The story of ‘how the GATS was won’ in 1994 is, at one level, about a contest between the US, as the superpower of the global North, and India and Brazil as the lead advocates for the global South. At a more profound level it documents the transition from one hegemonic regime to another. The US, at the apex of a bloc of leading industrialised countries, used its structural power to rewrite the rules for the domestic regulation of services. The project was supported by corporate and intellectual élites whose role was to develop strategies and propose the mechanisms to achieve that goal. The process of constructing the new regime under the conditions that prevailed at that time was much easier than sustaining it in the new millennium.
A matter of perspective
There are two versions of the genesis of the GATS, which reflect the perspectives of the victor (the US) and of the purportedly vanquished (India and Brazil).
The standard US version depicts the GATS as a child of America’s corporate/political intimacy that matured under their joint custody. Between the mid-1970s and 1993 the Office of the USTR, in collaboration with large and powerful services corporations, evolved a vision and strategy to create a binding and enforceable treaty that could restore the country’s economic supremacy. The US administration used its dominant presence in the OECD to build a critical mass of support among wealthy countries for the inclusion of trade in services in a new round of GATT negotiations. Potentially obstructive forums, especially UNCTAD, were marginalised.
US trade strategists then set out to ‘divide and rule’ the increasingly fragile Third World bloc. The US’s adversaries, led by India and Brazil, tried to resist by fighting from within the GATT and were progressively sucked into the vortex. Every concession became an advance that consolidated the US position. Their final capitulation was secured in 1989 after the US employed its ultimate trade-negotiating weapon of unilateral sanctions against Brazil and then India. Opposition to the creation of a services agreement had been reduced to a lopsided contest over its legal content.
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Success was achieved using threats and incentives. In the approving words of US commentator Jon Aronson: ‘The world ultimately acquiesced to US persistence and a skilful US campaign to alter nations’ perceptions of the stakes involved.’ Part of the campaign ‘was to convince developing countries that the United States was willing to “pay” for a new GATT round but would punish other countries if there were no round’. The ‘carrots’ included re-engineering of debt arrangements, and reducing US interest rates and the value of the dollar. The ‘threats’ were to engage in bilateral negotiations or plurilateral arrangements that limited MFN treatment to those who co-operated. ‘The final task was to divide the developing countries on services’ (Aronson, 1988, p 21).
The inevitable political compromises meant the GATS 1994 text and commitments fell short of the ambitious objectives of the USTR and corporate lobby. The critical infrastructure of telecommunications and financial services was held back for ongoing negotiations that produced more state-of-the-art outcomes. A pre-commitment to ‘progressive liberalisation’ of market access to countries’ services was built into the text, with a further round of negotiations set for 2000. Negotiations to tighten the disciplines on domestic regulations and other rules would start before then. The parallel tracks of regional, sub- regional and bilateral agreements, combined with unilateral sanctions, meant the US could choose how to pursue its strategic offensives with, or against, countries of geopolitical and economic significance.
The alternative version starts with the same understanding of US objectives. In the words of India’s then Ambassador to the GATT, SP Shukla:
The services issue was at the core of the American trade agenda, not only because the US occupied the dominating position in this area, but also because this issue was the key to the transformation of the GATT. The issue of services, transcending the narrow confines of cross- border transactions, . . . had the potential of rendering [the GATT] into an effective instrument to support and promote the activities of the transnational corporations.
(Shukla, 2000, p 14) Shukla vigorously rejects any suggestion that Southern governments were unaware of the stakes:
There is a misconception that developing countries did not understand what was being suggested and that’s why many things happened. That is farthest from the truth. They were totally aware of the game. They did their best. It is a different matter the political choices [their national]
governments made. . . . The point is that no other round in the GATT was preceded by such a long gestation period and such acute labour pains. That is precisely because the developing countries saw through the game.1
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Both versions agree that India and Brazil were pivotal. But the received wisdom is that the ‘gang of 5’ (including Egypt, Argentina and Yugoslavia) overplayed their hands. Their intransigence created the space for a moderate proposal that allowed services negotiations to proceed. Shukla recounts a different story of much greater intrigue. During 1985 and 1986 India and Brazil held secret meetings with the European ambassador to develop a fallback position, unbeknown to either the other rejectionists or the US.
