Services trade agreements: What every professional should know . . .

Rohan SamarajivaICASL, Colombo, 27 July 2010

State of debate on CEPA

• CEPA includes trade in goods & services and covers investment; also dispute resolution

• Opponents of CEPA have stated they have no objection to ILFTA, which means that the goods chapter is not problematic

• No objection to dispute resolution provisions, which fill a lacuna in ILFTA

• Not much talk about investment• The dispute can thus be narrowed to services, esp.

movement of natural persons under Mode 4

The language with which we talk about services trade

Examples of barriers to trade in services that may be addressed• Hypothetical, using an industry that is most likely not

being fully liberalized under ISLCEPA– Mode 1: Seller remains in Country A; buyer remains in

Country B• Telemedicine: seller in Chennai (e.g., Apollo); buyer in Colombo

– Are there professional bodies that prohibit/license?– Mode 2: Buyer comes to Country A to consume service

• Health tourism: seller in Chennai (Apollo); buyer from LK flies in for consultation/operation

– Are there rules against? Are there ways to prevent?

Examples of barriers to trade in services that may be addressed

– Mode 3: Seller establishes commercial presence in Country B to supply services

• Apollo sets up hospital in Colombo to serve patients in their own country

– FDI regulations• Theoretically possible to do Mode 3 without Mode 4,

but highly unusual because brand value is tied to people

– Mode 4: Natural persons coming to Country B to supply services

• Indian doctors come to LK to work at Apollo– Professional licensing regulations

Why a legal framework for Mode 4?

• Services trade in Modes 1 and 2 are difficult to police (or even get data on)– But generate demand for Mode 4 (also generated by

investment in agriculture and manufacturing) • Mode 3 is where the focus is

– Countries that want foreign direct investment will get it, with or without rules

– Particularly where Mode 4 is not rule-governed, power relations likely to dominate

• Investors will bring in the personnel they want on a case-by–case basis

– But officials/politicians may use discretionary power to extract rents

Mode 4 rules do not abolish immigration laws; simply reduce discretion & increase certainty

• Highly liberal form of regulating trade-related movement of natural persons1. Both countries to take full commitment within CEPA on

independent professionals delinked from commercial presence.

2. To put in place a visa system to ensure the fulfillment of Horizontal and Sectoral Commitments undertaken.

3. Undertake to put in place a Visa system ensuring grant of multiple entry visas to professionals.

4. Allow inter-firm mobility to professionals.• Milder version would link professionals to

commercial presence & exclude independent professionals

Mode 4 variations

Country A Country B

Mode 4: Presence of natural personsConsumer Natural PersonNatural

Person

ServiceFirm (foreign)

Delinked fromcommercialpresence

If the service firm enteredon basis of Mode 3 (linkedto commercial presence)

ServiceFirm (local)

Delinked fromcommercialpresence

Interfirmmobility

In all cases, natural person goes to Country A

Significance of service trade

Significance of services in Sri Lanka economy

• For the past decade, services have been the largest component of the economy

• In most years services have been main driver of growth

• While comprehensive services trade data are unavailable (this is normal for services trade), fragmentary evidence suggests that trade is significant and growing

Central Bank on services exports (and imports)—2005 Annual Report

ITES: an industry that benefited from unilateral liberalization (without laws/agreements)

• Liberalized telecom industry to allow supply by multiple firms and adequate investment, from 1990s– No restrictions on Mode 3; Mode 4 permitted under BOI

• Liberalized international telecom market in 2003, ensuring redundancy of international telecom service suppliers and media

• Improved IT education– Local supply and Modes 1-3

• Capitalized on niche strength in accountants– Local supply as well as Mode 1 & 3

• Attracted marquee BPOs to Sri Lanka (Mode 3) and facilitated others; now ranked 16th in attractiveness for locating services (India #1; Philippines #8; Pakistan #20)

• Software industry rose on own strength

IT & ITES Export Revenue 2007U

S$

Mill

ions

TOTAL EXPORT REVENUE FOR YEAR 2007 : 213 MILLION US$

Source: EDB Export Value Survey 2007 5

5th Highest Exports Revenue Earner in 2007 (2nd in services)

