GATS and the Right to Regulate

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Jessica Woodroffe, World Development Movement

Bizarrely, supporters of GATS express deep indignation at any suggestion that the agreement limits governments' ability to regulate. Bizarre because, at heart, GATS is an agreement designed to reduce government regulation. As the WTO Secretariat acknowledges in its background note on Application of the Necessity Test (WTO Job no 5929), there are "two potentially conflicting priorities: promoting trade expansion versus protecting the regulatory right of governments".

GATS rules get closer to the heart of democratic decision making than other trade agreements. Governments regulate economic activity both to protect their citizens and to influence how the rewards of economic development are distributed. This has proved particularly important if citizens in developing countries are to benefit from an influx of foreign investment. Yet GATS rules apply to 'commercial presence' as well as cross-border trade, thus restricting the ability of governments to act when a foreign company begins operations inside its border.

When a government fully commits a service sector in its Schedule of Specific Commitments, Article XVI on Market Access and Article XVII on National Treatment apply. Under national treatment rules, members agree to eliminate legislation which favours domestic companies over foreign corporations. So, for example, a government which has agreed to full national treatment rules for its tourism sector could be challenged by another WTO member for granting concessions to firms committed to employing local people. This would be seen as discriminating against foreign companies, on the grounds that they might find this a more difficult condition to meet than domestic businesses.

Market access rules go even further, limiting quantitative regulations on market share or the number of firms which can operate in an area, even if they apply equally to domestic and foreign firms. If, for example, a government had agreed full market access rules for its tourist sector, it could be challenged for limiting the number of hotels in a particular area, even if this was designed to protect the long-term viability of the tourist industry in that region. Legislation requiring investors to form joint ventures with local partners could also be threatened.

Persistent in their defence of the agreement, GATS advocates have argued that the 'right to regulate' is protected because governments can list limitations that preserve the right to impose policies like those mentioned above. This takes us to the very heart of the problem: under GATS, the ability to regulate is the exception rather than the rule.

The first problem is that this is a one-off right that members can exercise only at the point of making a commitment. This demands an unrealistic level of knowledge. Negotiators must know all the possible regulations that exist across a broad range of services, even though they are trade rather than social policy experts.

Such regulations are often implemented by local governments. Yet GATS is negotiated through national governments, by trade officials with very little awareness of the kind of restrictions regional governments impose on foreign investment. This has already proved to be an issue in India. In Kerala, one affected community found the State unable to impose restrictions on foreign investment in the tourism sector as a result of the national government's GATS commitments.

This 'one-off right' has a particularly worrying impact on future democratic decision making, as negotiators must also predict what policies governments may want to implement in the future. This severely restricts the ability of social pressure groups to bring new issues, such as the environment, onto the agenda.

Secondly even if limitations are made, they are not secure. They become targets for removal in future rounds of negotiations. In the current phase of negotiations, WTO members are required to increase the number of sectors committed to GATS and to remove limitations within sectors which they have already committed.

Developing countries are at a disadvantage on all counts. With a much more limited negotiating capacity, they are less able to predict which regulations they should protect. With less negotiating power they are more likely to find these protected regulations under threat in future negotiations. Finally, they will be more deterred by the dangers of a potential challenge from another WTO member (and the sanctions which follow) than a stronger trading partner would be.

Advocates of GATS usually argue at this point that there are some provisions enabling governments to change their minds. As explained in the introduction to this collection, these provisions make commitments effectively irreversible, particularly for developing countries.

Demand for regulation often comes from communities which experience the negative social and environmental costs of investment, as in the Indian case above. GATS ties the hands of elected governments trying to respond to such demands. Regulation may also be needed if governments are to respond to demands for equity from its citizens. Again GATS ties the hands of governments. But perhaps most worrying are the demands of future citizens which we cannot predict, and which governments will be unable to respond to as a result of GATS.

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