The three ambassadors agreed on a ‘common platform’ that would keep services negotiations on a separate track from the GATT, with clearly specified development parameters. Their proposal was tabled – in a final twist, by Canada – after the ministerial conference at Punta del Este had already run over time. That platform set the basis for negotiating the GATS parallel to the GATT. In the early years of the Uruguay round, India and Brazil led a unified Southern bloc in restraining the scope of the services negotiations. The situation changed in 1989, when both governments capitulated under a combination of US unilateral sanctions and domestic political changes. The Brazilian and Indian ambassadors who had fronted the hard line approach were replaced by more acquiescent representatives.
From Shukla’s perspective, the battles of the 1980s left an indelible mark on the GATS 1994 text. A positive list structure specified which sectors would be governed by key rules. That allowed the developing countries to limit their exposure and bought more time for education, research and building of alliances that would strengthen their position. Promises to promote development, and the requirement for an impact assessment before any future negotiations, provided hooks on which to hang their future resistance. Even though the Indian government later changed sides, other Southern governments relied on these hard-won flexibilities in their own passive subversion of the GATS 2000 negotiations. This time, their (in)action was complemented by national, regional and sectoral social movements, activists and think tanks whose campaigns largely neutralised the corporate lobby that had dominated the services agenda in the 1970s and 1980s, and paralysed the multilateral negotiations. Similar campaigns against the new generation of bilateral and regional agreements in some cases mitigated their impact and in others brought those negotiations to a standstill.
These two versions are flip sides of the same coin. This chapter analyses how the dynamics of the Uruguay round shaped the rise, stalemate and increasing marginalisation of the GATS. It draws on primary documents of the OECD and GATT/WTO and personal accounts from the key players, Geza Feketekuty, the assistant USTR responsible for services during the Uruguay round, and SP Shukla, India’s ambassador to the GATT from March 1984 to February 1989. Case study 3 examines the successful strategy of the trade policy activists that gave birth to the GATS. The counter-hegemonic campaign that featured from the later 1990s is the subject of Case study 4.
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Creating a constituency
The seeds of the GATS were sown between 1972 and 1979 during a turbulent decade of oil shocks, recession and restructuring. What in retrospect looks like a systematic strategy began in an ad hoc fashion. The first tentative step was the handiwork of policy entrepreneurs connected to a newly established Trade Policy Research Centre in London. In 1972 the Secretary General of the OECD appointed a High Level Group on Trade and Related Problems to stimulate longer-term thinking by member governments ahead of the Tokyo round of the GATT. The resulting Rey report contained a short Chapter IV on ‘international trade in services’ (OECD, 1972). It focused mainly on ‘invisibles’ in tourism and on remittances and transfers of investment income. The committee recommended that ‘action should be taken by the developed countries to ensure liberalization and non- discrimination in the services sector’ (Feketekuty, 1988, p 298). Although there was no explicit proposal that this action should take place through the GATT, it was interpreted as supporting future negotiations outside the OECD. This one-off, top down approach fell into a void. The OECD did not revisit ‘trade in services’ for another six years.
The US services corporations, organised by Pan American Airlines and AIG, took up the cudgels in 1974 as the Congress (belatedly) debated the US President’s negotiating mandate for the Tokyo round.2As a result, the US Trade Act 1974 contained three innovations. First, the President was required to negotiate for the removal of non-tariff barriers to international trade in goods and services. This set in train a dynamic process: the USTR had to report annually to Congress on progress in the Tokyo round and beyond, which meant US trade officials had to give meaning to the concept of ‘non- tariff barriers to trade in services’ and deliver something concrete. Second, a new section 301 authorised unilateral trade sanctions against countries whose
‘unfair trade practices’ burdened US commerce, which was defined to include services associated with international trade. The US capacity to alternate between unilateralism and multilateralism gave it extraordinary power and was later used to break India and Brazil’s resistance to the GATS. Third, a new Advisory Committee for Trade Negotiations included services industry representatives.
The success of the lobbyists prompted a more ambitious corporate strategy led by AIG and AMEX from within the US Chamber of Commerce. A seamless relationship developed with the trade bureaucracy. The Department of Commerce commissioned and published a report in 1976 on offshore
‘barriers’ faced by US services companies.3The Trade and Tariff Act 1979 created a new Industry Sector Advisory Committee for Services and a Services Policy Advisory Committee to the USTR. The campaign gained momentum when Geza Feketekuty was appointed Assistant USTR in 1978 and assumed full responsibility for policy on services in 1979. At this time, Feketekuty 1111
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says they were still working out what ‘trade in services’ meant. Most of their initiatives were ad hoc and designed to get the ‘pushy’ chair of AIG, Hank Greenberg, off the USTR’s back.4
One option was to utilise the OECD Trade Committee, where Feketekuty represented the USTR. In retrospect, the pre-cooking of a trade in services agreement in the OECD seems an obvious strategy. The US could build a political consensus among the major capital exporting countries and use the OECD’s resources and expertise to do the basic conceptual and technical work, prior to a push in the GATT. This would exclude the South-dominated UN bodies such as UNCTAD and bypass the specialist international sectoral agencies, such as the International Telecommunication Union (ITU), which took an interventionist approach to services regulation.
