Trade in Services

● Definition: The GATS defines trade in services as the supply of a service:

○ from the territory of one Member into the territory of any other Member (cross-border
supply);
○ in the territory of one Member to a service consumer of any other Member (consumption
abroad);
○ by a service supplier of one Member, through commercial presence in the territory of any
other Member (commercial presence);
○ by a service supplier of one Member, through the presence of natural persons of a
Member in the territory of any other Member (presence of natural persons).
● Commercial presence is defined in Article XXVIII(d) of the GATS as any type of business or
professional establishment, including through:

○ The constitution, acquisition, or maintenance of a juridical person.

○ The creation or maintenance of a branch or representative office.
● This establishment must be within the territory of a member for the purpose of supplying a
service.

● Scope:

○ The GATS covers measures by Members affecting trade in services. These measures
include those regarding:
■ The purchase, payment, or use of a service.
■ The access and use of services, required to be offered to the public generally, in
connection with the supply of a service.
■ The presence of a member's persons, including commercial presence, for the
supply of a service in another member's territory.
○ The agreement applies to any service in any sector except services supplied in the
exercise of governmental authority.
○ The supply of services encompasses the production, distribution, marketing, sale, and
delivery of a service.
○ The GATS also covers measures relating to foreign investment by service suppliers.
● Key Provisions:

○ Article I: Scope and Definition - This article defines the scope of the GATS and
provides a definition of "trade in services".
○ Article II: Most-Favored-Nation Treatment - This article prohibits discrimination
between services and service providers of different WTO Members. This means that a
WTO Member must treat the services and service suppliers of all other WTO Members
no less favorably than it treats like services and service suppliers of any other country.
○ Article III: Transparency - This article requires that all relevant laws, regulations, and
administrative guidelines pertaining to trade in services be published. Members also have
a duty to notify the Council for Trade in Services of anything new or changes in national
standards which affect commitments set out in Part III of GATS dealing with market
access and national treatment.
 ○ Article IV: Increasing Participation of Developing Countries - This article is based on
the notion that developing countries need some control over access to their markets to
sustain their government's policy ideals, which may vary from protection for infant
industries to the acquiring of know-how.
○ Article V: Economic Integration - This article allows WTO Members to enter into
economic integration agreements, such as free trade agreements, that provide for the
liberalization of trade in services between the parties to the agreement, even if this
results in discrimination against services and service suppliers of other WTO Members.
○ Article V bis: Labour Markets Integration Agreements - This article prevents
members from being a party to an agreement that establishes full integration of labor
markets between or among the parties to such an agreement, as long as certain
conditions are met. These conditions are that the agreement:
■ Exempts citizens of parties to the agreement from residency and work permit
requirements.
■ Is notified to the Council for Trade in Services.
○ Article VI: Domestic Regulation - This article requires WTO Members to ensure that all
measures of general application affecting trade in services are administered in a
reasonable, objective and impartial manner.
○ Article XVI: Market Access - This article prohibits WTO Members from maintaining or
adopting certain types of measures that restrict market access for services and service
suppliers of other WTO Members. These measures include limitations on the number of
service suppliers, limitations on the total value of service transactions, and limitations on
the total quantity of service output.
○ Article XVII: National Treatment - This article prohibits discrimination between domestic
and foreign services and service suppliers. This means that a WTO Member must treat
foreign services and service suppliers no less favorably than it treats its own like services
and service suppliers.
○ Article XXVIII: Definitions - This article provides definitions of key terms used in the
GATS.
● Facts and Theories:

○ Growth in Services Trade: Services play a central role in the world economy and
represent 71 percent of global GDP. However, the importance of services in the world
economy is not reflected in their share of world trade. In 2011, trade in services amounted
to only 18.6 percent of global trade, the smallest share since 1990.
○ Barriers to Services Trade: Trade in services is not subject to tariff barriers, but faces
many non-tariff barriers. These barriers primarily stem from internal regulations that
govern the production and consumption of services. Examples include:
■ Restrictions on the number of businesses allowed within a geographical area.
■ Obligations for practicing professionals to be members of local associations.
■ Sanitation standards for restaurants.
■ Technical safety requirements for companies.
■ Requirements that professional services be offered in the national language.
■ Professional qualification requirements.
■ Prohibitions for businesses to sell certain products or services.
○ Theories of Services Trade:
■ The classical theory of comparative advantage, developed by Adam Smith
and David Ricardo, can be applied to trade in services. This theory states that
 countries will specialize in and export the services in which they have a
comparative advantage.
■ The Heckscher-Ohlin theory, which focuses on differences in factor
endowments, can also be applied to trade in services. This theory states that
countries will specialize in and export the services that use their abundant factors
of production intensively.
■ New trade theories, which emphasize imperfect competition and product
differentiation, have also been used to explain trade in services. These theories
suggest that countries may trade in services that are similar because of
economies of scale, product differentiation, and consumer preferences for
variety.

Financial Services
● Definition: Financial services are economic services provided by the finance industry, which
encompasses a broad range of businesses that manage money, including credit unions, banks,
credit-card companies, insurance companies, accountancy companies, consumer-finance
companies, stock brokerages, investment funds, individual managers, and some
government-sponsored enterprises. Financial services are covered under the GATS and are
subject to the agreement's general obligations and disciplines.

