PART I
GATS AND GENERAL IMPLICATIONS

By Sh. Yousaf Haroon
Jan 26 - Feb 01, 2004

The General Agreement on Trade in Services (GATS) is among the World Trade Organization's most important agreements. The General Agreement on Trade in Services (GATS) provides for a multilateral set of rules and principles governing trade in services. The intangibility of services, the need for direct interaction between supplier and consumer/user in many cases, and the importance of appropriate regulatory control and supervision have rendered rule-making in services a challenging undertaking. It has been negotiated by the governments themselves, and it sets the framework within which firms and individuals can operate.

The entry into force of the Agreement in January 1995 thus constituted a landmark event in the history of the multilateral system, comparable to the inception of GATT in 1948. GATS (Table 1) which is part of the more comprehensive Final Act of the Uruguay Round and the Marrakash Agreement Establishing the World Trade Organization (the Marrakash Agreement), is divided into three parts:

(i) The framework comprising 29 articles which lay out the scope of the GATS, the general obligations and disciplines to be observed, and how specific commitments are to be negotiated and inscribed in the Agreement. The framework also contains a number of institutional provisions pertaining to consultation, disputes settlement and enforcement, the creation of a Council for Trade in Services, technical cooperation and relations with other international organizations.

(ii) Annexes (eight in total as illustrated in Table 2) clarifying exemptions and provisions on four specific sectors including Telecommunications.

(iii) Some 115 schedules of country commitments on specific services and services sectors (as of the end of the Uruguay Round).

TABLE 1: BIRDS EYE VIEW OF GATS

GENERAL AGREEMENT ON TRADE AND SERVICES

PART 1: SCOPE AND DEFINITION

ARTICLE I

SCOPE AND DEFINITION

PART II: GENERAL OBLIGATION AND DISCIPLINES

Article II

Most-Favored-Nation Treatment

Article III

Transparency

Article III bis

Disclosure of Confidential Information

Article IV

Increasing Participation of Developing Countries

Article V

Economic Integration

Article V bis

Labour Markets Integration Agreements

Article VI

Domestic Regulation

Article VII

Recognition

Article VIII

Monopolies and Exclusive Service Suppliers

Article IX

Business Practices

Article X

Emergency Safeguard Measures

Article XI

Payments and Transfers

Article XII

Restrictions to Safeguard the Balance of Payments

Article XIII

Government Procurement

Article XIV

General Exceptions

Article XIV bis

Security Exceptions

Article XV

Subsidies

PART III: SPECIFIC COMMITMENTS

Article XVI

Market Access

Article XVII

National Treatment

Article XVIII

Additional Commitments

PART IV: PROGRESSIVE LIBERALIZATION

Article XIX

Negotiation of Specific Commitments

Article XX

Schedules of Specific Commitments

Article XXI

Modification of Schedules

PART V : INSTITUTIONAL PROVISIONS

Article XXII

Consultation

Article XXIII

Dispute Settlement and Enforcement

Article XXIV

Council for Trade in Services

Article XXV

Technical Cooperation

Article XXVI

Relationship with Other International Organizations

PART VI: FINAL PROVISIONS

Article XXVII

Denial of Benefits

Article XXVIII

Definitions

Article XXIX

Annexes

ANNEXURES

Annex on Article II Exemptions
Annex on Movement of Natural Persons Supplying Services under the Agreement
Annex on Air Transport Services
Annex on Financial Services
Second Annex on Financial Services
Annex on Negotiations on Maritime Transport Services
Annex on Telecommunications
Annex on Negotiations on Basic Telecommunications

Source: WTO

TABLE 2: GATS GENERAL OBLIGATIONS AND DISCIPLINES W.R.T. TELECOMMUNICATIONS

ARTICLE II

MOST FAVORED NATION

This most basic principle of a multilateral trade agreement requires that services and service suppliers of any WTO Member receive treatment which is "no less favorable" than the treatment accorded to like services and service suppliers of any other WTO Member. This means for example that the service suppliers of one Member should not be given better conditions to connect to the basic network or to access spectrum than service suppliers of all other Members. Exemptions to MFN can be listed in a separate schedule known as the Member's List of Article II Exemptions.

