CHAPTER 11:
THE COMMERCIAL SERVICES SECTOR

There is tremendous potential for expansion of Canadian services exports, along with the creation of skilled jobs throughout all parts of Canada, if priority is given to issues affecting service exporters. [Dorothy Riddle, 121:905]

Commercial Services and Trade

In the 1940s, it was first proposed that the economy was composed of three sectors: the primary, the secondary and the tertiary. Services were lumped among other activities in this last sector; they were, in economic terms, treated as something like a "residual," with little strategic forethought put into them. While it may seem that this characterization of services was rather unflattering, although it is maintained even in some quarters today, it is a marked improvement over characterizations held in the eighteenth and nineteenth centuries when they were thought to be a wholly unproductive pursuit. Indeed, earlier definitions of exactly what services were are hard to come by; at that time, they were generally perceived to be intangible, invisible and perishable, being labour intensive and requiring simultaneous production and consumption.

Needless to say, things have changed. Since the 1960s there has been a definite and momentous structural shift in developed economies, and to a lesser extent in developing economies, away from primary production and manufacturing towards services. Services now account for the largest share of domestic production. In Canada, they represented 67% of the gross domestic product (GDP) and 73% of employment in 1997. Services are now recognized to be as diversified as goods in their form and can be labour intensive (haircut) or capital intensive (telecommunications); they can be perishable (cleaning) or durable (an engineered edifice); they can be produced and consumed simultaneously (theatrical show) or severed and storable (animated movie). Finally, services are increasingly being combined with goods, which has led to an estimation problem; they are generally believed to be underestimated since their value is hard to disentangle from that of the good.

Services are also tradable products. In 1997, world trade in commercial services, on a balance of payments basis, accounted for around one-fifth of world exports for goods and services, amounting to over U.S.$1 trillion. Canada's share of this trade was about $40 billion in exports. While the United States is the principal market for Canadian services, as is the case for goods, Canadian services exports are more diversified. In 1996, Brazil, Sweden, Taiwan, Mexico, the Philippines, Singapore, and Thailand were the largest growing service export markets for Canada. Given that the total value of domestic and international transactions in services in the global economy has been estimated to be as high as US$14 trillion, the economic potential arising from increased global liberalization of trade in services is important.

This trade, however, encounters many barriers, probably more than those faced by goods. Although, unlike international trade in goods, the barriers affecting trade in services rarely take the form of tariffs or border measures. Barriers can be applied to prevent a foreign service provider from entering a foreign market or, once the foreign service provider has entered the market, other types of barriers may exist or be erected. These can include restrictions on a firm's ability to establish operations in a foreign market; regulations that are not clear, change without warning, or not administered in a uniform manner; or entry requirements that limit the ability of foreign individuals to enter the market to provide their services. Market access in the context of agreements affecting trade in services, therefore, means the ability of foreign services to compete relatively unimpeded with similar domestically produced services.

Domestic regulations play an important role in increasing or limiting the ability of foreign firms to provide their services in an export market. Many of these relate to qualification requirements and procedures, technical standards, and licensing arrangements and can reduce market access by not being applied in a transparent and consistent manner. While these regulations are often in place to achieve specific domestic objectives, it is important to ensure that they are based on objective and transparent criteria and are not more burdensome or discriminatory against foreign suppliers.

International agreements sometimes include provisions that promote mutual recognition agreements (MRAs) between governments and their domestic professional organizations dealing with licences or certifications, education, or relevant experience of individuals that provide services. These organizations can be governmental or non-governmental bodies depending on the service sector concerned. Trade agreements such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Trade in Services (GATS) allow for the development of MRAs between members of the agreements, but generally require that non-members also be allowed to enter into the MRA if they are willing to meet the same conditions. The issue of whether the GATS should incorporate rules relating to establishing MRAs will probably be on the agenda for the next round of negotiations at the World Trade Organization (WTO).

The General Agreement on Trade in Services (GATS)

The GATS is the first multilateral agreement governing the trade in services and was one of the major accomplishments of the Uruguay Round. Prior to the GATS, access to services markets was not secured by contractual commitments. The GATS sets out the framework for the trade in services around the world, imposes rules that all WTO member countries must abide by, and provides a legal structure for dispute settlement should difficulties arise. The GATS contains three main features: first, it provides a framework of general obligations, rules, and disciplines; second, it sets out special conditions in annexes relating to individual regulated service sectors such as telecommunications and financial services; and, third, it contains national schedules of specific market liberalizing access commitments and lists of exemptions to the most-favoured nation (MFN) principle.

In general, the framework relates to all internationally traded services however they are delivered. The four modes of supply are:

Cross-border supply - Service is mailed, electronically sent, or otherwise transported across a border.

Consumption abroad - A consumer travels across a national border to consume a service. Examples include a tourist or a student.

Commercial Presence - A service provider establishes a foreign-based corporation, joint venture, partnership, or other establishment to supply services to foreign persons.

Presence of natural persons - An individual either alone or as an employee of a service provider travels to another country to deliver a service.