● Scope: The Annex on Financial Services applies to measures affecting the supply of financial
services. Supplying a financial service is defined as supplying a service according to paragraph 2
of Article I of the Agreement. Services supplied in the exercise of governmental authority are
defined as:

○ Activities conducted by a central bank, monetary authority, or any public entity to pursue
monetary or exchange rate policies.
○ Activities performed by a private entity that are typically performed by a central bank or
monetary authority, when exercising those functions.
● Types of Financial Services: Financial services include a wide range of activities, such as:

○ Insurance and insurance-related services:

■ Direct insurance: life and non-life insurance, including co-insurance
■ Reinsurance and retrocession
■ Insurance intermediation: brokerage and agency
■ Services auxiliary to insurance: consultancy, actuarial, risk assessment, and
claim settlement services
○ Banking and other financial services (excluding insurance):
■ Acceptance of deposits and other repayable funds from the public
■ Lending: consumer credit, mortgage credit, factoring, and financing of
commercial transactions
■ Financial leasing
■ Payment and money transmission services: credit, charge and debit cards,
traveler’s checks, and bankers drafts
■ Guarantees and commitments
■ Trading:
■ money market instruments: checks, bills, certificates of deposits
 ■ foreign exchange
■ derivative products: futures and options
■ exchange rate and interest rate instruments: swaps, forward rate
agreements
■ transferable securities
■ negotiable instruments and financial assets: bullion
■ Participation in issues of all kinds of securities: underwriting and placement
as agent (whether publicly or privately) and provision of services related to such
issues
■ Money broking
■ Asset management: cash or portfolio management, all forms of collective
investment management, pension fund management, custodial, depository and
trust services
■ Settlement and clearing services for financial assets: securities, derivative
products, and other negotiable instruments
■ Provision and transfer of financial information, and financial data
processing and related software by suppliers of other financial services
■ Advisory, intermediation and other auxiliary financial services on all the
activities listed in subparagraphs (v) through (xv), including credit
reference and analysis, investment and portfolio research and advice,
advice on acquisitions and on corporate restructuring and strategy
● Key Provisions:

○ Annex on Financial Services - This annex applies to measures affecting the supply of
financial services, with supply being defined according to paragraph 2 of Article I of the
Agreement.
○ Second Annex on Financial Services - This annex allows members to list measures
related to financial services in the Annex on Article II Exemptions during a 60-day period
that starts four months after the WTO Agreement takes effect. This is for measures that
are inconsistent with Article II of the Agreement.
○ Understanding on Commitments in Financial Services - This understanding, reached
during the Uruguay Round, forms the basis for post-1995 negotiations to further liberalize
trade in financial services. It is not part of the WTO Agreement.
● Facts and Theories:

○ Importance for Developing Countries: Financial services play a critical role in

economic development, enabling businesses to access capital, manage risk, and
facilitate trade.
○ Regulation of Financial Services: Financial services are heavily regulated to ensure
stability, protect consumers, and maintain market integrity. Balancing the need for
regulation with the goal of liberalizing trade in financial services is a key challenge for
policymakers.
○ Theories of Financial Services Trade: Theories of comparative advantage, factor
endowments, and imperfect competition can be applied to understand patterns of trade in
financial services. Factors such as technological advancements, regulatory differences,
and economies of scale can influence the competitiveness of countries in providing
financial services.
Modes of Supply of Services

The sources describe the concept of "modes of supply" in the context of the General Agreement on
Trade in Services (GATS). The GATS, adopted in 1994 and in force since 1995, focuses on physical
proximity to determine the mode of service supply and was negotiated when the internet was in its
infancy. The GATS distinguishes four modes of supply, which determine how services are traded across
borders. These modes are based on the movement of the service supplier and the consumer, as well as
the legal status of the supplier:

● Mode 1: Cross-Border Supply

This mode refers to services supplied from the territory of one WTO member into the territory of
any other member, without the physical movement of the supplier or consumer. Examples
include:

○ International shipping
○ Telecommunications
○ Online gambling by a company registered in one country with customers in another
country
● Mode 2: Consumption Abroad

This mode involves services supplied in the territory of one WTO member to a consumer from
another member. In this mode, the consumer travels to the supplier's location to receive the
service. Examples include:

○ Tourism
○ Healthcare in certain countries
○ Ship repairs where the customer sends their vessel to a foreign shipyard
● Mode 3: Commercial Presence

This mode pertains to services supplied through the establishment of a commercial presence by
a service supplier of one WTO member in the territory of another member. This typically involves
foreign direct investment, where a company sets up a subsidiary or branch in another country to
provide services. Examples include:

○ Establishing a foreign banking subsidiary

○ Setting up a joint venture in another country
● Mode 4: Temporary Movement of Natural Persons

This mode involves the supply of services by a natural person (not a company) from one WTO
member who travels to the territory of another member to provide the service. The consumer
does not move in this mode. Examples include:

○ Consultants
○ Foreign experts providing specialized services

Determining the mode of service supply is crucial in the context of the GATS as it affects the
application of trade rules and commitments. A service can be scheduled and treated differently depending
on the mode of supply. For instance, a member country might choose to liberalize banking services for
Mode 1 (cross-border services) but restrict Mode 3 (commercial presence), limiting foreign banks from
establishing branches within its territory.

The sources also point out that the GATS definition of "trade in services", which relies heavily on
these modes of supply, might not fully encompass the complexities of modern electronic
commerce. The traditional binary of service provider and consumer may not adequately address trilateral
relationships in online platforms like Airbnb, Grab Food, or Zipcar, where users act as both consumers
and providers ("prosumers").

While the sources do not explicitly discuss "mode" outside the context of the GATS, it is possible that the
term could be used in other areas of international trade law. For example, Incoterms 2010 uses the
phrase “mode of transport” to refer to the method of moving goods, such as rail, road, air, sea, inland
waterway, or multimodal transport. However, further context is needed to definitively interpret the meaning
of "mode" in any specific situation.