Feketekuty says the original proposal to conduct a study on trade in services that built on the earlier US industry study was impromptu. Over time, however, a sophisticated game plan emerged. Each incremental concession by other OECD members consolidated the US position.
Feketekuty tabled a short paper entitled ‘World Trade in Services: The Need for Analysis’ at the OECD Trade Committee in October 1978.5This recast services within a trade liberalisation discourse and treated the establishment of foreign investments related to services as ‘trade’. It pointed to a dearth of research and analysis on the barriers that were impeding the rapidly growing international services economy. The paper’s indicative list of barriers reached into the heart of domestic policy: ownership requirements, personnel and employment restrictions, taxes, intellectual property, government controls and regulations including licensing, the absence of international standards and procedures, imposition of duties and quotas, the restrictive rules on government procurement of services, and more.
The paper proposed a programme of sectoral studies that coincided with the active membership of the US Chamber of Commerce’s new committee on services.
According to Feketekuty, other governments initially responded with incredulity. As trade representatives, they viewed services as invisibles that were covered by the OECD’s Code of Liberalisation of Current Invisible Operations and were the responsibility of the OECD Committee on Financial and Fiscal Affairs. Nevertheless, the (then) European Economic Community (EEC) and Finland persuaded the committee to agree to a discussion.
Feketekuty speculates that they were trying to humour the US and help the administration to secure support for the Tokyo round package from its services industries, as a counter to the increasingly protectionist US manufacturing sector.
The OECD Secretariat prepared a lengthy note for discussion that highlighted three conceptual concerns.6First, there was no a priori definition of trade in services, especially whether it was limited to cross-border transactions or extended to the hugely contentious issue of foreign 1111
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investment. Second, the US goal to develop generic rules simply assumed that services such as maritime transport, insurance and construction had features in common, aside from being intangible. A third dilemma was the lack of national and comparative data or any agreed system for classification.
In addition, the secretariat pointed out that numerous international entities, such as the ITU, the Universal Postal Union, the International Aviation Travel Association and the UNCTAD (through the Shipping Liners Code), were charged with addressing the international regulation of these sectors.
The next incremental success for the US was the decision to establish an OECD working party on trade in services. This was the catalyst for a more concerted campaign. Feketekuty describes working ‘in co-operation with a loose international coalition of about a dozen key business executives and government officials’ to develop a comprehensive strategy (Feketekuty, 1988, p 306). Working through the OECD Trade Committee had the advantage that trade officials and diplomats would get up to speed in preparation for eventual GATT negotiations on services. In late 1980 Feketekuty tabled a US ‘inventory’ on barriers to trade in services.7This was based on a survey of US firms that, according to Jon Aronson, was commissioned from the US Chamber of Commerce behind the backs of other government agencies (Aronson, 1988, p 16). The categories of ‘barriers’ were aligned as far as possible to trade in goods. The inventory did not, by definition, include US barriers. That gave other services exporting governments a greater incentive to conduct their own surveys.
By this time, Feketekuty had secured almost unanimous agreement to progress the issue, but not on how to do so. The US, supported by Japan, Australia and Norway, wanted a generic analysis of the problems that services industries faced and mechanisms to eliminate them. This cross- sectoral approach would avoid the risk of becoming bogged down in lengthy discussions of specific sectors and micro-management through regulations.
Other governments were sceptical and preferred a sectoral approach with pilot studies. Only the United Kingdom (UK) actively opposed the idea, saying it ‘did not want the Committee to do anything at all in the services area as it would be a waste of resources and would come to nothing’.8 (Once Thatcherism penetrated the UK trade ministry in 1980, it became the most enthusiastic European advocate, especially on behalf of its financial services industry.9) As a compromise, the trade committee adopted a parallel process, without prejudice to what happened next. Governments who wished to prepare US-style studies could do so. The committee itself would conduct two pilot studies.
