GATS Mode 4: Opening World Service Markets

GATS Mode 4: Opening World Services
Markets


















Submitted by:
Pankaj Kothiyal





Executive Summary

Pankaj Kothiyal MBA (IB) IIFT Kolkata 1GATS Mode 4: Opening World Service Markets

Negotiations on the "temporary presence of natural persons" (mode 4) first took place
during the Uruguay Round of talks under the General Agreement on Trade in Services
(GATS), but were not particularly successful. They infact served the purpose of business
visits of high-level personnel within multinational corporations. Developing countries
were disappointed owing to the fiasco of the negotiations because of lack of commitment
in the areas where they had a comparative advantage. At the same time the multinationals
were looking forward to the movement of their personnel as a way to ascertain the
working of global practices and exploring new markets. This confluence of interests
created an aura of optimism in the subsequent Mode 4 negotiations.
Progress in mode 4 in highly desirable because the temporary movement of personnel
would lead to gains from trade in services and in addition to the above would avert the
problem of developing nations problem of brain drain. The main challenge underlying as
of now is the formulation of a package that can liberate some form of movement from the
prohibitive political difficulties that have restricted any form of progress on the Mode 4.
In order to be politically feasible the proposed changes in the Mode 4 should have the
following three dimensions. It should only focus only on professionals and not the low
skilled workers; it should be restricted to temporary movement of less than a year or so; it
should only fulfill services contracts and not to enter into employment.












GATS Mode 4: Opening World Service Market
Pankaj Kothiyal MBA (IB) IIFT Kolkata 2GATS Mode 4: Opening World Service Markets

The World Trade Organization's (WTO) General Agreement on Trade in Services
(GATS) categorizes trade in service into four "modes". These are:
Mode 1 - Cross-border provision with no one actually moving (e.g. postal
services or telecommunications)
Mode 2 - Consumption of services abroad through temporary relocation of the
consumer (e.g. visiting patient or student)
Mode 3 - Commercial presence or subsidiary branches (e.g. banks, hospitals,
or construction-firms that are owned by a foreign company)
Mode 4 - Temporary movement of natural persons (workers) across borders
to provide services (e.g. executives or doctors)
Mode 4 and temporary workers
Under Mode 4, there are commitments that cover four categories of service personnel,
including:
· Services salespersons (e.g. insurance salesperson)
· Intra-corporate transferees (e.g. executives, managers, and specialists)
· Business visitors (e.g. personnel engaged in establishing a foreign office or
subsidiary)
· Independent contract suppliers (e.g. doctor or architect)
Aspects of Mode 4
Workers under Mode 4 are not granted access to the local labor market. A foreign
firm must either employ them with commercial presence where the service is
provided or be under a contract for the provision of a service. They cannot be
unemployed–visa and right to stay dependent on employment.
Pankaj Kothiyal MBA (IB) IIFT Kolkata 3GATS Mode 4: Opening World Service Markets

One interpretation of the GATS language on Mode 4 would allow local firms to
import foreign workers through contracting with independent Foreign Service
providers or subcontracting with foreign firms.
Temporary currently undefined, but WTO members have agreed on periods ranging
from a few weeks to three to five years.
Current Mode 4 Commitments
The number of workers, occupations and sectors committed under Mode 4 is up to the
individual countries. Developing country governments complain that current
commitments are limited to highly skilled occupations such as doctors, lawyers, and
company executives. Mode 4 currently offers little more than existing wealthy
country visas, since these sectors are already favored by these systems.

Importance of Mode 4
· Temporary movement as envisaged by Mode 4 can help realize the gains from
trade in services while averting social and political costs in host countries and
brain drain from poor countries. Research shows that if OECD countries were
to allow temporary access to Foreign Service providers equal to just 3% of
their work force, the global gains would be over $150 billion (Winters et al
2002).
· Progress on mode 4 could galvanize the service negotiations by provoking
greater engagement from the developing countries. This in turn would lead to
a virtuous cycle of mutual beneficial liberalization.
· Despite the dramatic development in the technologies for electronic delivery,
Mode 4 will still remain vital for a plethora of services. For instance take the
example of the software industry. It becomes essential for software giants to
move their personnel onshore for a better client interaction. This is essential
from the point of view of the software developers since they can understand
Pankaj Kothiyal MBA (IB) IIFT Kolkata 4GATS Mode 4: Opening World Service Markets

