By Peter Ungphakorn
POSTED APRIL 12, 2017 | UPDATED MAY 4, 2017
A lot has been said about the impact on trade in goods if the UK and EU fail to strike a free trade deal after Brexit. They would rely on their WTO commitments, such as on tariffs and quotas. Much less has been said about the commitments on services, despite their importance to the UK economy.
This is not surprising. Firstly, countries’ commitments in the WTO on opening their services markets (known as services “schedules”) are unbelievably complicated. The WTO has a 2,000-word guide to understanding them (approximately 5 pages) — and even that is written for readers who are already familiar with a range of technicalities.
Secondly, although the EU member states’ commitments on services are combined in a single EU schedule, there are countless entries that apply only to individual member states. In other words, what applies in France may not apply in the UK, and so on.
For the EU, added to this complexity is the fact that authority (or “competence”) over services markets is divided between the EU Commission and the member states. This is unlike tariffs, which come under the customs union and are the central responsibility of the EU.
One of the results is that the EU’s present certified services schedule is for the 12-member EU that signed the original WTO agreement on services back in 1994 at the end of the 7-year Uruguay Round negotiations. A draft for the expansion to 15 members in 1995 still has not been certified because two decades later some of those 15 EU members still have not ratified it.
In other words, WTO certification for services is being held up within the EU. By contrast, its goods schedules have been delayed by objections or reservations from WTO members outside the EU.
The WTO’s page for the EU says the EU’s “services schedules include its member states but those who joined in 1995 (Austria, Finland, Sweden) and in May, 2004 […] also have schedules under their own names”. Presumably the same applies to the 2007 and 2013 expansions.
That said, further multilateral negotiations in 1995–1999 — after the Uruguay Round concluded in 1994 and after the WTO came into being the following year — added supplements on financial and telecommunications services. For the EU, these cover Austria, Finland and Sweden and therefore apply to the EU–15.
Finally, analysing the impact of trade barriers on goods is relatively straightforward since tariffs are numbers. Even where the numbers are complex, economists and statisticians can work with them with little difficulty.
But when Germany says accountancy services (other than auditing services) cannot be provided through a particular type of company — “‘GmbH & CoKG’ and ‘EWTV’” — quantifying that trade barrier or its impact is much more complicated.
As with goods, the EU’s services schedules have implications for Brexit in two ways:
- They are needed to identify the UK’s own commitments to open its services markets to the rest of the WTO, except where the UK has a free trade agreement in services — and the EU will also have to modify its schedule to take account of the UK’s departure
- If the UK and EU do not strike a free trade deal on services, their WTO schedules will define services trade between them. In other words, getting the schedules right is also important for the two because the schedules are a fall-back position in case they cannot strike a bilateral deal. The real impact would be considerably more complicated than just identifying the UK’s own schedules. For the UK, this is compounded by the fact that the schedules for 16 newer EU member states have not yet been incorporated into the EU’s (except for Austria, Finland and Sweden in financial services and telecoms). UK service providers seeking access to the EU single market might have to study up to 17 schedules to decide where best to set up business
Remember that a WTO schedule sets limits on how much protection a member provides to its producers. This is also true of services. Countries are free to open up more than their binding WTO commitments on services, provided they comply with general rules such as non-discrimination (where there are no exceptions in their schedules). But if they want to close markets beyond the limits in the schedules, they have to renegotiate.
Because of the complexity, this article is nothing more than an attempt to encourage a discussion by focusing on where to find the information rather than providing a comprehensive picture. I know less about trade in services than in goods. Hopefully the discussion can develop. But the overall picture for services may still be too complex for a big-picture examination, unlike tariffs and tariff quotas.
To recap what has been said elsewhere: although the UK is a WTO member and will continue to be after it leaves the EU, its WTO commitments — including on services — are bundled with the EU’s. So, in order to re-establish itself as a WTO member independent of the EU it will need to extract its commitments from those of the EU.
The EU’s goods and services schedules of commitments have still not yet been certified in the WTO for the enlargements up to the present 28 member states.