It requires the application of the national treatment and MFN principles, provides for transparency in respect of relevant laws, regulations, recognition requirements and administrative decisions relating to the supply of services, and limits restrictions on international payments for current transactions under the Agreement. Member countries are able to identify exemptions to the MFN obligation for a limited number of services. For example, an existing preferential bilateral arrangement may be maintained, provided the MFN exemption is recorded.

The annexes are an integral part of the Agreement. The annex on the movement of people permits governments to negotiate commitments respecting temporary stays to provide a service. It does not cover permanent employment or residence. The Agreement on Basic Telecommunications significantly liberalizes trade in basic telecommunication services through a set of principles covering matters such as competition safeguards, interconnection guarantees, transparent licensing processes, and the independence of regulators. The Agreement on Financial Services provides for specific commitments as opposed to general obligations, taking into account the specific characteristics of financial services. The most significant in this regard is that, in domestic regulations, members shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial supplier or to ensure the integrity or stability of the financial system. Except to safeguard the balance of payments, the GATS does not allow members to apply restrictions on international financial transfers and payments for current transactions relating to their specific commitments. Finally, the annex on air transport services covers aircraft repair and maintenance services, marketing of air transport services, and computer reservation services.

With respect to the schedules, each government registered in its national schedule initial market access commitments and the limitations it wished to maintain in respect of the 11 broad service sectors. These undertakings are described both in terms of permissible modes of supply and with respect to the conditions required for market access. Once a commitment has been made by a member country in a specific service sector or sub-sector, that country is no longer merely bound by the general MFN obligations found in the GATS, but also by a "national treatment" obligation, meaning that market access must be granted under the same conditions allowed to domestic service suppliers. The national treatment obligation is applicable only to scheduled commitments and only if reservations are not made to the contrary. It is a powerful trade liberalization vehicle, given that once it is granted, a member is obliged to treat foreign services and service suppliers in a manner no less favourable than domestic services and service suppliers. The treatment granted need not be identical so long as it does not worsen the competitive conditions faced by foreign services and service suppliers. The market access restrictions are broadly defined as: limitations on the number of service suppliers or service operations; limits on the value of transactions or assets foreign firms may have; limitations on the number of persons that may be employed either in a specific sector or by a specific firm; restrictions on the legal form through which a service supplier may supply a service (i.e. joint-venture only); and limits on foreign investment.

Commercial Services and the FTAA

The consensus view of experts in the field is that services are no different than goods in that their potential for trade can, in part, be determined by comparative advantage and factor endowment considerations, whereby the critical factors of production can be either or both physical or human capital. Accordingly, the more abundant this capital, the more competitive the domestic industry can be and the more advantageous it is for the nation to export services that use these factors intensively. There is also an indication that in select industries (banking, insurance, telecommunications) that scale economies are present and can influence the relative competitiveness of the domestic industry where global markets exist.

Several of the Committee's witnesses pointed to Canada's under-representation in the global trade of services and suggested that this poor performance could be improved.

With one of the largest service sectors to GDP, Canada is well positioned to benefit from this trend [to traded services] ... It has recognized strengths in a number of key service sectors - telecommunications, computer services, transportation, some aspects of culture and entertainment, finance, engineering, professional services, as well as education and health care [Gerry L. Lambert, Submission]

Along the above lines of comparative advantage and in addition to these cited sectors, Canada's large geography and small and disperse population suggest to the Committee that the tele-health care and tele-education services fields represent potential export industries for this country. Additional services industries were identified by some of our witnesses as important to our interests in the context of the Americas.

I think it's also important to build on and improve the scope and security of Canada's access to markets and its NAFTA partners. I think we can achieve that as well through the FTAA. Of specific concern to our members are issues such as extending the NAFTA or extending free trade within the NAFTA region to cover financial, telecommunications, and shipping services, and freer entry of professionals, and sub-national procurement issues. [Jayson Myers, 30:1615]

The Committee understands that the government has already launched a process designed to identify Canada's specific priority interests in export markets in terms of countries, types of services, methods of delivering a service, movement of people, and impediments or barriers to doing business (private or governmental). This Committee believes that the Americas should be considered of strategic importance to our services sector and we, therefore, recommend:

22. That the Government of Canada focus Canada's priority interests in the services export markets, bearing in mind the importance of the Americas.

The Committee's reading of the GATS is that it was a first attempt at bringing services into the ambit of trade rules and disciplines. It is a small step forward that will require extensive incremental improvements before it ever approaches the quality and coverage of the General Agreeement on Tariffs and Trade (GATT). If the GATS proceeds as did the GATT 1947, it should not disappoint. In terms of the FTAA, however, improvements on the GATS should not be that difficult to find and should be attempted right away. The Committee recommends:

23. That the Government of Canada focus negotiations on services of the Free Trade Area of the Americas agreement on broadening and deepening the scope of commitments of most-favoured nation and national treatment beyond that obtained in the General Agreement on Trade in Services, perhaps taking a sectoral approach.