their clients requirements better as well as it gives them an opportunity to
study the global markets in a better way as well as the personnel get a chance
to hone their skills.
· Also as the workers of the industrialized nations age and their skills increase
there would be a scarcity of the moderately and low skilled labor. There is not
any substitute for human labor and hence Mode 4 gains all the more
significance.
· The mode 3 and mode 4 are closely linked. Since all multinationals need to
move their managers, Executives and specialist across their various
subsidiaries. In the movement of the above the MNCs however face lesser
problems compared to the movement of the low skilled work force. However
these MNCs have to be very flexible when it comes to responding to shifts in
the demand. In such scenarios they are required to move their specialist
located in offices in other countries.

Barriers to Mode 4
Visa Formalities: temporary movement of service providers comes under the
purview of the immigration legislation and labor market policy and not under
International Trade policy so hence these can be used as effective bottlenecks to
restrict the labor movements.
Prohibition and quotas: these are imposed either explicitly or implicitly g by ways
of imposing the requirement of an adequate search of a national service provider (e.g.
in France in construction, research and development and other higher educational
services). Another way of imposing these restrictions is the requirement on the part of
the employers to take timely and significant steps to recruit sufficient number of
national workers and that no worker would be laid off for a certain period preceding
and following the filing of any work permit or visa application (e.g. in the US for
specialty operations).
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Wage parity conditions: The wage parity conditions imply that the wages paid to the
foreign workers should be at par with those of the domestic workers. Although the
policy aims at providing a non-discriminatory environment yet it offsets the cost
advantages, which could be realized by recruiting low cost foreign workers.
Discriminatory treatment: this is implemented through a number of instruments and
is a major impediment in regulating professionals. Requirements of citizenship are
often imposed as eligibility requirements putting foreigners at a disadvantage. In
addition to this there is discriminations in form of social security contributions and
taxes. For example in the US foreign nationals have to pay Social Security and other
taxes for which they do not get adequate tax credits in their home country.
Non-Recognition: sometimes the qualifications of the foreign professionals are not
recognized in the home country. Plus there is always the burden of license
requirements acting as an impediment in regulating professionals. The requirement of
a person to take up membership of professional organizations is an obstacle if the
person wishes to provide services on a temporary basis.


Some Proposals for Reforming the GATS

A number of WTO Members have put forward proposals for broadening and deepening
the coverage, and accelerating the reform processes, of Mode 4, as part of the ongoing
negotiations to advance the GATS. Formal Communications to the WTO have been sent
individually by the Governments of Canada, the European Union, Japan, the United
States. Proposals put forward by these Members are summarized in the following Table:

Proposal Member

Clarification and harmonization of Canada
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Definitions European Union
Expanded substantive commitments; Canada
Reductions in barriers to trade in European Union
Services under Mode 4 Japan
United States
Expanding horizontal (cross-sectoral) Canada
Coverage of undertakings European Union
Japan
Greater transparency, and easier access Canada
to information, on conditions, and European Union
administrative arrangements and Japan
procedures for temporary entry United States


The OECD has also set down a number of proposals for improving the operation and/or
advancing the liberalization under GATS Mode 4, a summary of which can be found in
the following Table:

Pankaj Kothiyal MBA (IB) IIFT Kolkata 7GATS Mode 4: Opening World Service Markets

Issue Proposal

Personnel Move to common definitions, especially for intra-
Definitions of Personnel corporate transferees, executives, managers.
Length of Stay Agreement on definitions/ standardisation of durations of stay
(for example, what constitutes "temporary") Failing that,
greater transparency in Member's schedules, by inclusion of
precise (individual) definitions of key concepts related to
length of stay (again, for example, "temporary")
Movement toward more general, (rather than selective)
Improving Market Access sectoral commitments Adoption of more horizontal
commitments (especially by classification of service provider,
for example, 'intra-corporate transferee') Expanding the
categories of personnel, to include technical support,
nonprofessional essential personnel, as well
as trainees (being future executives)

Administrative Procedures Improved transparency, most notably requirements for better
provision of information, timely responses and appeal
procedures. Streamlined procedures for preapproved
companies allowing 'blanket' approval of their transferees
(along the lines of the Australian 'pre-qualified sponsor'
program). Introduction of a GATS visa/work permit system,
limited to persons on short-term assignments.

