Part I of GATS demarcates its scope and coverage.It applies to those measures by WTO members which affect trade in services. The measures covered by it not only include the ones taken by the central government of a member country, but also those taken by regional and local governments.
If a government delegates certain powers to non-government agencies, then measures taken by such agencies are also covered by this Part. Further, this Part covers all services except those “supplied in the exercise of governmental authority”.
These are those services (for example central banking and social security) which are neither supplied on a commercial basis nor in competition with other service suppliers.
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Modes of Supply (Export) of Services:
Article I sets out a comprehensive definition of trade in services in terms of four different modes of supply. They are:
i. Cross-border,
ii. Consumption abroad,
iii. Commercial presence in the consuming country, and
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iv. Presence of natural persons.
Classification of export of services into these four modes is of crucial importance for understanding the issues and problems that arise in international trade in services. This classification has a direct bearing upon the principles adopted in GATS and commitments made by national governments.
1. Cross-border Supply of Services, referred to as “Mode 1” corresponds with the normal form of trade in goods. In many ways it is the most straightforward form of trade in services. In this mode, there is a clear-cut geographical separation between seller and buyer.
Only the service itself crosses national frontiers. Of late, particularly for India, “business processing outsourcing” (BPO) has become an important form of this Mode.
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2. Consumption abroad, referred to as “Mode 2”, is the supply of a service “in the territory of one Member to the service consumer of another Member”. Normally, in this Mode, the consumer travels to the country supplying the service.
Commonly known examples of this form of trade in services is a tourist or a student going to another country. Another example of this mode is the repair of a ship or an aircraft outside its home country.
Like cross-border supply, this is a straightforward form of trade which raises few problems, since it does not require the service supplier to be admitted to the consuming country.
3. Commercial Presence of the Foreign Supplier, or “Mode 3”. It represents the supply of a service through the commercial presence of the foreign supplier in the territory of another WTO member.
For example, establishment of branch offices or agencies to deliver services like banking, legal advice or communications come under this Mode. GATS Secretariat is of the view that this h likely to become the most import mode of trade in services in the coming future.
Difficulties and Apprehensions:
The fact that service transactions in Mode 3 require that the provider and the consumer be in the same place tends to raise some difficult issues, such as:
i. Frequently, the present of foreign business units evokes an apprehension of “economic imperialism” and “economic dominance” etc., by foreigners. And this can lead to certain reactions and protective actions by the governments of the host countries.
ii. Moreover, typical customs duties and other regulatory measures are not suitable for monitoring and regulating Mode 3 of trading in services. They come in conflict with certain domestic policy issues like subsidies and technical standards.
iii. Mode 3 of trading in services also raises difficult questions of parity of treatment between domestic suppliers and foreign suppliers, such as, those relating to opportunities to do business, taxation, labour laws, location, business practices, and so on.
Application of GATS rules tends to erode the independence of the government of the host country in formulating its policies relating to these matters.
4. Presence of Natural Persons or “Mode 4”. It means the presence of foreign nationals in the consumer country for producing services there. This Mode is directly connected with the inter-country movement of workforce. The workers of the host country may feel that their jobs are threatened.
Mode 3 versus Mode 4:
At this stage, it should be noted that Mode 3 does not necessarily require the presence of foreigners. For example, a foreign supplier’s office may be staffed entirely by local people.
However, the supplier may well feel a need to employ some foreign managers or specialists. When this is the case, Mode 3 will be found mixed with Mode 4. Also, Mode 4 may also be found alone, with no permanent commercial presence.
The employees of a foreign supplier may only be visiting the consumer country. Or, foreigners may be providing services as independent individuals.
Inherently Complex Nature:
From the foregoing description it is clear that trade in services is a highly complex matter and cannot be divided into clear-cut sub-categories of “Modes”.
Any classification will have overlapping cases. They raise very complex problems of their own and are intimately connected to political, economic, and social interests of the participating countries. Consequently, there is a clash of interests between countries having different levels of development.
It may also be added here that the need to regulate trade in services is far more for the developing countries for the simple reason that performance of services sector deeply affects their growth performance.
In contrast, the economic interest of the developed countries dictates that they should get free access to the markets of the developing countries.
In terms of developmental level, the developed countries are rapidly turning into research and services economies. They would naturally want to take advantage of their competitive position in these fields of economic activities.