS as a vehicle for further liberalization?
One of the daunting issues in this regard is the implementation of stringent policy for movement of natural persons through mode 4. It has been observed that mode 4 of services is the most restricted and least liberalized when it comes to policy formulation. The importance of trade in services is further underscored when taking into account the principal means of supplying services, which is through a commercial presence abroad, i.e. mode 3. Mode 3 accounts for about 60% of world trade in services, compared to 26% for cross-border supply, which is mode 1, 10% for consumption abroad i.e. mode 2, and just 4% for movement of persons i.e. mode 4. Since mode 3, which also involves FDI, is, overall, the main mode of supply for services trade, services are also the predominant component of FDI.
Source: UNCTAD Report, 2017
Mode 4 covers only temporary entry and stay in a Member’s territory to supply services and does not interfere with government policies regarding entry and temporary stay of natural persons and flexibility in application of visa restrictions. Governments are free to regulate entry and temporary stay, provided these measures do not nullify or impair the commitments.
Despite this fact, Mode 4 remains more restricted than other modes of services delivery owing to concerns over the implications for labour markets. Many countries allow for the entry of highly skilled labour such as transfers within corporations, while limiting entry for lower-skilled labour, for which developing countries and LDCs have sought an opening. Effective market access for services supplied through mode 4 could be provided through increased labour quotas, removing economic means tests, or setting clear criteria for such tests. Both the quantity and quality of mode 4 commitments continue to be limited in the Doha Round offers, restricting the movement of natural persons at all skill levels.
With 93% of global migrant stock being economic migrants, including suppliers of services, liberalizing mode 4 can be a win-win situation for both developed and developing countries. Estimated development gains for developing countries from opening the OECD labour markets by 3% will be over US$ 150 billion. A strong, commercially meaningful outcome in mode 4 will therefore have huge potential spill-over benefits for both developed and developing countries and LDCs.
Global economies along with the international community have set an ambitious target in the Programme of Action for the Least Developed Countries for the Decade 2011–2020 (Istanbul Programme of Action) that half of the LDCs should be able to graduate out of the category by 2020 and the share of LDCs in global exports should double by 2020. To achieve those targets, preferential market access for services exports from LDCs is as important as duty-free and quota-free treatment for their exports of goods. This mechanism will become commercially imperative to LDCs only when the substance of preferences given to them covers sectors and modes of export interest to them, especially in mode 4 (including low- and medium-skilled services providers), an area in which all LDCs have expressed a keen interest. Meanwhile it is important to ensure that preferences given to LDCs should be in addition to most-favoured nation treatment so as not to raise barriers for other developing countries.
From India’s perspective, the Indian IT industry is already experiencing the uncertainty caused by the Hire American-Buy American movement. The EU General Data Protection Regulation (GDPR), has also been rolled out last year, which will create difficult challenges for the outsourcing industry. One of the major stumbling blocks in the conclusion of the India-EU free-trade agreement negotiations has been the issue of data privacy, apart from automobiles. Of course, it was also one of the major deal breakers that compelled India to walk out of the RCEP, since other partners weren’t too keen on mode 4 commitments. Therefore, problems related to liberalize mode 4 of services exports seem to be growing and India is also likely to see significant hurdles soon.
In such a scenario, what is the way forward for India for increasing its services exports? Well, the most apt options remain mode 3 and mode 2. India needs to heavily focus on growing its services trade through these modes as they are still quite liberal.