Bargaining Over Services in TiSA

This week, President Tabare Vazquez agreed to withdraw his country from ongoing negotiations over services.  Uruguay will now notify the other 24 members[1] of the Trade in Services (TiSA).

This presents a good opportunity to examine TiSA.  Negotiations got underway in 2013 out of a shared frustration with a lack of progress in global trade talks for services coupled with a desire to push forward new, better suited rules for today’s interconnected, globalized economy and to give services an improved platform for growth. 

Services are an increasingly vital part of international trade.  The Asian Trade Centre has been part of an ongoing research project to track how much of the content of manufactured items like auto parts, aircraft engines, printer dyes, outdoor jackets, watches, whiskey, or making a table comes from services.  The full project will be out soon, but what has been particularly striking from this case study research is how much value is tied up in services content.

We often think of goods as physical items only—something you can drop on your foot and have to transport across borders in trucks, trains or ships.  But it turns out that for many value or supply chains today, at least half and perhaps as much as 80 percent of the value of a good is actually derived from services.

Such services can include research and product development, managing human resources, cleaning, security, distribution, logistics, warehousing, retail, and even after sales service and repair. 

TiSA members together contribute more than 70% of global trade in services.  For most, services also constitute a significant portion of domestic output contributing substantial numbers of jobs and generating important revenue for companies both large and small.   

Despite the critical importance of services, global rules for services remain underdeveloped and often lacking.  In part this is because services are devilishly hard to see and measure. 

Take examples from the Asian Trade Centre.  Our brochure was designed by a graphic artist in Pakistan, connected to us through an Australian online platform (www.freelancer.com).  Our website is hosted by an American company (Squarespace) and this blog is distributed by a different US company (MailChimp).  [All are receiving unsolicited endorsements.]  The blog content is written by me sitting in my lovely office today in Singapore and distributed to readers all across the globe. 

So how would available data capture all these services?  The short answer is not very well at all. 

In the mid-1980s when government officials were trying to design the first batch of global rules to govern trade in services,[2] most of what I just described would have been unimaginable.  Or, rather, some of the services might have been possible but the methods of delivery, the scale and the scope would not.

Consider Freelancer.  This company currently brings together more than 16 million people in 247 countries to provide a wide range of services from software writing and data development to engineering and accounting.  Connections can happen instantly and millions of files, pages, images, and data points are moving around and across borders daily.

At the time of the Uruguay Round negotiations, however, officials could mostly imagine delivering services via post, land line telephones or, perhaps, fax machines.  Otherwise, the primary methods of getting services to travel across borders meant the movement of people—I might travel to another country for medical treatment or to deliver a stakeholder workshop in Korea for the next RCEP round (currently planned for October 14 in Busan, by the way!  Stay tuned for details).  Or I might invest directly in a company, or travel temporarily as a business employee of a big firm to set up a project.

In short, officials were struggling with how to categorize services and to understand how they might be delivered across borders.  Hence the rules they created in the 1980s and early 1990s were rather crude.  Whenever I have to explain to businesses how services are broken up in the rulebook, I am usually met with blank stares.  In addition, services commitments suffered because governments were reluctant to commit to much, as no one was entirely certain about what might happen.

This is a long way round to explaining why services were part of the “built in” agenda for the start of a new round of global trade negotiations.  These talks started in Doha, Qatar, in November 2001, and have been moribund for a very long time.

Countries that are active in services trade became increasingly unsatisfied with old rules and limited market access commitments.  Unable to push forward the broader global negotiations, a handful of key countries decided to start parallel talks outside the WTO in Geneva.  These parallel talks, now called TiSA, might eventually be brought back into the WTO.

I don’t have room here to delve into trade geek obsessions with how TiSA can be reconnected with the WTO, but suffice to say that officials are trying to craft an agreement that unleashes more economic growth for services for the members while remaining conscious of likely issues and interests from the broader community. 

After 13 rounds of TiSA, the jury remains out on how successful officials are likely to be in meeting their ambitions.  The basic idea is to continue to build on existing commitments at the WTO but expand market access and to try to reduce domestic level regulations that make it hard for services to be competitive.  For example, one goal is to try to get foreign service providers to receive the same treatment as domestic service firms as much as possible.  Many similar rules do exist in various free trade agreements.

Yet TiSA talks are challenging.  Uruguay just became the first country to withdraw from negotiations, citing concerns about its ability to regulate sectors like financial services and telecommunications.  Frankly, this is likely to be overblown, as officials do not give up their right to regulate easily and these sectors are seen as highly sensitive in most countries.  TiSA will not violate a government's right to regulate for health, safety, and environmental outcomes, nor will it alter all qualifications for service providers or allow for unfettered access to job markets.

