Financial services have always been an important component of trade negotiations, both at the multilateral and preferential levels. Most FTAs negotiated since 1994 contain either special provisions on financial services, à la the General Agreement on Trade in Services (GATS), or comprehensive chapters covering all aspects of trade and investment in financial services. The TPP adopts the latter approach.

World Trade Organization

Preferential liberalization of trade in services is not a new phenomenon, but it has become a more common and prominent feature of the latest generation of bilateral preferential trade agreements (PTAs) negotiated in this decade. As of September 15, 2008, fifty-six such accords have been notified to the World Trade Organization (WTO) under Article V of the General Agreement on Trade in Service (GATS; see Table 7.1). Most of those notifications arrived after 2001 – fifty compared to six before the year 2000. In addition, many more agreements are currently being negotiated.

One might expect that countries entering these PTAs do so with the objective of eliminating barriers to trade in services, but more importantly, in the hope that the agreements will actually increase bilateral services trade between the parties. Lack of reliable data on trade in services (especially of bilateral flows) has made it almost impossible to carry out empirical studies of the determinants of bilateral services trade flows and – in particular – of the effects of PTAs on trade flows in services. However, the availability of statistics on trade in services has improved over the past year, particularly among Organization for Economic Cooperation and Development (OECD) countries. Taking those developments in the statistical field into account, the main purpose of this chapter is to provide an initial quantitative estimate of the effect of PTAs on bilateral trade in services, using the standard gravity model.

In the context of stalled multilateral trade negotiations, preferential trade agreements (PTAs) have continued to proliferate, raising important trade and policy issues. Unlike in any other period since the establishment of the multilateral trading system, all important trading nations are now involved in PTA discussions of one form or another. In the midst of the recent flurry of PTA activity, this paper attempts to fill a gap in the literature by providing a comprehensive evaluation of the liberalization commitments contained in the recent wave of preferential trade agreements on services. Indeed, the trade literature has tended to limit its examination of services components of PTAs to the type of rules they contain and to such other characteristics as whether a GATStype positive listing or NAFTA-type negative listing was used in undertaking commitments.

The paper hopes to make a contribution at the empirical level by comparing the commitments undertaken in PTAs with prevailing GATS commitments, as well as offers in the ongoing Doha Round negotiations so as to assess how much further access is granted under PTAs. The review of recent services PTAs should help shed light on some basic questions: do PTA commitments go further than existing GATS commitments and GATS offers and, if so, to what extent? What types of PTAs appear to encourage more liberalization (in terms of scheduling approaches, countries involved, etc.)? Do PTAs encourage actual liberalization, i.e. going beyond the status quo?

The Uruguay Round of trade negotiations, from 1986 to 1994, marked, to a great extent, the debut of services in trade negotiations. Since then, trade in services has become an indispensable element of such endeavors, be they bilateral, regional, or multilateral. Over time, what used to be an arcane issue, whose secrets were to be revealed only to a few initiates, has been attracting an increasing attention on the part not only of policy-makers and trade negotiators but also of businesspeople, researchers, and civil society. Why this increasing interest? There are several reasons for this. For one, services play a central role in economic activity in virtually all countries of the world. Their participation in gross domestic product (GDP) ranges, on average, from 50 percent in low-income countries to 54 percent in middle-income economies, and to 72 percent in rich countries. The importance of employment in services activities is no less impressive, averaging 72 percent of total employment in high-income economies.

Another reason for this increasing interest in services trade is its rising share in investment and trade. In 2006 commercial services exports, measured by traditional balance of payments standards, reached almost $2.8 trillion. In spite of this highly significant increase in absolute value, trade in services still accounts for about 20 percent of world trade. These figures highly underestimate the importance of services for world trade, however.

The purpose of this appendix is to provide the reader with an overview of key concepts used in negotiations on trade in services. Many of these concepts find their origin in the WTO General Agreement on Trade in Services, which has served as the model for the services chapters contained in many preferential trade agreements. Reference to other concepts not pertaining to the GATS, but nevertheless necessary to understand other negotiating models, is made whenever appropriate. The appendix also provides an overview of current services negotiations within the WTO Doha Development Agenda.

The appendix is not intended to be an exhaustive explanation or a legal interpretation of the GATS.

What is the GATS?

The WTO General Agreement on Trade in Services entered into force in January 1995 as a result of the Uruguay Round negotiations. It is the first and only multilateral agreement containing rules and disciplines on trade in services. Being part of the Agreement establishing the World Trade Organization, all WTO members are also signatories to the GATS and have to abide by the resulting obligations. As suggested by its Preamble, the GATS aims to encourage the expansion of trade in services under conditions of transparency and progressive liberalization, as a means of promoting economic growth and development.

The scope of the GATS

The GATS applies to all government measures affecting trade in all services sectors, with two exceptions, one sectoral and the other of a more general nature.

The first decade of this century has been characterized by intensive trade negotiations. Countries all over the world have resorted to a plethora of fora and mechanisms to enhance trade opportunities overseas. Negotiations at the WTO have been ongoing since November 2001 under the umbrella of the Doha Development Agenda. In parallel to that, many new preferential trade agreements have entered into force.

One of the salient aspects of these PTAs is the inclusion of disciplines for the liberalization of trade in services. A novelty two decades ago when the issue was introduced into the multilateral trade agenda, services trade has become a prominent and sometimes unavoidable feature of trade negotiations.

This flurry of PTAs has spurred interest and concern among academics and policy-makers, who wonder about countries' motivations for signing these agreements in the context of ongoing multilateral trade negotiations, and about their impact on trade flows and the multilateral trading system.

Save for studies on the type of obligations and liberalization modalities used by services PTAs, research with regard to preferential trade in services is rather in its infancy. The main purpose of this chapter is to contribute to this research by building upon previous work to assess the market access achievements of services PTAs and by discussing the implications for the multilateral trading system. In so doing, the chapter aims to deal not only with PTA negotiations and liberalization but also with multilateral negotiations. This provides a natural point of comparison.