British International Trade Minister Greg Hands has now confirmed that work on the UK’s schedules “will be based on the most recent certified EU schedules, which is EU–25 for goods, and EC–12 for services. Since the schedules were certified the EU has entered into further WTO obligations, which we will also seek to replicate in our schedules.”
(He was replying to a written question from Kirsty Blackman, the Scottish National Party’s Westminster MP for Aberdeen North.)
How this might be done for goods (particularly agricultural products) is discussed in several other articles in this blog.
THE FOUR MODES OF DELIVERY
Mode 1. Cross-border supply. The supplier and customer are in different countries. The service is supplied across the border
Mode 2. Consumption abroad. The customer travels abroad and receives a service from a service provider in the other country
Mode 3. Commercial presence. The supplier sets up business in the same country as its customers
Mode 4. Presence or movement of natural persons. Professionals and other service workers move to the customer’s country. Not to be confused with free movement of people
For services, experts say the task is fairly straightforward but time-consuming because of the volume of work required — around 160 types of services are covered, each having commitments on four “modes of delivery”. (There’s an example below.)
Officials will have to go through every provision in the EU’s services schedule that applies either to the EU–12 (or in some cases EU–15) or only to the UK. They will then have to transfer the provision into the UK’s schedule. This is not necessarily straight copy and paste.
Fortunately, judging by a quick electronic search for “UK”, only four limitations on market access are identified as applying specifically to the UK:
- Medical services (mode 3 — commercial presence): “Establishment for doctors under the National Health Service is subject to medical manpower planning”
- Veterinary services (mode 3 — commercial presence): “Access through partnership or natural persons only”. As I understand it, this means the UK reserves the right to prevent foreign veterinary companies from establishing in the UK. Foreign vets would have to form partnerships, be self-employed, or work for UK firms.
- Banking and other financial services (mode 2 — consumption abroad): “Sterling issues, including privately led issues, can be lead managed only by a firm established in the European Economic Area”
- Banking and other financial services (mode 2 — consumption abroad): “Inter-dealer brokers, which are a category of financial institutions dealing in Government debt, are required to be established in the European Economic Area and separately capitalised”
Those last two also show that some of the UK’s commitments are linked to the European Economic Area (EEA = the EU except Croatia, which is a provisional EEA member, Iceland, Liechtenstein and Norway). Nothing has been said publicly about what happens to these provisions if, as seems likely, the UK leaves the EEA.
However, some provisions apply to all EU member states through Commission regulations, and these may also have to be sorted out to establish the UK’s services schedule.
The same is true of the EU’s “MFN exemptions”, another part of the services schedule, where members reserve the right to discriminate between other WTO members (more below).
On the plus side, the absence of certified services schedules for the enlarged EU might not be a problem. The general provisions for the EU and those specifically for the UK might not be different in the enlarged schedules, experts say — although nothing can be guaranteed.
The certified services schedules are annexed to the General Agreement on Trade in Services (GATS), the WTO’s umbrella agreement for the sector.
The GATS covers around 160 different types of services, grouped under 12 broad headings and sub-divided down to three levels:
- Business services (professional, computer, R&D, real estate, rental and leasing, etc)
- Communication services (postal, courier, telecommunications, audiovisual, etc)
- Construction and related engineering services
- Distribution services (commission agents, wholesale, retail, etc)
- Educational services
- Environmental services (sewage, refuse, sanitation, etc)
- Financial services (insurance, banking, etc)
- Health related and social services
- Tourism and travel related services (hotels, restaurants, travel agencies, tour operators, etc)
- Recreational, cultural and sporting services (entertainment, news, libraries and museums, sport, etc)
- Transport services (sea, inland waterways, air, space, rail, road, pipeline, cargo handling, etc)
- Other services
The full list is in this document from 1991 (pdf), when it was first agreed during the Uruguay Round negotiations (in the document number, “MTN” stands for “multilateral trade negotiations”).
