Trade in services: Invoking LDC services waiver

The services sector has been playing an increasingly important role in the global economy over the last four decades. The services sector is the fastest growing sector relative to other sectors not only in industrialised countries but also in newly emerging market and developing economies (EMDE) like Bangladesh. In Bangladesh, the services sector accounts for about 50 per cent of gross domestic product (GDP). In developed countries like the USA and Japan, it now accounts for 80 and 71 per cent respectively of GDP.
The services sector now accounts for two-thirds of global output and close to half of global employment. Services also account for about 20 per cent of global trade and are expected to outstrip trade in merchandise by 2050. Trade in services demonstrated more resilience than trade in merchandise during the Global Financial Crisis (GFC) of 2007-08 in terms decline and also earlier recovery from the crises. Trade in services is growing at a much faster rate than trade in merchandise since the 1980s. The USA and the UK are the two leading exporters of services while the USA and China are the two top importers of services in the world.
The services sector incorporates a very wide range of industries such as financial services, health care, education, transport and communication and professional services, such as consulting engineering, architectural design, law, marketing, advertising and computing. Advances in the structure and composition of service delivery resulting from advances in technology and telecommunication have made services increasingly tradable. Strong continuing growth in the services sector now underpins the idea that the export of services will play an increasingly important part of future prosperity of countries such as Bangladesh. Services trade is the new frontier where developing countries will have to take part if they are to achieve their developmental aspirations. That will require the services sector to develop both forward and backward linkages with the agriculture and manufacturing sectors. Services are important intermediary products not only for domestic consumption but also for exports. In effect, every product that is produced and consumed has a service component in it.
An explanation for the expansion of the services sector can be attributed to the shift of productive resources, especially skilled labour, from manufacturing to services industries. Also manufacturing today is not what it used to be. Manufacturing has become much more capital and skill-intensive. While global supply chains have enabled countries like Bangladesh to gain entry into low tech manufacturing like textiles and clothing, they are likely to face shrinking global markets and over-capacity in this industry resulting from demand shifts and environmental concerns. A country like Bangladesh will find it increasingly difficult to find a niche in manufacturing. This may lead to many developing countries, including Bangladesh, to follow the path of de-industrialisation without transiting through the process of full industrialisation. And that leaves these countries with only one alternative - that is, to move on to becoming a services-oriented economy.
So given the increasing importance of the services sector in the Bangladesh economy as reflected in its rising share in gross domestic product (GDP), it is naturally expected that an increasing share of exports will also be coming from this sector. Prior to the establishment of the World Trade Organisation (WTO), trade in services under the auspices of General Agreement on Tariffs and Trade (GATT) was not included within its provisions; only trade in merchandise was included.
The General Agreement on Trade in Services (GATS) was one of the major outcomes of the Uruguay Round of Trade Negotiation designed to provide the multilateral framework of principles for rules for trade in services. GATS is a comprehensive agreement containing a comprehensive mechanism for international liberalisation of trade in services. The agreement also incorporates the non-discriminatory trade clause of Most Favoured Nation (MFN) to services trade as it applies to merchandise as well as the extension of national treatment to services once inside a country. It also provides a framework for negotiating specific market access similar to that exists for merchandise.
But overwhelming majority of service exports face market access restrictions and they are subject to discriminatory barriers which differentiate between national and foreign service provider. There are also indirect forms of discriminatory regulatory barriers which include limitation on immigration which limits the movement of people who are considered as essential to provide service. So far growth in service exports has been driven by the technological changes in the telecommunication and information technologies. Despite these changes, the provision of services has been highly regulated by government and as a consequence of which the gradual reduction in trade barriers protecting service industries is expected to be a very lengthy process. The deregulation of service industries include a range of complex issues including business migration and the flow of skilled personnel across national borders as well as issues relating to accreditation and mutual recognition of skill qualifications. But in the current prevailing sentiment against migration in developed countries and, in particular in the USA, will make future services trade liberalisation very difficult.
The GATS identifies four different modes of supply through which trade in services takes place. These four modes include cross-border supply, consumption abroad, commercial presence and presence of natural persons. Barriers to trade in services are solely based on regulatory restrictions, therefore trade in services is not affected by tariffs or tariff-like taxes as applied to merchandise. Overall, trade in services face more restrictions than in merchandise. Thus trade in services is sensitive to national regulations affecting the supply of services.
The services sector in Bangladesh is expanding, albeit at a slow rate. The sector now accounts for a little more than 40 per cent of employment. Services accounted for 5.2 per cent of total exports in 2016 while services imports stood at 16.4 per cent during the same year. Of total services exports, other commercial services accounted for (63 per cent) followed by transport (23.8 per cent), travel (8.9 oer cent) and goods-related services (4.3 per cent) in 2016 and during the same year imports of services were dominated by transport (78.1 per cent), other commercial services (15.9 per cent), travel (5.8 per cent) and goods related services (0.2 per cent). Many services are not traded directly and services contribution to exports are more fully captured on a value-added basis. For instance, land transport and electricity and professional services used up in manufacturing, such as the ready-made garments (RMG) industry, are only reflected in trade on a value-added basis. On a gross export basis, these values are embedded in the value of the products and are not separately estimated. Overall, Bangladesh accounted for 0.04 per cent of total world exports of services relative to its share of 0.22 per cent of world merchandise exports in 2016. Bangladesh's share in total world imports of services during the same year was 0.17 per cent relative to its 0.26 per cent share of total world merchandise imports.
The data clearly demonstrate that Bangladesh imports significantly more services than exports. One area of concern that has been highlighted in recent times is that Bangladesh's RMG industry has become very reliant on skill importation from India and Sri Lanka. Given that the RMG industry is fairly a very low-tech industry, why Bangladesh could not supply skills required for such a low tech industry needs to be addressed. It is indeed a very sad reflection on the country's education system, including vocational education system. It is estimated that US$ 4.0 billion have been repatriated last year to India and Sri Lanka by these skilled personnel. Also a very low ratio of Bangladesh services exports to total exports (5.2 per cent) compared to its contribution to national GDP (around 50 per cent) imply that Bangladesh's exports of services are much less than they could be. To address this issue Bangladesh can take advantage of the least developed country (LDC) services waiver and the 2003 LDC special and differential clause and use those to its advantage by targeting those service industries where the country has comparative advantage.
Muhammad Mahmood is an independent economic and
political analyst.
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