ARTICLE III 

TRANSPARENCY

Requires that WTO Members publish all measures (i.e. laws, regulations, administrative guidelines, procedures, decisions, and directives) which can affect the trade in services covered by a Member's GATS commitments.
The transparency provision also requires Members to inform the WTO of any new measures or changes to existing ones and to respond promptly to requests by other Members for specific information.
Enquiry points are to be established for this purpose. The transparency provision does not require the publication of commercially confidential information. It is a key element in promoting the stability and predictability of the trading system because it allows service suppliers to know the rules under which they can do business in the country that has opened its markets.

ARTICLE VI 

DOMESTIC REGULATION

The provisions in this article are intended to ensure that a Member who has undertaken certain market opening commitments does not "nullify or impair such specific commitments" through measures relating to qualification requirements and procedures, technical standards, and licensing requirements. The provisions of this article require, furthermore, that the WTO develop disciplines to ensure that any such requirements, if they exist, are based on objective and transparent criteria and are not more burdensome than necessary to ensure the quality of the service. This is referred to as the "Article VI Work Programme" which will be put into effect now that the basic telecommunications negotiations have been completed.

ARTICLE VIII 

MONOPOLIES AND EXCLUSIVE SERVICE PROVIDERS

Nothing within the GATS prevents a Member from maintaining monopolies so long as these are not contrary to its specific commitments; however, this article requires that Members ensure that such monopolies do not act in a manner which is inconsistent with the Member's MFN obligations and specific commitments. Furthermore, the Member should ensure that the monopoly does not abuse its monopoly position by, for example, subsidizing its competitive activities (which may be provided by an affiliate) with the profits of its monopoly activities.
This provision is repeated in the NGBT's regulatory framework Reference Paper.

ARTICLE IV 

BUSINESS PRACTICES

Similar to Article VIII, this article deals with certain business practices of service suppliers which may restrain competition and thereby restrict trade in services. Like Article VII, it is relevant because of the prevalence of monopolies and exclusive service providers in this sector and, where competition has been introduced, the frequent presence of telecommunications service providers with a dominant market share and the potential to gain unfair advantage from their position.

ARTICLE XVI 

MARKET ACCESS

Market access is the country's commitment to open its market to permit service providers from other Member countries to sell the listed telecommunication services in a manner consistent with any limitations that have been indicated. Market access limitations are defined primarily in terms of quantitative restrictions, but also include some other forms of limitations such as caps on foreign equity participation or restrictions or requirements regarding the type of legal entity permitted to supply the service.

ARTICLE XVII 

NATIONAL TREATMENT

National Treatment requires that Member countries subject foreign telecommunication providers to conditions no more onerous than the conditions imposed on domestic providers, except with respect to any departures from national treatment explicitly stated as limitations in its offer (e.g., some governments have entered restrictions on the ability of foreigners to purchase land or have indicated in schedules that foreign equity participation in a service supplier in a particular sector is limited to a certain, specified percentage). There may be limitations on nationality or residency of directors, foreign ownership restrictions, or preferences given to domestic suppliers in the allotment of frequencies.

ARTICLE XVIII 

ADDITIONAL COMMITMENTS

Additional Commitments create an open-ended possibility to negotiate and agree on commitments on measures affecting trade in services that are not expressly captured by market access and national treatment.

KEY ELEMENTS OF THE GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)

HOW THE GATS AGREEMENT WORKS?

The aim of the Agreement is to get members to apply common rules on how foreign services providers can deliver services in national economies and also to reduce over time the barriers to the provision of those services. The idea is that greater competition in the delivery of services will increase competitiveness in the economy and improve the quality of services provided. Among the other important provisions of the framework of rules are those which:

Require member countries to ensure transparency in the regulations applicable to service industries and activities,
Aim at ensuring the increasing participation of developing countries in the trade in services.

CATEGORIZATION OF SERVICES

The GATS schedules largely follow a classification, based on the United Nations Central Product Classification (CPC) system, which identifies 11 basic service sectors (plus a twelfth category for miscellaneous services). These sectors are subdivided into 160 sub-sectors or separate service activities. (The number of activities actually covered by GATS commitments is a little smaller).

The 12 sectors are:

1. business (including professional and computer) services;
2. communication services;
3. construction and related engineering services;
4. distribution services;
5. educational services;
6. environmental services;
7. financial (insurance and banking) services;
8. health-related and social services;
9. tourism and travel-related services;
10. recreational, cultural and sporting services;
11. transport services, and
12. other services not included elsewhere.

As an example, the tourism category breaks down into sub-sectors for hotels and restaurants, travel agencies and tour operators, and tourist guide services. The list of services is not finite. Members can and do propose new categories of services in order to seek specific commitments to remove restrictions.