In a rapidly changing environment, designing appropriate services rules are both necessary and difficult to do well.  We will have to watch and see how successfully TiSA manages the task.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***       

[1] Remaining TiSA members include: Australia, Canada, Chile, Chinese Taipei (Taiwan), Colombia, Costa Rica, the European Union, Hong Kong, Iceland, Israel, Japan, Lichtenstein, Mauritius, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Republic of Korea, Switzerland, Turkey, and the United States.

[2] As part of the Uruguay Round negotiations in what was then the Global Agreement on Tariffs and Trade (GATT) and is now the World Trade Organization (WTO).

The TPA Vote: The Day America Stopped Leading on Trade?

The U.S. Senate’s apparent inability to proceed with Trade Promotion Authority (TPA) may represent the day when the Americans conceded leadership on global trade. 

The vote that blocked consideration of TPA highlights to the rest of the world that the Americans cannot be counted on to get things done any more. The Trade Promotion Authority (TPA) bill is not just about the Trans-Pacific Partnership (TPP). 

TPA is meant to cover a set of extremely important, next generation, trade deals with: the 11 other parties in the TPP; up to 19 members in an expanded TPP by 2020; the Europeans in TTIP; more than two dozen countries in services (TiSA); a hugely important grouping of members in the information technology space (ITA2); with China and others over opening up government procurement markets in a clear and transparent manner (GPA2); more than 160 countries in implementing new rules to move goods faster and cheaper across borders (the WTO Bali deal on trade facilitation); and anything else that might begin negotiations in the next 5 years.

The Senate had an opportunity to outline their primary objectives and allow the Executive Branch to see what is the best possible deal that could be gained.  Afterwards, Congress will vote on each individual agreement after consultations along the way.

These ought to have been key objectives for every member of both parties.  Yet some members in the Senate have allowed misinformation to guide their thinking.  Most damaging has been a set of arguments about currency manipulation, disguised as a discussion about "enforcement" or "enforceable provisions."  The agreements currently on the table--all of them, but especially the TPP--already have extremely strong enforcement provisions built in.  These help to ensure that participating members in each deal follow the rules.

Currency manipulation is not about enforcement of a trade deal.  It is simply a bad idea.  It is not workable and will not address the supposed problem.  Even worse, the collateral damage might end up ensnaring the United States by preventing actions that the Americans may want to take in the future.  

But insisting on including this set of rules alongside the TPA debate just illustrates the nature of the debate in Washington.  It is not about creating helpful rules to guide trade in the next five years.  It is about following narrow, domestic partisan interests and using flawed arguments. 

In the end, it also shows the rest of the world that the United States cannot be viewed as a trusted partner because--no matter how much you bend to accommodate the Americans in a negotiation--they will always add one more bitter pill and insist that you swallow it.  Even then, passage of the final deal is never assured.  

The TPA legislative vote has been cast by the White House as a “procedural issue.”  It is true that the specific problem in voting was whether or not the TPA bill could be considered on its own, or in conjunction with three other bills.  One is presumably not controversial—to renew ongoing trade programs with Africa.  One is to provide worker training for workers harmed by trade (Trade Adjustment Assistance or TAA).  Finally, the worst idea on the table, of having something with currency manipulation as a key objective in (all?) trade agreements.

While Washington has gotten stuck in partisan battles over TPA, the timing for TPP has only gotten worse.  This agreement does not just include the United States.  Delays over TPA have held up the conclusion of the TPP.  If the Americans end up unable to pass the implementing legislation on the TPP until after the next election in 2017, other members may also face similar domestic challenges between now and then that permanently stop the TPP.

By 2017, who knows what will have changed in the other TPP members?  Canada votes in an apparently close election in October.  The Japanese Prime Minister has staked a great deal on the TPP and his tenure length is unknown.  Chile just reshuffled the cabinet.  The domestic scene in Malaysia is also uncertain.  The Australian Prime Minister has already been forced to survive one vote on his leadership.

This "procedural" issue in the United States Senate over TPA could end up like the proverbial butterfly flapping its wings.  The consequences of this delay could, indeed, reverberate for a long time to come.

***

Let me reprint part of an earlier post to explain again why currency manipulation should never have been an objective and certainly does not deserve to shut the Americans out of a responsible leadership role in trade:

Any sort of currency manipulation clause is unlikely to solve the problem it is ostensibly trying to address.  Worse, in order to ensure that American interests are not undermined, the provisions have to be carefully crafted such that they might never be triggered.  The final point of damage—even if there are virtually no circumstances under which such clauses might be used, America’s trade partners in the TPP might simply refuse to conclude negotiations at all.

So what is the problem so many backers of such legislation are trying to address?  In brief, governments can give a competitive advantage to their export industries if their currency is lower in value than their export partners.  The difference in currency values effectively makes imported goods cheaper in the foreign market, encouraging consumers and producers to buy more, relatively cheaper, foreign goods than relatively more expensive domestic items. 