Each of these services can be delivered in four modes:
- Mode 1. Cross-border supply. The supplier and customer are in different countries. The service is supplied across the border. For example a UK news agency supplying a news service to a newspaper in France
- Mode 2. Consumption abroad. The customer travels to another country and receives a service from a supplier in that country. For example a tourist staying at a hotel abroad
- Mode 3. Commercial presence. The supplier sets up business in the same country as its customers. For example a UK news agency setting up an office in France to supply French newspapers
- Mode 4. Presence or movement of natural persons. Workers or staff move to the customer’s country. For example, the UK news agency sends a British manager to France to run the office there. Note that this is not the same as “free movement of people”. Mode 4 may require visas and work permits, which could be fast-tracked or easier to obtain.
(Some economists are now talking about a fifth “mode”: the value of services incorporated in goods, but this is not yet formally in the WTO.)
None of this means “unfettered free trade” in services. Services regulation is a separate topic in the WTO — liberalisation and deregulation are not the same. And all those pages of commitments are essentially lists of exceptions or limits on liberalisation.
GATS itself recognises the need to regulate and it allows countries to exclude “services supplied in the exercise of governmental authority”. These include utilities, social security and any other public service such as health or education that is not supplied commercially, does not have market conditions, or is not in competition with other suppliers. An annex on air transport completely excludes airline landing rights.
The EU’s schedule goes further in setting limits on commercial access to its government services and only opens up education services that are privately-funded.
The EU’s latest WTO-certified services schedule is in five documents, although searches produce eight, three of them superceded. Seven of the eight are “commitments”; one is a list of “exemptions” from non-discrimination between other countries (“most-favoured nation” exemptions). There are a number of ways to find them:
- In the WTO’s iTip database. This is the simplest way to find individual commitments. Here, although it is possible to search for the UK’s commitments, the results are for all the EU–12 (sometimes EU–15)
- Download the documents using these pre-configured searches, and selecting “European Union”
- Use the links below to download pdf versions (correct at the time of writing)
First, the original 1994 commitments:
- The main schedule (GATS/SC/31 of 15 April 1994 — 97 pages). This is in two parts: “horizontal” commitments applying to all services sectors (to page 11), and commitments for the specific sectors (the remaining pages). This schedule is for the EU–12 and still applies except where updated for financial and telecoms services, and “mode 4” by the supplements below.
- Exemptions from non-discrimination (“MFN exemptions”) allowing the EU to discriminate in certain cases (GATS/EL/31 of 15 April 1994 — 13 pages). This currently applies to the EU–12
Then, supplements updating commitments in specific sectors (or in one case a services “mode”) resulting from further WTO negotiations. Some include commitments for Austria, Finland and Sweden, which joined the EU in 1995:
- Financial services, supplement 1 (GATS/SC/31/Suppl.1 of 28 July 1995 — 27 pages): replacing the original financial services commitments of the EU–12, Austria, Finland and Sweden
- Financial services, supplement 1, revision 1 (GATS/SC/31/Suppl.1/Rev.1 of 4 October 1995 — 27 pages): again replacing the original financial services commitments of the EU–12, Austria, Finland and Sweden
- “Mode 4” (“movement of natural persons”), supplement 2 (GATS/SC/31/Suppl.2 of 28 July 1995 — 20 pages): replacing the “mode 4” provisions in the original EU–12 commitment. These are the EU–12’s current “mode 4” commitments
- Telecommunications services, supplement 3 (GATS/SC/31/Suppl.3 of 11 April 1997 — 10 pages): replacing the original telecoms commitments of the EU–12, Austria, Finland and Sweden. These are the EU–15’s current telecoms commitments
- Financial services, supplement 4 (GATS/SC/31/Suppl.4 of 26 February 1998 — 24 pages): replacing supplement 1 revision 1
- Financial services, supplement 4, revision 1 (GATS/SC/31/Suppl.4/Rev.1 of 18 November 1999 — 19 pages): replacing supplement 4. These are the EU–15’s current financial services commitments
WTO members’ commitments in services work in three ways:
- Market access — how much of the market is open to foreign service providers or customers, and where that is limited
- Non-discrimination (1) — equal treatment between foreign service providers and the country’s own suppliers or nationals, known as “national treatment”, and where that is limited
- Non-discrimination (2) — exemptions on treating other WTO member countries equally, known as “most-favoured nation (MFN) treatment”
The first two are in the main services schedule of commitments. These identify where the member’s market is open, or where it reserves the right to restrict access, or to keep the market totally closed. This is expressed negatively as “limitations on market access” (column 2 in the example below).
