Domestic Regulation in Services: Members Weigh Options for Levelling Playing Field

30 November 2017

The growing share of services trade and the increasing shift of global value-added from goods to services has sharpened international focus on the importance of good regulation. Furthermore, the advent of the digital economy and new business models have drawn the attention of national regulators and trade negotiators alike toward appropriate regulations. In this context, national productivity and trade-related competitiveness increasingly depend on sound domestic regulation and reduction of regulatory barriers — if not regulatory coherence — across borders.

The WTO’s General Agreement on Trade in Services (GATS) addresses the topic of domestic regulatory frameworks. The GATS provides for specific “criteria” to be considered and applied throughout the design and administration of “domestic regulations” affecting trade in services. These criteria include transparency, objectivity, impartiality, reasonableness, and the avoidance of overly burdensome regulations which may amount to a disguised restriction to trade in services.   

Domestic regulations do not constitute limitations on market access or national treatment, but they can determine the ability of service providers and services to access a specific market effectively. They include measures of general application affecting services trade, which can involve measures relating to qualification requirements and procedures, technical standards, and licensing requirements.

For instance, to provide legal services in a given jurisdiction, a membership to a local bar association may be required, or in the case of health/medical services, a specific certification, technical standard, or license may be needed to authorise the supply of the service. Therefore, whether a service supplier can access a certain market effectively is determined both by “traditional market access limitations,” as well as the landscape of domestic regulations governing a particular activity.

Given their complexity, variety, and relevance, domestic regulations could play a key role in levelling the playing field of international trade in services. Their quality and efficacy have the potential of “changing the face” of a country’s regulatory space, and thus radically improving its ability to engage and benefit from trade. Alternatively, if designed and implemented in a way inconsistent with the criteria or principles agreed under the GATS, domestic regulations have the potential of becoming another layer of beyond-the border limitations.

The discussion and subsequent negotiation of further disciplines on domestic regulations remains one of the most crucial unresolved challenges of international trade rulemaking and policy. Any step towards achieving increasing regulatory coherence and enhancing the soundness of regulatory regimes could be a valuable contribution to the multilateral trading system and to the fulfilment of the Sustainable Development Goals (SDGs) under the UN’s 2030 Agenda for Sustainable Development, if crafted appropriately.

The evolution of services trade talks at the WTO
Since the GATS was signed over two decades ago, WTO members have been unable to agree on new and enhanced rules governing trade in services, despite achieving negotiating progress in a few other select areas, such as new disciplines on agricultural export subsidies and the Trade Facilitation Agreement.

Article VI:4 of the GATS on domestic regulations contains a specific mandate for members to “develop any necessary disciplines” with a view to “ensuring that measures relating to qualification requirements and procedures, technical standards, and licencing requirements do not constitute unnecessary barriers to trade in services.”    

The negotiating challenge has been addressing the tension between governments’ right to regulate economic activity, and the explicit mandate of the GATS to develop disciplines aimed to ensure that “measures relating to qualification requirements and procedures, technical standards and licencing requirements” are not “more burdensome than necessary to ensure the quality of the service.” The latter is known in trade jargon as a “necessity test.”

Historically, negotiations on domestic regulations at the WTO have been text-based and shepherded by a chairperson under the Working Party on Domestic Regulation (WPDR). Two chairs’ texts, from March 2009 and April 2011 respectively, have been issued from the WPDR and attached to reports from the chair of the Council on Trade in Services “Special Session,” the broader forum for negotiating new rules on services trade. These documents reflect all observations, areas of consensus, and disagreements expressed by members throughout the negotiating process to that point.

The overall divide among the WTO membership can be described broadly as falling into two camps. One involves opposition against undertaking any type of discussion or negotiation on the issue of domestic regulations, because of concerns that imposing further disciplines could lead to a loss of domestic policy space. There is also a profound disagreement around the historic issue of the “necessity test,” with no clear solution in sight. While some oppose any reference to it, others advocate for its inclusion as a matter of effective access to markets.

Currently, members have been unable to agree on which chair’s text to use as a basis for future negotiations. Alternatively, a group of 25 members led by Australia and the European Union has recently been trying to revive the negotiation by promoting a discussion on a subset of less controversial trade-facilitating elements within the broader agenda on domestic regulations. It does not, however, discard the discussion on the most sensitive issues, but instead focuses on the areas where consensus may be possible.

The proposal contained in JOB/SERV/272/Rev.1, released on 7 November 2017, covers topics such as the submission and processing of applications; criteria applicable to timeframes; acceptance of electronic applications; establishment of enquiry points; enhanced transparency mechanisms; necessity test; and a new section on development. A subsequent version, JOB/SERV/272/Rev. 2, was released on 24 November 2017.

The inclusion of the “necessity test” topic under this proposal was a specific demand of a limited group of WTO members which have historically supported the fulfilment of that part of the Article VI:4 mandate – specifically, Chile, Hong Kong, Moldova, New Zealand,
Peru, and Switzerland. The proposal also includes elements regarding the opportunity to comment and provide information before a regulation’s entry into force; submission of applications; application timeframes; application fees; independence (of the competent authority); and technical standards.   

Overall, these additions introduce further precision to existing obligations, but do not amount to a significant update of their substantive core. Nevertheless, they advance an agenda on domestic regulations at the WTO which aims to narrow the gap between multilateral rules and the developments under regional trade agreements (RTAs), as many of the proposed improvements have already been adopted under bilateral and plurilateral initiatives.

There are also various interlinkages between this area of trade policymaking and sustainable development objectives. Domestic regulations play a significant role in assuring equal opportunity for market access. Sound regulatory frameworks enhance the ability of small and medium-sized enterprises (SMEs) to engage in trade, and take full advantage of the resulting benefits. Developing multilateral standards or criteria can increase regulatory coherence among countries, which facilitates cross-border trade in services.

Furthermore, the inclusion of a comprehensive section on “development” in this proposal, inspired by the principles governing the Trade Facilitation Agreement, recognises the centrality of incorporating an effective system of trade assistance into multilateral trade negotiations. By doing so, WTO members can draw an explicit linkage between trade obligations and the achievement of the SDGs under Agenda 2030.

This section on “development” differentiates between developing, developed, and least developed countries. While the last would be exempt from all obligations, they are nevertheless encouraged to comply, within their capabilities. For developing country members, the section describes a mechanism for delayed entry into force of specific provisions, subject to explicit timeframes and conditions. Likewise, it lays out a system of “on request-trade assistance” in support of developing countries who face institutional and regulatory capacity constraints.

Looking towards Buenos Aires

Discussions in recent months have largely been based on the above-mentioned proposal. However, considering that a significant portion of the membership has not expressed support or has effectively rejected the proposal, despite having drawn the backing of one-third of the WTO membership, the negotiation scenario heading into the WTO’s Eleventh Ministerial Conference (MC11) remains uncertain.

If members were to strike a deal on “domestic regulations” at MC11, this would mean that the historical deadlock on multilateral services negotiations would begin to be overcome. If so, 2018 could see the beginning of a new stage in multilateral trade negotiations where trade in services would intensify its partnership with trade in goods through the lens of “facilitation.”

On the other hand, if members are not able to agree on an outcome at MC11, the discussion could be sent back to the Council on Trade in Services (CTS) and WPDR for further deliberation among delegations, though how long this might take is unclear. Sources say that given the significant level of support for this proposal, it is likely that cosponsors could ask for ministers’ specific guidance in defining how the WTO should move forward in this area over the coming year.

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