How would a government go about making this happen?  If a government intervenes in currency markets, it can drive down demand for its own currency (or drive up demand for foreign currencies) by buying and selling currency.  

Another way to accomplish the same thing is to print more money domestically.  If there is more money in circulation now, the value of any given note is lower.  However, governments engaged in such behavior often argue that such policies are not aimed specifically at artificially depressing the value of the currency for the purpose of generating an unfair trade advantage. Therefore, such behavior is not considered currency manipulation, at least as members of Congress appear to want to define it. 

The purchase of assets by the government can also change the value of currencies, even if the objective is to stimulate the domestic economy.

Singapore loosened monetary policy recently in response to weaker oil prices and low domestic demand.  The government argued it was using one of the primary items in its tool kit to address low inflation, since it does not use interest rates as a tool. 

Thus, governments may have lots of legitimate reasons for adjusting currencies without the specific intention of getting a leg up for exports.

It may be important to note that not every country is able to manipulate currencies.  If the country is small, especially with limited demand, the value of the currency is more likely set by market forces.  A country with limited resources cannot intervene very much to buy or sell currencies.  And, finally, the United States has a unique position in the global economy.  Since the U.S. dollar functions as a reserve currency, it allows the United States to have different options than anyone else in the markets (for the moment, at least, but that is another story).   Let me also note that because of this position, the United States does not have to intervene in currency markets like anyone else.

Efforts to stop countries from “unfairly manipulating” their currency will not work. 

There are many reasons why not, but start with the fact that most countries in a position to manipulate currencies also have complex economies.  These economies rely on both exports and imports.  For many firms, exports can only be produced with imported content.  By depressing the value of the currency to make exports cheaper, imports become more expensive.  As a result, firms may not actually be competitive in the export market since the price of imported content of the final goods might be more than offset by whatever the discount on the export side might be.

Equally key, for the most complex products, the value of the benefit from a depressed currency is likely to be small.  Consider an i-Pod, for instance.  Imagine that China were, in fact, manipulating their currency to a massive extent—say 50% off the presumed “normal” value of the yuan.   In this hypothetical context, it might appear that Chinese intervention is dramatically affecting the price of the device in the American market.  But, in fact, the total amount of Chinese content in an i-Pod could be as little as $4 of the $150 sales price.  Thus, the extent of the “unfair” advantage of Chinese currency might make a whole $2 difference to the final buyer.

Recall that this example gives figures for a truly exceptional rate of currency intervention at 50%.  The actual extent of manipulation is likely to be considerably smaller.  This means that the total price difference could be literally pennies.

While other products may not show such dramatic figures, the point is that—in most complex, higher value items—the content is likely to be provided by multiple countries.  As a result, even crazy high manipulation is unlikely to affect the final price very much. 

The Big 3 auto companies are driving the issue of currency manipulation in Washington.  But a car in the modern, globalized economy is very much like an i-Pod.  Even if you could determine that a China or a Japan was intervening to depress currency prices by a lot, the total difference in the price of a finished car is still likely to be much more modest than people realize.

To make this pressure by the Big 3 auto companies more surprising, many of the cars sold in the United States today are actually manufactured in whole or part in the United States (or NAFTA countries).  Thus, the value of potential manipulation on the total cost of a car is small. 

Practically speaking, a currency manipulation clause has additional challenges.  How can the specific amount of currency tweaking be measured?  Currencies change regularly in the open market, so a trade agreement has to take this into account somehow.  Even in the alleged cases of Japanese or Chinese manipulation, few could agree on the extent of intervention—was it 10 or 45% or something in between?

What is the appropriate response to such intervention?  Even if a trade agreement could specify the triggers for determining manipulation, then what?  Many of the proposed “solutions” appear to run afoul of other laws and regulations.

The United States, clearly, does not want to become ensnared in its own rules either.  Depending on how defined, basic American policy in the independent Federal Reserve could be challenged by foreign governments.  Problems like this make whatever provisions that might end up in trade agreements so tightly restrictive that they can never be applied or it might mean that the United States breaches the rules and argues for non-intervention in its own affairs. 

Finally, none of the specific partners currently negotiating the TPP are keen to see rules on currency manipulation included.  This agreement has been under discussion for more than five years.  To add a controversial (to put it mildly) item so late in the game is to risk imploding the whole deal.

Some may argue that TPP partners have already accepted proposals and provisions that they do not like.  What is different about currency manipulation from other American ideas?  At some point, however, pushing too hard may make others snap.  This is likely to be that point.  Adding a very unpopular and unworkable idea like currency manipulation clauses into the TPP mix at this late day is a truly dreadful idea that should be discarded immediately.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

2015: A Promising Year for Trade

I am pleased to announce the launch of the “Talking Trade” blog with the Asian Trade Centre!