KEY PROVISIONS OF GATS

The principal obligation in the GATS is to guarantee non-discriminatory treatment to Foreign Service providers as markets are opened. National treatment is not an automatic right. Members are invited to grant national treatment in the process of progressive liberalization of services markets. GATS also has a general obligation to ensure that national laws governing the provision of services are transparent.

PROTECTION IN THE SERVICE SECTORS

Major difference between goods and services lies in the way protection is granted by governments to domestic industries. Industries producing goods are generally protected by the imposition of tariffs or other border measures such as quantitative restrictions. Service industries are protected mainly by national domestic regulations on foreign direct investment and the participation of foreign service suppliers in domestic industries. Such regulations may, for instance, prohibit foreign service suppliers (e.g. banks or insurance companies) from investing in or establishing a branch that is necessary for the supply of services. Regulations may be applied on a discriminatory basis to natural persons providing services, thus treating them less favorably than domestic producers (non-application of the national treatment principle). They may also provide for dissimilar treatment of service suppliers from different countries (non-application of the MFN principle).

EXEMPTIONS AND RESTRICTED COVERAGE

Members of GATS were given initial rights to list areas to which they would not initially extend non-discriminatory treatment. These exemptions are listed in schedules. The right to maintain these exemptions was limited to 10 years. The industries to which Most Favoured Nation (MFN) exemptions were nearly universally applied were those providing cultural services, particularly film and television.

MFN TREATMENT

In trade in goods, the MFN principle, as of Article II of GATS, requires a country to extend any "advantage, favour or privileges" it grants to another country (for instance, in lowering tariffs or in applying the rules and formalities for importation and exportation) to all other member countries. This obligation to extend MFN treatment is unconditional. GATS also imposes an obligation on countries to apply the MFN principle by according to other countries, in respect of the measures covered by the Agreement, "treatment no less favourable than that it accords to like services and service suppliers of any other country." The obligation to extend such treatment applies on both de jure and de facto basis. GATS, however, recognizes that not all countries may be able to assume such an obligation immediately. It therefore provides that a country could, if it so wishes, maintain measures that are inconsistent with the rule for a maximum transition period of 10 years. The exemptions are temporary and the need for maintaining them is to be reviewed periodically after five years; they are to be abolished after 10 years (i.e. by 1 January 2005).

TRANSPARENCY: ESTABLISHMENT OF ENQUIRY AND CONTACT POINTS

Foreign suppliers often find it difficult to do business with firms in outside countries because of the rules and regulations applicable there. The lack of transparency of such rules poses even more serious problems in the service sectors where domestic regulations are the main means used to protect domestic producers from foreign competition. The Agreement therefore requires each member country to establish one or more enquiry points from which other member countries can obtain information on laws and regulations affecting trade in the service sectors of interest to their industries. In addition, in order to assist service suppliers in developing countries, the Agreement calls on developed country members to establish contact points. To obtain information from enquiry points, service enterprises will have to channel their requests through their national governments; requests for information from contact points can be made direct. The contact points are to be geared to providing information at the business level. In particular, the Agreement requires contact points to provide on request to service suppliers in developing countries information on:

The availability of service technology;
Commercial and technical aspects of the supply of services;
Registering, recognizing and obtaining professional qualifications.

Service industries often exercise monopoly powers in the domestic market; exclusive rights to supply services are sometimes given by governments to a small number of suppliers. In all such cases, members are under obligation to ensure that such suppliers do not abuse their monopoly or exclusive rights or act in a manner inconsistent with their general and specific obligations under the Agreement. The Agreement further recognizes that service suppliers could adopt practices that may distort competition and thereby restrain trade. Whenever a problem of this nature occurs, the affected member country has a right to request the member where the service supplier is situated for consultations with a view to eliminating such practices assumed by countries. In relation to sectors where specific commitments are undertaken, these include the following obligations:

To ensure that all domestic regulations of general application affecting trade in services are administered in a reasonable and objective way;
To maintain or institute tribunals or procedures providing for the review of administrative decisions affecting trade in services;
To issue to foreign suppliers the authorization required for the provision of services within a reasonable period;
Not to apply restrictions on international transfers and payments, except when the country is in serious balance-of-payments difficulties.

PROCESSES OF LIBERALIZATION

As with the General Agreement on Tariffs and Trade (GATT), in GATS members list their commitments in national schedules. The commitments show what restrictions have been removed and which industries remain reserved for national providers. The aim of successive rounds of negotiations is to progressively remove restrictions on foreign suppliers of services and to extend national treatment to foreign providers.