Statistical Collections Enhance, both in quantity and quality, the collection of robust
statistics of the movement of natural persons under
Mode 4 by WTO Members, including ensuring internationally
comparability.

Pankaj Kothiyal MBA (IB) IIFT Kolkata 8GATS Mode 4: Opening World Service Markets



Movement of Natural Persons in Regional Trade Arrangements
A number of major regional trade agreements/arrangements (RTAs) contain
provisions relating to the movement of natural persons, with varying degrees of
liberalism and transparency. Some RTAs cover the mobility of natural persons in
general (dealing with both permanent migration and non-workers); others allow the
free movement of labor (including entry to the local labor market); some are limited
to facilitating movement of labor related to trade and/or investment; some cover labor
at all skill levels; while others are limited, expressly or by commitments, to higher
skilled labor.
However, while a number of the more substantive RTAs contain rights to labor
mobility, these entitlements do not necessarily flow-on to automatic rights to practice
in certain professions or labour skilled areas. Rather, national licensing and
qualifications recognition requirements still apply, and those seeking to engage in
those activities still have to meet national conditions and criteria.
Similarly, commitments on labor mobility in RTAs does not subsume national
migration laws, with parties generally retaining the prerogative to grant/refuse entry,
and administer at their own discretion visa and residence permit systems.
Agreement on the European Economic Area
The Agreement on the European Economic Area, between the European Union and a
number of non-EU European nations, goes beyond the temporary entry of service
providers, allowing nationals of member countries to enter any EU member nation as
workers or self-employed service providers.
Under the Agreement, there are no restrictions on the freedom to provide services,
with temporary services providers entitled to national treatment (that is, the same
Pankaj Kothiyal MBA (IB) IIFT Kolkata 9GATS Mode 4: Opening World Service Markets

treatment as nationals of the host country) in terms of employment, remuneration and
other conditions of work. However, entitlement to remain in the host country is
conditional on the individual being in active employment.
ASEAN Free Trade Area (AFTA)
The ASEAN Free Trade Area (AFTA) agreement contains no specific clauses dealing
with mobility of natural persons, although its general provisions on the trade in
services cover Mode 4 issues.
The ASEAN Framework Agreement on Services (adopted in 1995) mandates
members enter into negotiations aimed at achieving 'GATS-plus' commitments (that
is, beyond their existing commitments under the GATS), while the Framework
Agreement on the ASEAN Investment Area (adopted in 1998) commits members to
promoting freer movement of capital, skilled labor and professionals, and technology
amongst Member States.
Asia Pacific Economic Co-operation (APEC)
The Asia Pacific Economic Co-operation (APEC) grouping addresses the movement
of natural persons in its Osaka Action Agenda, under which member nations agreed
to enhance the mobility of business people involved in trade and investment around
the region. Key elements for realizing this objective include exchanging information
on regulatory regimes, and streamlining the processing of short-term business visitor
visas and applications for temporary residence of business people. An APEC
Business Travel Card (a multiple entry visa, in 'credit card' form) has also been
introduced and progressively taken-up by a number of APEC member countries.
Initiatives to liberalize the temporary movement of personnel have generally focused
on residency permits for intra-corporate transferees who are executives, managers or
specialists (but not self-employed), although Member States retain their national
prerogatives on entry requirements.