This blog provides my commentary on trade and trade-related news and events.  The opinions presented here are given in my personal capacity.  I hope you enjoy it! --Deborah Elms

The coming year holds a number of key trade milestones that we will be tracking.  For example:

1)   The Trans-Pacific Partnership (TPP) is due to be concluded.  I know, I know, I’ve been promising this for six months.  But it’s serious this time!  The electoral calendar in the United States means that the deal will need to get done as soon as possible so the American Congress will grant Trade Promotion Authority (TPA) and move towards implementing legislation before the 2016 presidential campaign season heats up.

2)   The ASEAN Economic Community (AEC) debuts on December 31, 2015.  While ASEAN will miss the targets for this hugely ambitious agenda, the year will include efforts by members to schedule new commitments in sensitive areas, such as market opening for additional services sectors and investment areas.  More on the AEC at a later date, but with the ambition of delivering “free trade in goods, services, investment, skilled labor and freer movement of capital” among the 10 ASEAN countries and a deadline that was moved forward five years, it is not surprising that members will struggle to reach the targets.  Compounding the problems of integration are extreme levels of diversity across the ASEAN membership from Singapore and Brunei to least developed country members like Lao PDR, Myanmar and Cambodia. 

3)   Several key bilateral arrangements are coming in 2015.  Most important is the announcement of the China-South Korea FTA.  The document is undergoing a more complicated than anticipated legal scrub at the moment, but should be out at the end of the month.  Although this agreement is likely to include many carve-outs of key sectors and long implementation periods for some items, the impact of linking these two economies together will be significant. 

4)   Other key bilateral arrangements in Asia include China/Australia announced on November 17, 2014; New Zealand/Korea initialed on December 22, 2014; Vietnam with the Customs Union of Russia/Belarus/Kazakhstan on December 18, 2014; and Vietnam/South Korea signed in November 2014.  Implementation of many of these agreements will be forthcoming in 2015.

5)   The European Union continues to move ahead with its efforts to spread trade integration with ASEAN.  EU Parliamentary ratification of the EU-Singapore agreement is stalled, pending the outcome of a case in the European Court of Justice over whether the EU has the negotiating competence to create commitments for its members in investment.  In the meantime, the Philippines and Vietnam are finishing up their EU FTAs.  [Note that EU GSP preferences for Thailand expired on January 1, 2015.]

6)   Costa Rica is set to enter the Pacific Alliance in 2015.  This means that half of this trade association (Mexico, Peru and Chile) will be inside the TPP while half (Columbia and Costa Rica) will remain outside.   Given the tight integration of these markets--both planned and underway in the Pacific Alliance--this split could be challenging to manage. 

7)   Changes in the Pacific Alliance could put pressure on APEC as well, since neither Columbia nor Costa Rica are currently members.  APEC has an expired “moratorium” on new members that is getting increasingly difficult to defend.  2015 could be the year for discussion of membership of countries like India and these Pacific states.

8)   At the multilateral system, implementation of the World Trade Organization’s agreement on trade facilitation should proceed in 2015.  The Bali deal has been stalled over India’s objections on a separate deal over food subsidies, but the blockage appears to be clearing up now. 

9)   Negotiations continue at the WTO over revisions to the Information Technology Agreement (ITA2).  This deal is meant to update the list of IT goods granted tariff free access to WTO members.  Right now, covered items include record players, but not smartphones since the current list is decades old.

Potential deals for 2015 include:

10)   In the category of potential agreements due in 2015:  the 16 parties of the Regional Comprehensive Economic Partnership (RCEP) are currently scheduled to conclude talks this year.  But the members have held 6 rounds so far and are still basically arguing over where to start.  Nonetheless, the schedule has been mapped out for conclusion of this FTA with the 10 members of ASEAN plus Japan, South Korea, China, India, Australia and New Zealand. 

11)  Another potential trade deal that might get finished in 2015 is the 23 member talks in Geneva under the heading Trade in Services Agreement (TiSA).  These trade talks are currently on the sidelines of the WTO, but may eventually be pulled back into the larger community.  The agreement is intended to update the rulebook on services trade that was first created in the early 1990s.  Given the importance of services, even in manufactured goods trade, creating a freer flow of services with greater certainty should spur economic growth and investment by companies.

12) Also possible in Geneva is a finished deal covering Environmental Goods and Services (EGS) for WTO members.  This agreement would lower tariffs on items valuable for addressing climate change like wind turbines. 

13)    And, finally, although not an Asian agreement, if concluded the Trans-Atlantic Trade and Investment Partnership (TTIP) between the United States and the European Union, could radically reshape the face of global trade, especially if the two major partners managed to coordinate regulations and standards in a meaningful manner.