THE GATS AND FOREIGN INVESMENT

Second Annual Forum of Developing Country Investment Negotiators

3-4 November, 2008Marrakesh, Morocco

Offah Obale, South Centre

obale@southcentre.org

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GATS and Foreign Investment

Countries have for a long time concluded Bilateral Investment Treaties (BITs) that establish disciplines for investment in goods and services. No such horizontal investment disciplines have so far been established under the WTO.

WTO Members considered the establishment of a multilateral investment agreement in the initial stages of the Doha Development Agenda. However, no consensus on launching negotiations in this area could be formed and the topic was removed from the DDA’s work programme as part of the July 2004 General Council Decision.

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GATS and Foreign Investment

While the GATS can be described as a multilateral agreement that covers investment in the services trade context, it is not an agreement on investment per se in the spirit of the failed Multilateral Agreement on Investment (MAI).

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Investment in Services

Services make up the bulk of what is ultimately involved in shipping goods across borders, from warehousing to customs brokering, freight forwarding, port and airport management services; inspection services; express delivery and distribution services. This continuum provides a ready platform within which WTO Members can address key border infrastructure bottlenecks by engaging in selective, progressive liberalization across a wide range of sectors.

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Modes of Supply

According to the GATS classification, international trade in services occurs through four different modes as follows:

Cross-border supply (mode 1) - refers to the supply of a service across a border where both the service provider and consumer do not leave their respective countries. An example of cross-border supply is the offering of telemedicine services- curative medicine via the internet- in Canada, for consumption by a patient in Venezuela;

Consumption abroad (mode 2) – refers to the supply of a service where the consumer physically travels from one country to another to obtain a service. An example of consumption abroad is a student from Bolivia travelling to the United States to undertake graduate studies in a United States university;

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Modes of Supply

Commercial presence (mode 3) – refers to a service supplier offering a service in another country through, for example, an agency, branch, subsidiary or joint venture. An example is a United kingdom telecommunications corporation offering telephone services in Nicaragua through a subsidiary;

Movement of natural persons (mode 4) – refers to people temporarily entering another country in order to provide a service. An example would be a Cuban nurse offering nursing service in the United States for a limited period of time

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GATS Definition of Commercial Presence "commercial presence" means any type of

business or professional establishment, including through

(i) the constitution, acquisition or maintenance of a juridical person, or

(ii) the creation or maintenance of a branch or a representative office,

within the territory of a Member for the purpose of supplying a service (GATS Article XXVIII)

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GATS Definition of Commercial Presence A juridical person is: (i)"owned" by persons of a Member if more than

50 per cent of the equity interest in it is beneficially owned by persons of that Member;

(ii) "controlled" by persons of a Member if such persons have the power to name a majority of its directors or otherwise to legally direct its actions;

(iii) "affiliated" with another person when it controls, or is controlled by, that other person; or when it and the other person are both controlled by the same person

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GATS Definition of Commercial Presence This definition covers foreign direct

investment in services only where the investor of the other party holds more than 50 per cent of the equity interest or exercises control over the invested enterprise.

The definition of commercial presence extends to “the creation or maintenance of a branch or a representative office”.

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Mode 3 (Commercial Presence)

Commercial presence is the area where the largest amount of liberalization commitments have been undertaken by WTO members.

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Scheduling of Commitments

Each WTO member makes commitments – set out in a schedule – in service sectors ranging from transport and communication services to health, education and tourism services across the four modes of service supply.

Commitments are made in relation to “market access” and “national treatment”.

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Scheduling of Commitments

Commitments on “market access” set out the terms, limitations and conditions for market access which a country must apply without discrimination to the services and service suppliers of all WTO members.[GATS Article XVI (I)]

A full commitment on “market access” would therefore prohibit a country from limiting access to its services markets and grants full access to foreign investors.

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Scheduling of Commitments

However, a country need not make a full commitment to “market access” and WTO members can determine individually the limitations, conditions and terms of “market access” that fall short of full market access. Such limitations, conditions and terms must be applied without discrimination to the services and service suppliers of all WTO members.

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Scheduling of Commitments

The six permitted limitations are:

- limitations on the number of service suppliers;

- limitations on the total number of natural persons that may be employed in a particular service or that a service supplier may employ;

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Scheduling of Commitments

On Investments- limitations on the total value of service

transactions or assets;- limitations on the total number of service

operations or on the total quantity of service output;

- measures that restrict or require specific types of legal entity or joint venture; and limitations on the participation of foreign capital.

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Scheduling of Commitments

Commitments on “national treatment” set out the conditions and qualifications on national services and service supply in a particular country which will be applicable on a non-discriminatory basis to the services and service suppliers of other WTO members.

A full commitment on “national treatment” prohibits a State from discriminating between domestic and foreign “like” services and service suppliers. In determining what constitutes discrimination of like services and service suppliers, much depends on the interpretation of “like”.

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Scheduling of Commitments

The GATS affords no automatic right of establishment to foreign investors.

The only obligations of WTO members are to schedule any existing restrictive measure they wish to maintain in sectors where liberalization commitments are voluntarily undertaken;

To ensure freedom of payments and transfers relating to investments in such sectors.

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Implications

Market access commitments are particularly important. If country ‘A’ commits to open a sector e.g. insurance sector to foreign providers, it cannot change its mind without cost.

For example, should it decide to establish monopoly provision on insurance services in areas formerly open to foreign providers, it will be obligated to compensate countries whose trade in services is harmed by this change.

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Implications

Compensation may take various forms. Country ‘A’ could liberalize equivalent service sectors in exchange, or, as a last resort, the country whose providers are affected could withdraw equivalent market access from country A’s providers.

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GATS Flexibilities

Governments can use the GATS selectively to encourage investment in sectors of their choice, subject to the conditions they wish to impose or retain, including with respect to technology transfers and the employment or training of local workers.

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GATS Flexibilities

The Agreement also permits governments to maintain foreign ownership restrictions in sectors where they have made commitments. Examples include:

- requiring foreign investors to incorporate or establish the business locally;

- states reserving the right to adopt or maintain measures on investment in agriculture, hunting, forestry and fishing;

- a foreign bank shall not without the written approval of the minister of finance reduce or impair its assigned capital or transfer out the whole or a substantial part of its asserts or liabilities.

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GATS Rules

Trade in services is affected by a variety of rules ranging from domestic regulations (qualifications and licensing requirements) to subsidies and emergency safe guard mechanisms. The quality of these rules can influence the social and economic effects of services trade liberalization e.g. the recent experience in financial services.

Members of the WTO have agreed that a central task in the ongoing set of services negotiations will be to further develop rules to ensure that domestic regulations support rather than impede the opening of services markets to trade.

Policy-makers should therefore be attuned to the negotiations surrounding the development of GATS rules

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END

Thank you!!