Introduction
General Agreement on Trade in Services
FTAs and supply of services
Current challenges for digital trade
Key considerations for services providers


Introduction

The United Kingdom's departure from the European Union has focused the public conscience on the importance – or otherwise – of free trade agreements (FTAs). Yet, while supply services account for 70% of EU gross domestic product (GDP)(1) and 80% of UK GDP,(2) most of the discourse around FTAs has focused on goods.

This article considers how the international trading rules apply to cross-border trade in services, including:

  • the basic obligations on World Trade Organisation (WTO) members;
  • the general exceptions to the rules and the role of FTAs;
  • challenges for digital trade; and
  • the key issues for providers of cross-border services.(3)

General Agreement on Trade in Services

The General Agreement on Trade in Services (GATS) forms a key part of the Agreement Establishing the WTO. The GATS was concluded as part of the Uruguay round of trade negotiations which took place between 1986 and 1993 and culminated in the establishment of the WTO (for further details please see "World Trade Organisation: an introduction").

The aim of the GATS is similar to that of the General Agreement on Tariffs and Trade (GATT), which applies to goods. The main purpose of the GATS is to create a rules-based system for international trade in services and to liberalise that trade.

Scope
The GATS applies to measures taken by WTO members which affect trade in services. For these purposes, the GATS defines 'trade in services' as the supply of a service:

  • from the territory of one WTO member into the territory of any other WTO member;
  • in the territory of one WTO member to the service consumer of any other WTO member;
  • by a service supplier of one WTO member, through commercial presence in the territory of any other WTO member; or
  • by a service supplier of one WTO member, through the presence of natural persons of a WTO member in the territory of any other WTO member.

Each of these categories of trade in services is a different 'mode' of supply, respectively known as:

  • Mode 1: cross-border supply – namely, services which flow from the territory of one member into the territory of another member (eg, banking);
  • Mode 2: supply which constitutes consumption abroad (eg, where a tourist or patient moves into another member's territory to obtain a service);
  • Mode 3: supply involving a commercial presence – namely, where a service supplier of one member establishes a territorial presence in another member's territory to provide a service (eg, a domestic subsidiary of a foreign insurer or a hotel chain); and
  • Mode 4: supply involving a natural person's presence – namely, where one person moves from the territory of one member to the territory of another to provide a service (eg, an accountant, hairdresser, ski instructor, software writer, doctor or lawyer).

The GATS does not apply to services supplied by governments on a non-commercial basis where these are not in competition with any other service providers.

Obligations
Most-favoured nation principle
The GATS requires that all WTO members uphold the most-favoured nation (MFN) principle in relation to measures adopted that may affect trade in services.

Under the MFN principle, WTO members must treat one another equally and cannot discriminate from member to member. This means that, subject to certain exemptions and exceptions, if a WTO member grants favourable market access to one WTO member for the provision or consumption of services, it must grant that same market access to all other WTO members.

As part of the negotiations of the GATS, WTO members were able to agree exemptions from the MFN principle in respect of certain types of service. These exemptions are subject to certain conditions, (eg, a review every five years). Prior to the entry into force of the GATS, 61 such MFN exemptions were agreed.

Another exception applies in respect of FTAs which cover all or substantially all of the trade between the FTA countries. Where WTO members conclude such an FTA, the signatory parties can offer preferential access more favourable than the MFN treatment afforded to other WTO members. The role of FTAs within the international supply of services is considered in more detail below.

Commitments of WTO members
The GATS also requires that each WTO member has a 'schedule of specific commitments', setting out the service activities for which the WTO member has agreed to provide market access and national treatment, on an MFN basis. These schedules also set out the conditions attached to this treatment and whether those conditions differ by reference to the modes of supply outlined above.

The service lines are classified under so-called 'central product classification codes', which function similarly to tariff codes for goods (for further details please see "Back to basics: free trade agreements").

The GATS provides for several types of condition or limitation that WTO members can impose upon market access commitments. For example, a WTO member can require that market access for a certain service may be provided only if the service is supplied by a specific type of entity or a joint venture.

A national treatment commitment is where a WTO member commits not to operate discriminatory measures between domestic and non-domestic services or services suppliers. Such commitments may also be subject to conditions, provided that the member does not modify the conditions of competition within their domestic market in favour of domestic suppliers.

FTAs and supply of services

As noted above, WTO members can deviate from the MFN principle where they agree an FTA which covers all or substantially all of the trade between the parties to the FTA.

FTAs may therefore contain additional commitments to liberalising trade in services between the FTA parties, going beyond the parties' WTO commitments.

Current challenges for digital trade

The provision of services is increasingly done via digital means (eg, through e-commerce platforms or videoconferencing software), and this trend looks set to continue, having become the default method of delivery during the COVID-19 pandemic.

This rise in digital trade can blur the lines between the goods/services split that exists within the WTO – particularly the division between the GATT (which applies to goods) and the GATS (which applies to services).

The WTO has sought to agree at a multilateral level a means of addressing these complexities, and WTO members have agreed that customs duties should not be applied on electronic transmission. An 'electronic transmission' is in essence any non-physical product sold through an e-commerce platform.

This can in itself pose problems for digitally enabled products, such as Internet of Things (IoT) technology. IoT products often comprise a physical good (eg, a doorbell with a camera) complemented by a digital component which may be required to deliver services remotely (eg, to remotely connect the doorbell camera to the user so that the user can monitor who is at their door). This digital component may operate across borders, while the physical component may have been imported. The liberalisation of trade in such products will thus require the equivalent liberalisation of the trade in the relevant services.

Newer FTAs, such as the US-Mexico-Canada Agreement, contain specific chapters that address electronic commerce and many FTAs seek to lock in the current moratorium on customs duties on electronic transmissions. Some of these new e-commerce chapters also prohibit any restriction being imposed on cross-border data flows or data localisation requirements, subject to exceptions for public policy reasons (eg, privacy and cybersecurity).

With regard to privacy and cybersecurity, WTO members are increasingly regulating the gathering and dissemination of data concerning citizens (eg, the EU General Data Protection Regulation). These rules typically impose conditions on the transfer of data across international borders (eg, requiring that the country in which data will be stored has adequate data protection legislation in place).

These rules impose limits on cross-border trade in relevant services which may be subject to the GATS depending on the individual country's GATS commitments. Therefore, they could be subject to challenge where restrictions apply. However, in such cases, a defence would likely exist based on the exceptional provisions discussed above.

Key considerations for services providers

Businesses supplying services across borders should ensure that they are aware of any applicable conditions on the sector in which they operate, noting that the restrictions may vary depending on the mode through which the service is delivered.

For further information on this topic please contact Bernardine Adkins or Savannah Would at Gowling WLG by telephone (+44 207 379 0000) or email ([email protected] or [email protected]). The Gowling WLG website can be accessed at www.gowlingwlg.com.

Endnotes

(1) Source; rounded to the nearest 5%.

(2) Source; rounded to the nearest 5%.

(3) This article is based on a webinar, which can be viewed here.