CV

Cera

mics

Coir

Spice

Gem

& Je

welry

47 m80 m

108 m

135 m

IT/B

PO-e

stim

ate

213 m

Tour

ism

Rubb

er

Tea

Appa

rel

410 m

546 m

1 b

3 bUSD millions

6

IT & ITES Industry Growth 2006 to 2007 U

S$

Mill

ions

INDUSTRY GREW AT 23% FROM 2006 TO 2007

23%

Source: EDB Export Value Survey 2007

Industry 2006 2007 Growth

IT 120 Million US$ 154 Million US$ 28 %

ITES 51 Million US$ 57 Million US$ 13 %

Both 1.675 Million US$ 1.875 Million US$ 12 %

IT IT

ITES

ITES173 Million US$

213 Million US$

7

From 2010 June Budget Speech

• “Although Sri Lanka was not known for exports of IT and business processing services, since 2005 this activity has graduated to earn around US$ 250 million of foreign exchange, in addition to giving a place of pride to our IT professionals . . . . This sector has a comparative advantage to become a billion dollar export activity . . ..”

Budget Speech sees service exports as future (but Mode 4 emphasis too much?)

• “ . . . we must not explore only our export potentials in manufactured products but also in a wide range of services such as ports, aviation and professional services, to maximize our earning capacity. Our government’s vision is to increase the skills of our labour force which is looking for overseas employment to enable much higher income. A skilled labour force could double earnings from overseas remittances which are currently in the range of US$ 3.5 billion.”

Strategy

Services strategy: Sri Lanka

• Service exports as well as successful agricultural and industrial exports into niche markets will depend on ICTs and logistics– ICTs critical in shift to advanced service exports,

e.g., Mode 1 exports, not Mode 4• Need to have a law-governed framework to

reduce uncertainty, encourage investment and increase productivity

• If productivity is high, no need to fear

Sri Lanka services strategy developed in 2002-03 to guide reform actions

• Thrust sectors identified– Tourism– IT and IT enabled services– Logistics

• Priority enabling infrastructures & services identified– Ports and marine services– Airports and aviation services– Telecom networks and services

Thrust services and enabling infrastructures

PORTS TELECOM.NETWORKSAIRPORTS

Air PassengerTransport Services

Marine PassengerTransport Services

TelecommunicationsServices

Air FreightTransport Services

Marine FreightTransport Services Courier Services

TOURISM LOGISTICS IT ENABLED SERVICES

Need for a services strategy

• A small country with limited trade-negotiation capacity has to focus, guided by– Overall services strategy that seeks to aggressively

liberalize thrust services and enabling infrastructures– Stakeholder input – Likelihood of success

• Mahinda Chintana II language on five hubs & tourism, more or less maps with 2002-03 priorities, with additions in energy services (& retail?)

Education services: How opening the market will do good

AT Kearney service location rankings, 2009, point to education as bottleneck to growth

Rank Country Financial Attractiveness

People skills &Availability

Business Environment

Total Score

1 India 3.13 2.48 1.30 6.91

7 Philippines 3.19 1.17 1.24 5.60

16 Sri Lanka 3.13 0.95 1.17 5.25

History

• LK was traditional exporter of education services– Modes 2, 3 and 4

• Abhayagiri Monastery/University (100 BC-700 AD)– Mode 2

• Fa Hsien (411-12 AD)• Maldivians in LK schools; few Indians (last 50 years)

– Mode 4 • LK teachers in Africa, West Asia; not India? (20th Century; declining)

• Importer of education services– Post-graduate degrees (not from India), Mode 2– Professional qualifications (massively from UK/Australia; not much

from SAARC region, possibly excluding Shanti Niketan), Modes 2 & 3

Status quo in LK

• Exporter of education services– Mode 2

• But decreasing (Maldivians in LK schools; no Indians)• At international schools & colleges which are Mode 3 importers,

e.g.,– Chinese students (Mode 2) attending ACBT (Mode 3)