SCHEDULING COMMITMENTS

When the first schedules of commitments were prepared, members were required to list restrictions that applied "horizontally", that is, across all industries.

HORIZONTAL COMMITMENTS: Broadly speaking, developed countries have not specified many horizontal limitations on the establishment of a commercial presence by foreign suppliers. The creation of a subsidiary company or a branch by a foreign supplier to carry out a service activity or to make an investment in the domestic service industry will therefore continue to be permitted under their existing legislation. These, as a rule, provide for the grant of authorization on liberal terms. However, in the majority of the Uruguay Round schedules, horizontal commitments relating to the movement of natural persons were largely limited to:

Intra-company transfers covering essential personnel, i.e. managers and technical staff linked with commercial presence in the host country, and
Business visitors who are short-term visitors not gainfully employed in the host country.

SECTORAL COMMITMENTS: Commitments undertaken by countries in their sectoral schedules complement their horizontal commitments. While developed countries have included in their schedules all service sectors, developing countries have exercised a certain degree of flexibility and have covered a limited number of sectors, taking into account such factors as the stage of their development. The type of limitation specified in the sectoral schedules relates to the characteristics of the service activity and the modes in which service transactions primarily take place.

The content of the commitments undertaken and the limitations are imposed in six sectors in negotiations during and after the Uruguay Round:

1. Financial services;
2. Telecommunications services;
3. Professional services;
4. Construction and related engineering services;
5. Health-related and social services; and
6. Management consultancy services.

WTO members were also required to list restrictions according to the mode of supply and to what extent national treatment was afforded to foreign service suppliers. Finally they were required to list what services were "unbound" that is, where no commitments to remove barriers has been made. The schedules of commitments thereby contain "positive" lists of commitments indicating what restrictions have been removed and "negative" lists showing services where no restrictions have been removed.

ANNEXES TO GATS

There are several Annexes to GATS. They serve different purposes. Among the more important is the Annex on Movement of Natural Persons. This is a sensitive issue, reflecting differences among members of the WTO about the relative importance of movement of natural persons. A number of developing countries have large numbers of citizens working in foreign economies in services industries. Earnings from such persons represent the largest source of export earnings for the Pakistan, for example. Many countries however are sensitive to the implications for immigration policy of removing restrictions on the movement of natural persons. The Annex stipulates that national authority to control immigration is not affected by the GATS.

There are two annexes on financial services. The first protects the right of governments to regulate financial services in order to exercise prudential supervision. The second details commitments to open markets that arose from negotiations conducted after the GATS came into effect.

There are also two annexes on telecommunications. The first established a right for foreign services providers to secure access to public telephone networks. The second recorded the results of negotiations conducted after the GATS came into effect, in which members made commitments to provide access to providers of basic telecommunications. A related decision recognizes a set of guidelines to promote competition in domestic telecommunications markets. Some members of the WTO have committed to apply those guidelines in their national policy.

COMPOSITION OF SCHEDULES OF COMMITMENTS

The shape of the schedules is determined by categorization of how services are supplied, of services by industry and commitments to nominate how market access and national treatment will be provided.

MODE OF SUPPLY

The GATS covers all internationally-traded services with two exceptions: services provided to the public in the exercise of governmental authority, and, in the air transport sector, traffic rights and all services directly related to the exercise of traffic rights.

Unlike the GATT, the GATS is not so much about barriers at the border as barriers inside the border. Regulatory reform is one step further still beyond the removal of internal quantitative restrictions on market access, for it attempts to establish the economic, technical, social, environmental and other terms and conditions under which market participants act. While the GATS recognize the "right to regulate", it also provides rudimentary regulatory requirements, as well as a basis for the negotiation of more detailed rules governing regulatory measures. This approach to trade liberalization was a result of lessons drawn in the countries that first opened their markets to competition. They learned that commitments to liberalize market entry and to remove restrictions on foreign investment would not of themselves bring about competitive outcomes, especially in industries, such as telecommunications, where there are significant economies of scale and scope, network effects and positive externalities. Rather, one must create a regulatory environment that complements and supports the decision to permit competition.

Article I of GATS sets out a comprehensive definition of trade in services in terms of four different modes of supply cross-border, consumption abroad, commercial presence in the consuming country, and presence of natural persons.

Cross-border supply of services, or "Mode 1" in the jargon, corresponds with the normal form of trade in goods. It resembles the familiar subject matter of the GATT. Only the service itself crosses national frontiers.

