United States: Start of Negotiations on the International Services Agreement but Impact Could be Limited

Services liberalization – long a pillar of the World Trade Organization’s (WTO) Doha Round – made a comeback earlier this month when the US Trade Representative (USTR) announced it would start negotiations on the International Services Agreement (ISA).

WTO members had agreed to move forward on this agreement in July 2012, and USTR’s announcement begins a process that will force representatives of the 20 participating countries to attend an unending series of meetings in places such as Geneva, London, Switzerland, Washington DC, etc. Needless to say, these negotiations will take a good amount of time.

Aside from the United States and the European Union (EU), countries participating in the ISA are Australia, Canada, Chile, Colombia, Costa Rica, Hong Kong, Israel, Japan, Mexico, New Zealand, Norway, Pakistan, Peru, Singapore, South Korea, Switzerland, Taiwan and Turkey. Interestingly, none of the BRICS (Brazil, Russia, India, China and South Africa) and nations from Africa or the Arabian Gulf are currently participating in these negotiations. Their absence raises questions about the future effectiveness of the ISA because these absent nations represent some of the fastest growing economies in the world with loads of untapped potential for the services industry.

Regardless, the ISA – when it goes into effect – will have a tremendous impact on global trade and no nation has a bigger stake in the success of these negotiations than the United States. The US’ services industry is a major driver of the country’s economic growth employing over 80 percent of all working Americans and providing a surplus of $178.5 billion in 2011; indeed, these exports were over $36 billion in November 2012 giving the US a $17 billion surplus just for that month.

This industry also carries strong potential for growth – USTR estimates US services exports of $600 billion (2011 figures) could grow by an additional $800 billion following the ISA’s implementation. This prediction is based on the fact that while services comprise 75 percent of US economic output, they only account for 3 percent of exports – compared to 28 percent for agricultural products and 18 percent for goods.

One reason for this, heretofore, limited export growth is the heavy restrictions US companies face in the global markets. These non-tariff barriers include prohibitions on foreign participation, equity limitations, regulatory and nationality requirements, restrictions on data flows and support for state-owned enterprises.

The ISA aims to remove these barriers thereby allowing for a more level playing field, strengthening and modernizing rules for services trade and potentially adding three million new jobs, according to Brad Jensen of Georgetown University’s McDonough School of Business.

It shouldn’t come as surprise, therefore, that everyone from FedEx and the US Chamber of Commerce is excited about and fully supportive of these negotiations.

The flip side obviously is that a level playing field will increase competition for US firms. However, given their overwhelming lead in this industry and their penetration of the US market vs. the non-US market, it’s pretty certain that US companies will benefit greatly from the ISA.

This level playing field will also help advance the industry’s growth in the emergent Asian economies – analysts have predicted the next century will see more growth in Asia than anywhere else – providing major potential for companies in developed economies.

This raises my major issue with the ISA in its current form: To be sure, the agreement carries significant benefits for participating countries but its effectiveness will be blunted by the absence of emergent countries such as China and India. This will particularly hurt developed economies since they need to improve market access to the growing developing countries for consistent growth.

Emergent nations have less incentive to provide this access and, therefore, hold an upper hand in these negotiations. This gives them an advantage they will use which could prolong the negotiations beyond the already projected lengthy timeframe.

On a positive note, the quick turnaround between the agreement to begin negotiations and the announced start of these negotiations is a positive development representing a change in attitude towards the importance of international trade. Support for trade seems to be directly connected to the strength of the global economy i.e. the stronger the economy, the more support for trade.

This relationship gives policy-makers yet another incentive to work together and implement measures to start and maintain economic growth.