A combination of political determination, negotiating savvy, corporate pressure and positive noise was slowly bearing fruit. The ‘trade in services’
discourse had become normalised among OECD trade officials. They began developing more sophisticated analogies to GATT rules on unfair trade practices, non-tariff barriers and protectionism. The intention to use ‘trade 1111
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in services’ disciplines to curb national services policies and regulatory autonomy was spelt out in a lengthy secretariat paper in early 1981:
While some barriers are deliberate measures designed to shield existing firms from external competition, many are the result of a variety of measures designed to achieve social, economic, cultural and national security objectives. . . . Any liberalisation effort in the service sector would have to take due account of the legitimate objectives of many of the measures seen as obstacles to trade or competition in the service industries. Our goal should not be to remove all barriers, i.e. complete de-regulation and elimination of all subsidies; but, rather, as is the case currently in the GATT with respect to trade in goods, there should be an assumption of free trade but with recognised exceptions for accepted reasons. Regulations designed to achieve legitimate social goals should be adopted and implemented in a manner which is least distortive of trade and least costly in terms of efficiency. This suggests the need for the development of international rules and procedures [that] could focus on the extra territorial effects of domestic actions . . .10
Conceptual frameworks and legal rules for international trade were seen as a ‘natural complement’ to the OECD’s work on ‘positive adjustment’
policies, code for its emerging neoliberal policy agenda.11 The officials speculated that the OECD might address these issues in parallel. Another document suggested that trade ministries could be encouraged to work with services firms to bypass obstructive parts of their bureaucracy:
Tactically, US and, more recently, UK, service sector firms are seeing that progress on liberalisation requires them to get the attention and support of governmental trade policy-makers as they are getting nowhere through the industry specific approach. . . . The trade policy approach requires government trade policy makers to be willing to work in the services area against the resistance of industry-specific regulatory bodies.12 Moving to the GATT
In two short years the artifice of ‘trade in services’ had become part of the OECD’s policy platform. The time had come for the US to increase pressure for a new GATT round on services. In April 1981 Feketekuty prepared a statement on US objectives for trade in services negotiations and announced plans to seek the political endorsement of OECD ministers.13
The support of the EEC was crucial. Officials were familiar with the general concept – the Treaty of Rome 1957 envisaged ‘an internal market characterized by the abolition, as between Member States, of obstacles to the free movement of goods, persons, services and capital’. But, as noted in 1111
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the Introduction, the emerging ‘services economy’ in Europe centred on the integration of services and industry. It was also embedded in a very different policy environment. The federal nature of European governance, the multi- layered structure for decisions on trade negotiations and the (thor consensus on the Commission’s trade mandate meant it was impossible to promote an overly ambitious agenda.
Moreover, the national bureaucracy of each member state was responsible for regulating services. Those officials were also represented on, and committed to, the sectoral committees of the OECD and unlikely to support initiatives that undermined those programmes or their own regulatory authority. The Commission’s officials lacked the resources, corporate pressure and mandate to push services within the OECD Trade Committee, where its member states were also represented. They therefore preferred a gradual building of consensus through existing legal and institutional mechanisms, with the possibility of eventual negotiations in the GATT.
Their continued ambivalence towards GATT negotiations was influenced largely by the implications of a new round for agriculture and sensitivities about domestic regulation of services, especially affecting culture.
The OECD ministers adopted a muted position on services at their June 1981 meeting. Likewise, a tense meeting of GATT parties in November 1981 agreed only to reconvene a year later to prepare a draft work programme for a new round. By the time they met again in November 1982 Feketekuty enjoyed the full support of the recently elected President Ronald Reagan and his appointee as USTR, William Brock. On the eve of the ministerial an article in Brock’s name entitled ‘A Simple Plan for Negotiating Trade in Services’ was published in The World Economy(Brock, 1982). The meeting was held in tense circumstances, barely three months after Mexico had defaulted on its debt repayments, signalling a Third World debt crisis. The developing countries, led by India, insisted that they would not consider any new negotiations before the commitments on development that had been made in both the Tokyo round and the GATT Work Programme for the 1980s were implemented. Moreover, the GATT’s legal mandate related only to trade in goods, not services. Brock claims to have threatened India that ‘hell would be dappled with little icebergs before India got anything out of the United States if they continued to act that way’ and ‘relations between the American and Indian delegations were “less contentious the next day”’(quoted in Dryden, 1991).
The US secured a concession at the 1982 meeting that Shukla describes as a ‘turning point in the history of the GATT’ (Shukla, 2000, p 15). The ministerial declaration set out a two-year programme. Contracting Parties who had an interest in services should conduct national examinations of the issues and exchange information, using a standard format where possible. The results, along with information and comments from relevant international organisations, would be reviewed at the next GATT ministerial 1111
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