"Mode 2" is consumption abroad, or in the words of Article I the supply of a service "in the territory of one Member to the service consumer of another Member". Typically, this will involve the consumer travelling to the supplying country (for example for the repair of a ship or aircraft outside its home country).

"Mode 3" is the supply of a service through the commercial presence of the foreign supplier in the territory of another WTO member. Examples would be the establishment of branch offices or agencies to deliver services such as banking, legal advice or communications. This is probably the most important mode of supply of services. It also raises the most difficult issues for host governments and for GATS negotiations. Freedom to establish commercial presence is freedom to invest. Mode 3 does not necessarily require the presence of foreigners. The foreign supplier's office may be staffed entirely by local personnel.

"Mode 4" is the delivery of services through the presence of natural persons, or in less opaque language, the admission of foreign nationals to another country to provide services there.

Some services can be supplied in several of the four ways, while many other services by their nature cannot. For example, the services of professional advisers may possibly be supplied through a visit to them by their foreign client, by mail, through an office maintained in the client's country, or by a personal visit to that country. On the other hand, a tourist can only enjoy a foreign country's beaches by going there, and street-cleaning services obviously must be provided on the spot. Unlike market access for a shipment of goods going from one country to another, which is principally a matter of customs duties and other formalities at the border, the ability to provide a service to another country depends crucially on government regulations that may be quite different for one of the four modes of supply than for another.

MARKET ACCESS

The remainder of the article sets out six forms of measures affecting free market access that may not be applied to the Foreign Service or its supplier unless their use is clearly provided for in the schedule. Between them, the six elements cover all the aspects of limitation of market access that may be specified in national schedules.

They are:

limitations on the number of service suppliers;
limitations on the total value of services transactions or assets;
limitations on the total number of service operations or the total quantity of service output;
limitations on the number of persons that may be employed in a particular sector or by a particular supplier;
measures that restrict or require supply of the service through specific types of legal entity or joint venture, and
percentage limitations on the participation of foreign capital, or limitations on the total value of foreign investment.

NATIONAL TREATMENT

Closely related to the MFN principle is the principle of national treatment.

At first sight, it may be difficult to understand why the right to national treatment is restricted under the GATS to services for which commitments have been undertaken, whereas under the GATT it applies to all goods. The reason lies in the nature of trade in services.

Whereas, the GATT national treatment rule prohibits member countries from imposing higher internal taxes on, or applying more rigorous domestic regulations to, an imported product than those imposed on a similar domestic product, after the imported product has entered the country on payment of tariffs and other charges payable at the border. The rule is intended to ensure that, in practice, the domestically produced product does not obtain protection higher than that resulting from the levy of tariffs. Since countries do not impose tariffs on imports of services, the imposition of the national treatment principle, by requiring countries to apply their national regulations equally to both domestic and foreign suppliers, would have resulted in the sudden loss by domestic service industries of their entire protection.

In GATT, universal national treatment for goods is possible, without creating free trade, because the entry of foreign goods into a national market can still be controlled by import duties, quantitative restrictions and other border measures. By contrast, a foreign supplier of most services, particularly if those services are supplied by commercial or personal presence in the importing country's market, will in practice enjoy virtually free access to that market if given national treatment, since this by definition will remove any regulatory advantage enjoyed by the domestic service supplier.

In the event, the GATS rules provide that the extension of the national treatment principle by countries would be based on the outcome of negotiations during which they would indicate the sectors or sub-sectors in which, and the conditions under which, they would be prepared to extend such treatment to foreign services and suppliers. It states that in the sectors covered by its schedule, and subject to any conditions and qualifications set out in the schedule, each member shall give to foreign services and service suppliers, treatment, in measures affecting supply of services, no less favorable than it gives to its own services and suppliers.

The basic obligation is stated in terms very similar to those of the national treatment rule in GATT's Article III, but the scope of application is limited in the case of the GATS to services sectors for which commitments have been given in the schedule of the country concerned. As in the case of market access, the requirement that any limitations on national treatment be specified in the schedule gives these limitations the same character as a GATT-bound tariff: the stated conditions or qualifications represent the worst treatment that may be given, and there is nothing to prevent better treatment being given in practice.

ADDITIONAL COMMITMENTS

The remaining provision in Part III, Article XVIII, says that members may also negotiate additional commitments (not additional restrictions) with respect to other measures affecting trade in services, such as those on required qualifications, standards and licensing.

