Volume 17, Number 3 Article by Rupa Chanda September, 2005
Inter-modal Linkages in Services Trade :
The General Agreement on Trade in Services (GATS), one of the many agreements under the World Trade Organisation (WTO), seeks to progressively liberalise trade and investment flows in services through rounds of discussions. The commitments made by countries are on market access, i.e. the extent of market entry permitted to foreign service suppliers under each of four different modes of supply, and on national treatment, i.e. once permitted into a country, how a foreign service supplier will be treated vis à vis domestic service suppliers, again for each mode of supply. Countries are free to choose the sectors they want to table for negotiations as well as the extent and nature of market access and national treatment they wish to grant to foreign service providers.
Prof Rupa Chanda of IIM Bangalore conducted a study for the OECD Secretariat, Paris (forthcoming in 2005/2006), aimed at understanding how services trade occurs through different modes of delivery and how these modes are related and often bundled together in the provision of a service across borders. The objective is to provide an integrated perspective on service sector trade so that countries can better leverage cross-modal and cross-sectoral trade opportunities, address constraints in a holistic manner, and maximise the overall gains from services trade.
The four modes of supply in services trade referred to above are: cross border supply, consumption abroad, commercial presence, and movement of natural persons, termed modes 1, 2, 3, and 4 respectively. In Mode 1, the service actually moves/is shipped across borders, such as the flow of information over the internet, tele-education or tele-health services provided between countries, or a diskette which carries in it data and other information. This is the most analogous to trade in goods. Mode 2 occurs when a consumer moves to another country to get a service, as in tourism services or when Indian students go to another country for higher education services. Mode 3 refers to foreign commercial presence in a service sector, for instance, the setting up of a branch or subsidiary, an affiliate or representative office, a joint venture, etc., which is akin to capital movement and establishment of some form of juridical presence in a service sector. The best example of this mode is the setting up of foreign bank branches/subsidiaries/ATMs or foreign equity participation in the telecommunications sector. Mode 4 is service trade that occurs through the temporary cross border movement of service providers, regardless of skill level, and in various capacities, be it independently such as an independent professional/contractual service supplier, or along with commercial presence, such as an intracompany transferee moving between subsidiaries of a multinational.
As things stand, commitments made by countries have been most forthcoming in those services and modes that are relatively more open to begin with, while modes such as movement of natural persons and commercial presence remain subject to restrictive commitments and narrower scope of obligations. Increasingly, however, governments have noted the fact that there is a lot of interdependence across the four modes of service trade and that instead of addressing negotiating issues in each service sector and mode independently, one may need to take a broader, cross-sectoral, and cross-modal perspective in order to negotiate more effectively for improved market access and national treatment commitments. Moreover, they have also realised that their own commitments in a particular mode for key services such as telecommunications have implications for their export interests in other areas and other modes, and thus the need to take into account import-export linkages across sectors and modes.
Findings
This study examined the various kinds of linkages that are found in service sector trade, using evidence from companies, countries, and interviews/surveys. Essentially three types of linkages are found across the four modes of supply, namely, positive, substitutive, and negative linkages. Positive linkages take the form of (i) complementarities across modes, where one or more mode is simultaneously used for providing the service across borders; and (ii) facilitation across modes, where trade through one mode creates conditions that are conducive for trading through other modes. Substitutive linkages involve the substitution of one mode of supply with another. Negative linkages involve (i) restrictions on one mode, which affect trade through other modes of supply and distort the way in which a service is traded; and (ii) restrictions which apply across multiple modes and constrain several modes simultaneously. In addition to these first order linkages, there are also extended spillover effects across the modes that arise indirectly over a period of time.
The study looks at various service sectors and across various countries to understand how each of these types of linkages operates and which modes of supply are mainly concerned. The case of facilitating and complementary linkages is seen in the context of energy, construction, engineering and R&D, education and training, financial, business, and retail distribution services. Here, the most two modes that are found to be commonly linked are modes 3 and 4, whereby temporary movement of service providers complements commercial presence, and there is a supporting and intermediary role played by mode 1 in this process. There are several examples of firms that have established commercial presence overseas and have had intrafirm movement and deputation of personnel (mode 4) across countries to run the overseas operations, i.e., modes 3 and 4 have been complementary. In some of the examples, commercial presence overseas through captive subsidiaries has enabled the offshoring of certain service operations. In such cases, mode 3 has facilitated mode 1 or cross border supply. In some of the services, such as in education and training services, complementary and facilitating relationships are present between modes 2, 3, and 4, with some organisations setting up overseas networks of training institutes and subsidiaries, staffing them with instructors from the home market, and in turn attracting students from other countries to the home country’s institutions.