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Australia - New Zealand Closer Economic Relations Trade
Agreement (ANZCERTA)
The ANZCERTA arrangement deals with the movement of natural persons between
Australia and New Zealand through its Services Protocol, which provides full market
access (Article 4) and full national treatment (Article 5) for all service providers.
In parallel, although not formally part of the ANZCERTA, the Trans-Tasman Travel
Arrangement allows nationals of the two nations to freely live and work in each
other's country for indefinite periods (although there are limitations on those with
criminal records).
Caribbean Community (CARICOM)
The Caribbean Community agreement contains a Protocol on Establishment, Services
and Capital, which expands Member States' commitments to the free movement and
provision of services.
The Protocol provides, in particular, for the free movement of university graduates,
other professionals, skilled persons and those employed in a defined list of
occupational groupings (for example, entertainment, the media and sport). It also
provides for freedom of travel and exercise of profession by eliminating passport
requirements and work permits for CARICOM member nationals.
Elsewhere in central and south American regions, the MERCOSUR agreement, over
a ten year transition period, prescribes the movement of natural persons much along
GATS lines (that is, pursuant to specific commitment made by the
Members), while the Andean Community agreement has text, which encourages
liberal movement of natural persons (although not containing specific provisions).
European Union
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The European Union provides a broad right of labour mobility, as one of the four
fundamental freedoms of the single market.
The European Community Treaty (at Article 18) provides every citizen of a Member
State with a personal right to move and reside in the territory of another Member
State, albeit with some conditions and limitations (for example, public health and
public security).
The EC Treaty also covers the movement of: employees (Article 39), although a six
month time limit on residency normally applies; and, the self-employed (Article 43),
with a right of establishment, based on national treatment (that is, the same conditions
as apply to own-nationals of the Member State), although there are some provisions
relating to adequacy of capital in the enterprise.
North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement (NAFTA) between Canada, Mexico and
the United States, contains a Chapter (number 16) on the Temporary Entry For
Business Persons.
Key elements of Chapter 16 include the elimination of labor market testing
requirements, most notably labor certification and employment validation, and covers
four categories of labor skilled persons: business visitors; traders and investors; intra-
company transferees; and, professionals. Temporary entry under Chapter 16 is
defined in a negative manner, namely entry without intent of establishing permanent
residence. While the United State applies a quota system for the entry of Mexican
professionals, such caps do not apply to other bilateral combinations or labor skilled
groups.
NAFTA also contains a number of transparency provisions, most notably requiring
Member nations to publish information on temporary entry requirements, while a
Working Group on Temporary Entry is examining further options for simplification
and streamlining of processes.
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Proposed Expansion of Mode 4
Some developing country governments want to expand independent contract
suppliers and intra-corporate transferees services covered under Mode 4 to include
medium and low-skilled workers, such as domestic or construction workers, thus
covering sectors in which they hold a competitive advantage. Because the current
framework allows for only temporary movement of workers across borders to provide
services, and their visa and right to stay are dependent on employment within the firm
or contract under which the worker entered the country, this may amount to a global
guest worker program. High-level executives, managers, business visitors and others
engaged in business negotiations or overseeing foreign operations are not "guest
workers," as they are in positions of authority and are well-compensated.
The WTO and Protecting Human Rights
To date, labor standard rules remain firmly outside WTO rules–leaving the
responsibility to the International Labor Organization (ILO), which lacks meaningful
enforcement mechanisms. Given this, expanding the GATS Mode 4 to manage the
movement of temporary low- and medium-skilled workers must proceed with great
caution–especially when civil society and the migrant communities themselves are
excluded from the process. Under GATS negotiations, government negotiators limit
Mode 4 commitments to suit their local labor needs, not to create a general
international standard for legal labor migration. The result will likely be a specialized
guest worker program rather than a broad improvement in the mobility and rights of
workers.
State of Mode 4 Negotiations
Since developing country governments have pushed for Mode 4 commitments
covering low and medium-skilled sectors, the negotiations have stalled. Developed
countries claim they are reluctant to cede control of immigration to the WTO because
Pankaj Kothiyal MBA (IB) IIFT Kolkata 13GATS Mode 4: Opening World Service Markets

of security concerns. The Mode 4 issue is increasingly becoming a deal-breaker for
developing country negotiators–especially the Least Developed Countries.
However, a growing number of groups representing migrant communities, organized
labor, people of faith, and people concerned with human rights and justice–even
those based in developing countries–are expressing opposition to the expansion of
GATS Mode 4 and question its potential as a development policy.
Can Mode 4 realize its potential?
In spite of the apparent commonality of interest between developing and developed
countries, progress on liberalizing Mode 4 in terms of unskilled workers is politically
fraught. There are abiding concerns about temporaries (cultural identity, assimilation
and drains on public purse) but these are considered to be mitigated in the instance of
Mode 4 as GATS does not provide a definition of temporaries and members may
specify their own limits because it proved impossible to agree common definitions.
There are concerns about the competitive challenge to local less skilled workers. This
is particularly true in countries with comparatively high unemployment. It may
become less of an issue as demographics make workers scarcer. It is also possible to
introduce policies to ease the transition, as happened with trade in goods.
There are political concerns about the effects of trade liberalization related to anti-
globalization. There is a view that trade reform is re-distributional and so in the long
term will benefit nearly everyone, but there can be adverse effects in the shorter term.
As a result policies are needed to counteract these - this will also be the same with
the evolution of Mode 4, so Mode 4 actors should learn the lessons of wider trade
reform. There are also concerns that Mode 4 will leave migrants out of domestic
legislation covering wage levels and basic rights and some organizations are lobbying
the WTO to ensure that ILO standards are met.