GENERAL IMPLICATIONS OF GATS COMMITMENTS

For service industries in developing countries, the main advantage of the liberalization measures taken by these countries whether unilaterally or in the context of the Uruguay Round are expected to flow from the efficiency gains from increased competition in their domestic markets. The entry of foreign service providers in service sectors like telecommunications, banking and insurance will force domestic industries in countries where they were highly protected to improve their competitive position by adopting more efficient methods of providing services. The resulting better performance of the service industry will benefit not only the general public but also manufacturing enterprises in their export trade. The ability of such enterprises to compete in foreign markets depends heavily on how efficiently communications, banking and insurance services are available to them.

FOREIGN INVESTMENT OPPORTUNITIES

The commitments assumed by governments also provide service industries in developing countries a new opportunity to collaborate with foreign service industries and to benefit from their technology. In negotiating collaborative arrangements, the industry can use as bargaining leverage the limitations imposed by their governments in their schedules of commitments. These, inter alia, specify that approval will be granted only if foreign service suppliers agree to bring in the most up-to-date technologies and to train local employees in their use.

BENEFITS OF CONTACT POINTS

One of the major handicaps which service industries in developing countries suffer when entering into collaborative arrangements is their lack of knowledge of the commercial and technical aspects of the services and technologies they want to obtain. GATS therefore provides for the establishment by developed countries of contact points from which such information can be obtained by interested service industries in developing countries.

DOMESTIC LEGISLATION

The description earlier in this chapter of commitments in several sectors provides a broad idea of the nature and content of the commitments that countries have assumed in regard to services. However, the commitments relate only to certain aspects of domestic regulations. In order to assess their beneficial impact, it is necessary to examine them against the full background of the domestic regulations and rules applicable to the service sector in the countries making the commitments. In some cases, the commitment may simply reaffirm or bind an existing practice, for instance, of giving approval to the establishment of a branch or a subsidiary company. In other cases, it may amount to accepting a new obligation.

For service suppliers interested in developing trade, the information contained in the national schedules will therefore be of practical value only if they have all the relevant information on the domestic legislation, rules, regulations and practices forming the backdrop to such commitments. To assist service and other industries in obtaining such information, GATS requires member countries to establish enquiry points. These should provide information on the laws and regulations applicable to the service sector.

Opportunities for Natural Persons

In some sectors, the competitive advantage of a number of developing countries, particularly the more advanced among them arises from the existence of a vast pool of technically qualified people. Many skills-intensive services are provided through the temporary movement of natural persons to the countries where the service is provided. The horizontal commitments which countries have assumed in recently concluded negotiations on the movement of natural persons will now provide new opportunities for technically and professionally qualified persons to provide such services, without having to establish an office or other form of commercial presence.

INDUSTRIAL POLICY & GATS

The legally enforceable rules covering the international trade in services contained in the General Agreement on Trade in Services (GATS) can also affect industrial policy initiatives. Though it is a very tricky question when implementation of WTO rules apply to Industrial Policy keeping in-view of the nascent stage of development of a particular industry, or national importance on the basis of value addition, export potential, infrastructure, security or humanitarian concerns either to protect or to liberalize such as drinking water, or defense equipment or telecommunications.

Relative to disciplines on goods trade, the Agreement as a whole is much less effective in terms of liberalization. It contains a positive listing of sectoral commitments on market access and national treatment. It allows sectoral bindings on four modes of supply: cross-border supply, consumption abroad, commercial presence and presence of natural persons. Through the inclusion of commercial presence as a mode of supply, rules on foreign investment in services are now part of the multilateral trading system. Members, therefore, can use foreign investment liberalization as tool of industrial policy. This has happened to some extent with bindings in tourism, but not in other sectors. As with other forms of liberalization, the effect of the GATS is twofold. First, market access makes it possible to develop export sectors. Second, bindings have the effect of inducing competition in home markets.

Developing countries have an export interest in a limited range of sectors such as tourism and professional services. In these and other cases a key issue is the movement of natural persons (or mode 4). Horizontal barriers in this area make it difficult for developing countries to build export competitiveness in their comparative advantage areas.

Under GATS policies that are related to infrastructure, human capital formation, innovation and diffusion of technology, capacity building and competition policies are now critical for export competitiveness. These policies need to be complemented by a stable exchange rate that does not penalize (or favour) exports. These are generic pro-development policies; that is, they are not confined to and do not favour particular industries or producers.