Two sectors are found to exhibit very strong positive linkages across different modes of supply. These are information technology and business process outsourcing services and healthcare services. Evidence on Apollo, L&T Infotech, and various companies in the Philippines, Malaysia and Cuba are presented to highlight the complementarities in these two sectors. In the case of IT and BPO services, the most prevalent intermodal linkage that emerges is the complementary relationship between modes 1 and 4, i.e., the complementary nature of offshore and on-site provision of software and other business services, the latter often being supported and facilitated by mode 3, i.e., the overseas development centre or subsidiary of the client firm. In the case of healthcare services, company as well as country-specific evidence reveals the interdependence across all four GATS modes, for example mode 2, the consumption of health services by foreign patients which is facilitated by the setting up of foreign hospitals and joint ventures with foreign partners, i.e., mode 3, and supported by teleconsultation and other telehealth services, i.e., mode 1 as well as the staffing of overseas health care establishments with home country health care professionals and management personnel.
Substitutive linkages are found in sectors like health and education services where overseas commercial presence can substitute for consumption by foreigners in the home country of investment, i.e., mode 2 exports. There are also examples from BPO and IT-enabled services, where temporary movement of service providers or mode 4 is substituted by voice/internet/satellite based offshore delivery of various business services under mode 1. Another example is that of retail distribution services where the need for overseas commercial presence is obviated by cross-country retailing online and expanding e-commerce opportunities.
Negative linkages are found to take the form of cross-cutting limitations across the four modes of supply as well as intermodal distortions. Cross-cutting limitations arise when restrictions on one mode constrain the scope for trade through other modes, such as restrictions on commercial presence, mode 3, that curtail the scope for associated mode 4 based delivery, or recognition requirements which cut across modes 1 and 2 in sectors like healthcare services. Intermodal distortions occur when restrictions such as data privacy laws force cross border supply of certain services to be done only through the establishment of captive subsidiaries, i.e., mode 3. Examples from the air transport, tourism, and health services sectors highlight different kinds of negative linkages.
In light of the many kinds of linkages that emerge from the analysis, the study notes certain domestic policy measures and strategies that can help internalise the externalities due to linkages across modes and across service lines. The study notes three broad areas for domestic policy action. Firstly, it suggests that governments facilitate the central modal source of the positive linkage where such a mode exists and can be identified, by removing various domestic constraints to this mode. Secondly, it suggests the need to facilitate and increase the effectiveness of the main channels by which the positive linkage arises and influences other modes. Thirdly, it suggests that governments address the domestic policy-based, infrastructure, and other constraints that affect trade opportunities in related modes so that the positive linkages are realised and negative linkages are reduced. It also notes the need to reflect these three broad elements, namely, facilitating the key drivers, promoting the channels by which linkages are propagated across modes, and liberalising all modes in general in the negotiating strategy on services, at the multilateral, regional, and bilateral levels.
The discussion on linkages also suggests possible directions for future GATS negotiations. The first relates to potential focus areas for negotiations. The study shows the importance of three particular modal combinations in services trade, namely, modes 3 and 4, modes 3 and 1, and modes 1 and 4 often facilitated by mode 3. The study thus suggests that greater focus may be required in the negotiations on restrictions that specifically affect these modes, or which cut across these modes. In several respects, modes 3 and 1 present the best opportunities for liberalisation given the general trend towards global dispersion of firm activities and liberalising foreign commercial presence in developing countries in the case of mode 3, and the rise in global outsourcing and thus converging interests between host and home country firms and industry associations in the case of mode 1. To the extent that these two modes are addressed, export interests in movement of natural persons in the case of skilled contractual service suppliers, independent professionals, and intracompany transferees, are likely to get addressed, given their supporting role in overseas commercial presence or in enabling outsourcing operations. The second possibility concerns the adoption of a cluster-based approach to the GATS negotiations, as there are clearly clusters of services, which tend to exhibit trade linkages across modes. For instance, telecom, software, and other business services are linked in terms of trade opportunities and modes of supply. There is also a prevalent enabling role played by certain sectors. The study suggests that under a cluster approach, service sectors/sub sectors and activities and the relevant modes where there are linkages, be discussed in a bundle and relevant disciplines under the GATS, such as those on subsidies, domestic regulation, and transparency, could be addressed as a whole for that bundle.
Overall, the findings clearly indicate the complex nature of service trade and the difficulties in pinning down different modes of supply by which a service is transacted across countries. The analysis also suggests that inter-modal dynamics and spillover effects in services trade are likely to become more widespread, complex, and multidirectional in nature, with the growing transnationalisation of production and services, further advances in information and communication technology, and the emergence of many more countries in services trade
For further details on this study contact Rupa Chanda, Associate Professor, Economics and Social Sciences, Indian Institute of Management Bangalore. rupa@iimb.ernet.in
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