Where there are no limitations, the market is open. Where there are no commitments (“unbound”), the country is free to close the market.
The commitments also list “limitations on national treatment” (column 3 below). Again, where there are no limitations the country will treat foreign companies as its own. Where there are limitations or no commitments at all (“unbound”), the country reserves the right to favour its own service providers.
Each of these is also specified for the four “modes” of supply, listed across the top of the page, with the limits on commitments running down the two central columns.
The EU’s main schedule document starts with “horizontal commitments” mainly dealing with limitations on investment, real estate ownership and “mode 4” (movement of professionals and other services workers or employees) across all services sectors.
Next come commitments in the 160 services sub-sectors — or more accurately, limitations on the commitments.
This is the section of the EU’s schedule on news and press agency services (chosen because it is one of the shorter items!):
For the second form of non-discrimination — most-favoured nation (MFN) — the exemptions are listed separately. They arise for a number of reasons, including preferential arrangements between countries that existed before the services were negotiated in the Uruguay Round.
This may explain why, for example, the EU reserves the right to discriminate in favour of Switzerland in a number of areas. The EU may be “grandfathering” sectoral deals with Switzerland that existed before 1994.
One question may be whether the UK and EU will want to “grandfather” preferences they currently or previously gave to each other when they separate their services schedules. This would add complications to the process.
In general, extracting the UK’s MFN exemptions from the EU’s schedule may also be more complicated because a large number of exemptions are under EU-wide regulations and some refer to regions in the EU that are outside the UK. How much of them will apply to the UK after leaving the EU remains to be seen. This may also be linked to the Great Repeal Act, in which the UK will convert EU laws and regulations into its own before deciding whether any need changing. It all adds to the work load.
So, apparently, extracting the UK’s services schedule from the EU’s may be fairly straightforward. But it will take some time. There may be complexities that need careful tailoring so they can apply to the UK. The UK wants to complete this within the 2-years prescribed for leaving the EU under Article 50 of the EU Treaty. Whether this can be done remains to be seen.
The UK might be able to avoid negotiations on its services schedule, so long as other WTO members don’t demand a say. But that might not be possible because other countries might argue that Brexit is upsetting a negotiated balance, as a former senior Swiss trade official suggests could also happen with agriculture, throwing into doubt the possibility that the UK would simply “replicate” all the relevant parts of the EU’s schedule.
Much more complex are the barriers that the UK and EU would face in each other’s markets if they cannot agree on free trade in services.
For the UK, the complexity lies in the details for the 160 services sub-sectors multiplied by the four modes of delivery, and the limitations on access and equal treatment that apply generally across the EU and in each of the remaining 27 member states. It also lies in finding out what EU member states are actually applying rather than their binding limits in the WTO.
Assessing that is beyond me. Over to you.
(Here’s one answer: “Brexit Means U.K. Lawyers and Bankers May Not Be at Your Service” — Bloomberg May 4, 2017)
EU ENLARGEMENTS OVER THE YEARS
January 1, 1958 (under GATT) — 6 founder members
January 1, 1973 — 3 new members
9. United Kingdom
January 1, 1981 — 1 new member
January 1, 1986 — 2 new members
January 1, 1995 (WTO created) — 3 new members
May 1, 2004 — 10 new members
16. Czech Republic
January 1, 2007 — 2 new members
July 1, 2013 — 1 new member
(More details here)
Updates: May 4, 2017 — added link to Bloomberg story
• Aircraft: by Francois Van, Unsplash, Creative Commons public domain CC0
• São Paulo Stock Exchange (Bovespa): by Rafael Matsunaga, via Flickr, Creative Commons CC-by-2.0
• Taj Mahal: by Chee Huey Wong via Pixabay, Creative Commons public domain CC0
• Electrician: via Pixabay, Creative Commons public domain CC0
• India’s Commerce Minister Kamal Nath mobbed by reporters at the WTO, July 2008: WTO