• Mode 4 (decreasing)• Importer of education services

– First degrees (possibly India > UK @1500/yr)• Modes 2 and 3

– Post-graduate degrees – Professional qualifications (massive increase)

Who wins/loses?• Parents lose

– Because supply is restricted in LK, some have to opt for expensive Mode 2 and 3 importation of education services

– Some have to make do with low-quality educational services• Shielded from competition, LK education quality has declined, affecting

ability to export through Modes 2, 3 and 4• Inadequate information on supplier quality

• Students lose– Shielded from competition, LK education quality has declined (for

those who stay) – Uncertainty re acceptance of credentials (for those who go)

• Employers lose– Dearth of qualified personnel– Uncertainty re credentials

Who wins/loses?• Potential service providers lose

– Companies (modes 1, 2 and 3)– Professionals (modes 1, 2 and 4)

• Shielded from competition, LK education quality has declined, affecting ability to export through all Modes, reducing markets for companies and reducing earning power of professionals

• Country loses– Poor quality of education

• Local as well as Mode 2 and 3– No multiplier effects from supply of education

• Goods and services supplied to those consuming education services

No one really wins

• But the status quo remains, locked in by student unions, political parties and fear-based thinking of the past

• Short-term beneficiaries are private tuition providers and such

What if brought under a service trade agreement?

• Replace present dual (?) system of “regulation” in Sri Lanka with system based on “national treatment”– Toothless regulation of government-owned suppliers by UGC– Non-regulation of private suppliers by BOI– Quality Assurance & Accreditation Council?

• CPC 923, 924 and 929 would have to be reorganized– Government ownership can continue, but regulation would have to be

transparent and satisfy MFN and national-treatment criteria– Subsidies would have to be given to all

• Natural to convert to voucher system• Mode 2: mutual recognition of credentials

What if?• As suppliers in LK (whether owned by government,

LK investors, foreign investors) improve quality– More Sri Lankan students will stay in LK– More foreign students will come to LK (Modes 1 and 2)– Suppliers may go aboard (Mode 3 & 4)

• Sri Lanka may again become an education exporter• Entire economy would benefit from improved

education

Concluding thoughts

• Trade liberalization is not really about exporting more and importing less– It is about using external pressure to improve quality and

efficiency– In small economies, there is little pressure to improve

quality and efficiency without removing barriers• Legal frameworks are not about enabling trade as

such, but about increasing certainty inducing investment creating competition increasing productivity

AT Kearney Global Services Location Index 2009(number in parenthesis indicates ranking in 2007 GSLI)

1. India (position in 2007 GSLI: 1) 2.China (2) 3.Malaysia (3) 4.Thailand (4) 5.Indonesia(6) 6.Egypt (13) 7.Philippines (8) 8.Chile (7) 9.Jordan (14) 10.Vietnam (19) 11.Mexico (10) 12.Brazil (5) 13.Bulgaria (9) 14.United States (Tier II)* (21) 15.Ghana (27) 16.Sri Lanka (29) 17.Tunisia (26) 18.Estonia (15) 19.Romania (33) 20.Pakistan (30) 21.Lithuania (28) 22.Latvia (17) 23.Costa Rica (34) 24.Jamaica (32) 25.Mauritius (25)

26.Senegal (39) 27.Argentina (23) 28.Canada (35) 29.United Arab Emirates (20) 30.Morocco (36) 31.United Kingdom (Tier II)* (42) 32.Czech Republic (16) 33.Russia (37) 34.Germany (Tier II)* (40) 35.Singapore (11) 36.Uruguay (22) 37.Hungary (24) 38.Poland (18) 39.South Africa (31) 40.Slovakia (12) 41.France (Tier II)* (48) 42.Ukraine (47) 43.Panama (41) 44.Turkey (49) 45.Spain (43) 46.New Zealand (44) 47.Australia (45) 48.Ireland (50) 49.Israel (38) 50.Portugal (46)