EIU Research Note | November 2015

8 Things to Know About Trade in Services and GATS

1. Why Has Trade in Services Become an Important Topic?
Until 1995, the general sense to trade in services was that services a less tradable sector and the focus of government
policies on trade were on goods. The rapid progress in telecommunication and technology in the post 1900s brought a
new dimension to international trade with a wide range of service activities that were previously considered non-tradable
entering international trade. This led a considerable expansion in trade in services via new modes of demand and supply.
Services are now the biggest contributors to a countrys GDP in most countries in the world. In the Sri Lankan context
also this hold true with the services sector accounting for about 57.6% (2014) of the GDP.
Trading in goods and services are increasingly linked together. For example, apparel exporters cannot be competitive in
the international market without access to an efficient banking, insurance, accountancy, telecom or transport system and
sound research and development. Also the purchase of many products nowadays often comes with a service component.
In reality services, especially in the areas of travel, transport, telecommunication, education and finance has become
significant component of the global trading environment. Therefore benefits of service liberalization extend beyond services
oriented industries and felt across all economic sectors.

2. Is Trading in Services Different to Trading in Goods?

Trade in goods can take place either with the supplier being present or not present within the territory of the member.
However trade in services in some instances require simultaneous physical presence of both the service supplier and the
consumer. Also many services are not produced until the consumer of the service has demanded for the specific service.
Also some degree of transformation, where a services substituting are goods is noticed in some areas of trade. For example
the cloud computing to some extent has replaced the need for installed hardware and services associated with cloud
computing such as technical infrastructure, platforms and software are increasingly provided as services on a global basis.
There are two different agreements under WTO to govern trade in goods and trade in service. GATT focuses only on trade
in products whereas GATS focuses on both service and the service provider. (However notifications regarding trade
barriers/liberalization should address the impact on both service and the service supplier.)

3. What is GATS?
Services are the largest and most dynamic component of both developed and developing economies in the world. Their
inclusion in the Uruguay Round of trade negotiations led to the General Agreement on Trade in Services (GATS). GATS
is an inter-governmental agreement to establish a multilateral framework for rules and regulations for trade in services
with increased transparency and predictability. GATS also clarifies the obligations of members within the agreements
framework with specific commitments to prevent further trade restrictions and describes the legal structure for observing
those obligations. Furthermore GATS also specifies on the requirement to engage in ongoing rounds of negotiations
progressive liberalization of trade in services.

4. When and Why Did GATS Come into Effect?

Given the relevance of a trade negotiation in services for international trade, a treaty for multilateral trading system in
the service sector was developed, similar to the General Agreement on Tariffs and Trade (GATT) providing a system for
merchandise trade.
GATS came into force in January 1995 with the conclusion of the Uruguay round of WTO trade agreements, where the
new World Trade Organization was born with a revised GATT (General agreement in Trade in Goods) and GATS. It is the
first and only set of multilateral rules covering international trade in services.
Since January 2000, they have become the subject of multilateral trade negotiations.

5. How Many Countries are Signatory to GATS?

All members of the WTO, currently 161 members are signatory to GATS (of which 117 are developing countries or separate
customs territories) and to varying degrees, have assumed commitments in individual service sectors.
Sri Lanka has been a signatory to GATS since it came into effect in January 1995.
WTO members have made individual commitments under GATS stating which of their services sectors they are willing to
open to foreign competition, and how open those markets are.
GATS allows WTO Members to decide for themselves which sectors will be liberalized and to define country-specific
conditions on the form that liberalization will take.

6. What Services are covered under GATS?

The GATS covers all internationally-traded services, except;
-

Exercise of governmental authority services provided to the public in the exercise of governmental authority
Traffic rights and all services directly related to the exercise of traffic rights
Other areas that could have an impact on service providers such as fiscal policy and taxation measures, exchange
rate management and most immigration rules applicable to temporary business entry are not covered under GATS.

For the purpose of structuring their commitments, WTO Member have generally used a classification system comprised
of 12 core service sectors;
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Business services (including professional services and computer services)

Communication services
Construction and related engineering services
Distribution services
Educational services
Environmental services
Financial services (including insurance and banking)
Health-related and social services
Tourism and travel-related services
Recreational, cultural and sporting services
Transport services
Other services not included elsewhere

These sectors are further subdivided into a total of some 160 sub-sectors. Under this classification system, any service
sector may be included in a Members schedule of commitments with specific market access and national treatment
obligations. Each WTO Member has submitted such a schedule under the GATS.

7. How Does a Cross-Border Trade in Service Take Place and What Are
the 4 Modes?
A service is traded when an economic exchange takes place between a resident and non-resident regardless of the location
of the transaction being made. The GATS defines four ways in which a service can be traded, known as "modes of supply"
Mode of Supply

Supplier Presence

Cross-border
Mode 1
supply of services

Mode 2

Consumption
abroad

Mode 3

Commercial
presence

Services are supplied from one country to another without

requiring physical movement of either supplier or consumer.
Only the service crosses the border, usually delivered through Service Supplier is not
information and telecommunications
present within the
territory of the of the
Services are provided to another countrys citizens, who are member
required to travel to the territory where the services are
located in order to benefit from the service.
Company from one country establishes subsidiaries or
branches to provide services in another country

Service Supplier is
present within the
Movement
of
Requires cross border movement of a natural person. Service territory of the territory
natural
Mode 4
providers travel from their own countries to supply services of the member
persons (distinct
in other countries.
for legal person)

Example from the education services sector

Mode

Example

Mode 1

Online education courses provided by foreign universities.

Mode 2

Sri Lankan Students going for higher studies in overseas universities

Mode 3

Sri Lankan students studying in subsidiaries of foreign universities situated in SL

Mode 4

Foreign lecturers moving in to lecture Sri Lankan students

Example from the health services sector

Mode
Mode 1
Mode 2

Example
Trade across borders through mail and electronic media
(E.g. air freight of lab samples, internet consultations and medical education etc.)
Sri Lankan patients travelling to another country to obtain healthcare services.

Mode 3

Establishment of a foreign company/subsidiary for the provision of health services.

(E.g. health management services, health insurance etc.)

Mode 4

Doctors and health consultants visiting Sri Lanka for the provision of health services.

8. Can Bilateral/Multilateral Trade Agreements in Services Go Above or

Below GATS Commitments?
Yes. New bilateral/multilateral trade in services agreements are characterized by "GATS-Plus" and "GATS-Minus commitments.
GATS PLUS Commitment: A bilateral/multilateral Trade in Service Agreements can offer wider or deeper commitment
concerning market access or national treatment compared with that of GATS. Regional / Bilateral Service Agreements can
produce these GATS-Plus by offering commitments that can extend the national treatment and market access to areas
where the member has not made such commitment in the GATS yet.

GATS Minus Commitment: A bilateral/multilateral Trade in Service Agreements can offer narrow or restricted
commitment concerning market access or national treatment compared with that of GATS. GATS-Minus commitments in
a bilateral/multilateral Trade in Service Agreement could include; additional restrictions not listed in GATS, tightening the
existing GATS limitations, omission of subsectors or sector segments and reciprocity elements and an overview of modes
and service sectors that has been affected by them.

Prepared by Economic Intelligence Unit (EIU), The Ceylon Chamber of Commerce.

For queries, contact Jayani on jayani@chamber.lk
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