Pankaj Kothiyal MBA (IB) IIFT Kolkata 14GATS Mode 4: Opening World Service Markets

The way forward
Transparency

There are concerns about imprecise definitions in Mode 4, which makes countries
cautious of committing themselves. A number of countries that are interested in
promoting the liberalization of Mode 4 have made public declarations about the
importance of clarity. In summer 2005 Canada proposed a model to present information
and to provide more detail in a comparable format.
Establishment of multilateral norms
In a communication by India and a further joint statement by 14 developing countries, a
number of points have been raised aimed at tackling some outstanding issues. Three key
areas that are obstacles to the liberalization of GATS Mode 4 are identified:

Economic Needs Tests (ENTs)

These are a barrier to implementation of Mode 4 and in addition are ill-defined and have
unclear specifications so there is a fear they can be used at a government's own discretion
to exclude people. In addition the uncertainty they cause about commitments leads to
further caution. The suggestion is that ENTs be removed entirely for certain categories of
worker, although these are likely to be skilled, professional and business categories.

Visas and Work Permits
Concern about national visa and work-permit regulations stems partly from issues of
transparency but also from concerns about administrative hurdles and delays. It is felt that
governments should separate the temporary movement of people under GATS from other
types of migration and therefore a universally applicable visa specific to GATS should be
implemented.

Pankaj Kothiyal MBA (IB) IIFT Kolkata 15GATS Mode 4: Opening World Service Markets

Recognition of Qualifications
Each country has different licensing requirements for people providing services and
particular methods for, or barriers to, recognizing qualifications acquired abroad. A
multilateral framework for recognizing qualifications would increase transparency and
aim to reduce the domestic regulatory burden.

A further threat to the progress of Mode 4 negotiations is whether existing (and still
developing) bilateral and regional agreements could be 'better' at liberalizing
international movement for unskilled and less skilled workers, while Mode
4 be dedicated to liberalizing the movement of professionals within developed countries
and with faster developing countries. The bilateral and regional agreements that are
proliferating to the benefit of both developed and developing countries tackle flexibility
issues and cultural concerns in particular. For the foreseeable future any liberalization of
movement is likely to be made through bilateral agreements.










Pankaj Kothiyal MBA (IB) IIFT Kolkata 16GATS Mode 4: Opening World Service Markets


REFERENCES:

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A Comparative Study on Labour Migration Management in Selected Countries,
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International Organization for Migration, World Migration 2003: Challenges and
Responses for People on the Move

Bhagawati, J., Schatz, et al. (1984) "The West German Gastarbeiter System of
Immigration", in European Economic Review, 26: 277-294.

Doudeijns, Marco, Dumont, Jean-Christophe (2003) "Immigration and Labour Shortages:
Evaluation of Needs and Limits of Selection Policies in the Recruitment of Foreign
Labour", presented at the The Economic and Social Aspects of Migration: Conference
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International Labour Organization (2003)
ILO Migration Survey 2003: Country Summaries.

Mattoo, Aaditya, Carzaniga, Antonia, eds. (2003)
Moving People to Deliver Services, Washington, DC: World Bank, 2003.

Nielson, Julia (2002)
"Current Regimes for Temporary Movement of Service Providers: Labour Mobility in
Regional Trade Agreements", Joint WTO-World Bank Symposium on Movement of
Natural Persons (Mode 4) under the GATS, April 2002. Available at www.oecd.org

Pankaj Kothiyal MBA (IB) IIFT Kolkata 17GATS Mode 4: Opening World Service Markets

Nielson, Julia (2003)
"Trade Agreements and Recognition"
OECD/Norway Forum on Trade in Educational Services Managing the
Internationalisation of Post-secondary Education, 3-4 November 2003, Trondheim,
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Organization for Economic Cooperation and Development (OECD), 1998
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OECD, 1998, 2002, 2003
Trends in International Migration: Annual Report

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Pankaj Kothiyal MBA (IB) IIFT Kolkata 18