Ramifications of GATS Mode 4 for EU-India Trade Relations

This paper argues that there remains substantial scope for emerging markets in general—and for India in particular—to make further commitments towards greater liberalization within the services sectors and within all modes of supply provided in the General Agreement on Trade in Services (GATS). It will be demonstrated that, despite the commitments made within the GATS, services sectors still exhibit limitations that restrict equal competition for foreign competitors, sometimes resulting in non-compliance with the World Trade Organization (WTO) doctrines of market access and national treatment. Different WTO Members set different strategies for services liberalization, reflected in their GATS or other negotiating positions. Excessive use of non-tariff barriers can lead to ineffective enforcement of GATS commitments, resulting in true market access lagging behind bound rates. Some countries keep a conservative position on their bound commitments, while in reality a more liberal access is enjoyed, affording them stronger leverage on future rounds of negotiation. A failure to effectively enforce bound commitments can also reflect an inability within a country to ensure uniform domestic implementation.

1. General Background

       According to a communication of the European Commission, “the focus of [European Union-India] relations has shifted from trade to wider political issues” [European Commission, “An EU-India Strategic Partnership,” COM (2004) 430 final, 16 June 2004, p. 3]. However, trade continues to play a major role between the two parties. EU trade with India has more than doubled since 2000. India has significantly increased its number of trade diplomats in recent years, which shows its commitment to the world trading system [For an overview of India’s recent impressive performance in world affairs, see “The Rise of India,” Foreign Affairs, Vol. 85, No. 4, July/August 2006, pp. 1-56]. The European Union and India hope to increase their trade in both goods and services through negotiations for a Free Trade Agreement (FTA). The negotiations over an EU-India FTA, whose parameters were set out in the report of the EU-India High Level Trade Group, commenced in June 2007, and parallel negotiations include a maritime agreement, since maritime transport accounts for 53 per cent of the total trade transactions. It is unequivocally the major mode of transportation [Eurostat]. The main framework for trade dialogue between the EU and India is, nevertheless, the WTO. There is an India-EU Strategic Partnership as well as a Joint Action Plan which outlines commitments to reciprocally tackle existing barriers to trade and increase bilateral trade flows [European Commission, “An EU-India Strategic Partnership,” SEC (2004) 768, Brussels, 16 June 2004, COM(2004) 430 final; EU Council, “The India-EU Strategic Partnership: Joint Action Plan,” 7 September 2005, 11984/05 (Presse 223)].

      The potential EU-India FTA has been progressing increasingly slowly for some months, but continues to represent a major opportunity for European firms [See report by Ecorys, “Global Analysis Report for the EU-India TSIA,” Draft Version, TRADE07/C1/C01–Lot 1, 21 May 2008.]. There are still some key barriers to doing business in India and national treatment concerns, which European companies wish to overcome [See International Financial Services London, “EU-India talks, IFSL to consult on City views,” available at http://www.ifsl.org.uk/tradepolicy/]. In fact, in 2008 the World Bank ranked India 120 (out of 181 economies) in terms of the “ease of doing business” [See The World Bank, “Doing Business,” available at http://www.doingbusiness.org/ExploreEconomies/?economyid=89]. This is the case with telecoms and courier services, the latter being a service where India has not yet made any offers or commitments within the GATS. Several sectors, including maritime transportation, construction, and telecommunications, require the approval of the Foreign Investment Promotion Board prior to establishment. In distribution services, where the EU has taken a leading role in advocating the liberalization of market access, there are currently no retail commitments, and in some sectors, including express delivery, draft legislation currently threatens existing market access.


      Mode 3 of the GATS (commercial presence) has been the most liberalized in India. The Indian Ministry of Commerce increased foreign equity limits to 74 per cent in all telecom subsectors between 2000 and 2006, and to 100 per cent in internet service provision lacking a gateway. This foreign investment comes with a number of non-quantitative restrictions relating to national treatment. However, strict guidelines exist on the permitted composition of an Indian company’s board, with a majority required to have Indian citizenship.

      Moreover, in addition to tariff barriers to imports, India also imposes a number of non-tariff barriers in the form of quantitative restrictions, import licensing, mandatory testing and certification for a large number of products, as well as complicated and lengthy customs procedures. Furthermore, there is a high variety in treatment in the various sectors and among Indian states, which creates confusion and additional costs for foreign companies seeking to set up in India. The postal and courier services have in recent years undergone a period of worldwide liberalization. The EU has advocated further liberalization and an increase in the scope of coverage pertaining to the GATS commitments [See European Commission, “Summary of the EC’s Revised Requests to Third Countries in the Services Negotiations under the DDA,” 24 January 2005, at p. 5]. In this sense, the EU has been working consistently to eliminate monopolies in the postal and courier services sector.

       As for the specific case of telecommunications, European service providers looking for growth opportunities are eager to supply to large markets in emerging economies such as India. The current area of coverage in many emerging markets remains low to date. If emerging economies were to further liberalize their telecommunications markets, European providers would benefit from large gains. Accordingly, the EU requests that all countries, except for least-developed countries, allow full competition in their telecom markets. At the moment, the competition difficulties include the granting of exclusive rights to suppliers and mandatory economic needs tests for new entrants. In addition, there are oftentimes severe limitations on foreign equity and regulations which render some foreign operators unable to gain establishment by disallowing majority control of their businesses and restricting the types of legal entity permitted. The difficulty in decreasing legislation on these limitations to the national treatment principle has been compounded by the fact that many countries lack an independent telecom regulator.

       Since 2002 the telecom industry in India has grown rapidly, with subscribers to wired and wireless service increasing from 44.97 million in March 2002 to 225 million in June 2006, an average annual growth rate of 49.5 per cent. Within this growth, mobile telephony dominates, reaching 185 million subscribers in June 2007, from 13 million in 2003, an average annual growth rate of 94 per cent. During the same period, private participation increased significantly, from a 15.1 per cent market share in March 2002 to 64.1 per cent in November 2006, eroding the share of India’s two public sector providers, Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited [World Trade Organization, India Trade Policy Review 2007].

       Between August 1991 and July 2007, India’s telecom sector collected approximately US $20 billion in foreign direct investment (FDI), accounting for nearly 10 per cent of all foreign direct investment. FDI has been particularly high in recent years, in the aftermath of increasingly progressive liberalization, with US $2.3 billion to the telecom sector in the 2006-2007 fiscal year and US $3.4 billion in the first three months of 2007-2008 alone [Indian Ministry of Commerce, Department of Industrial Policy and Promotion, “Fact Sheet on Foreign Direct Investment,” July 2007]. The growth of India’s telecommunications sector has been driven by necessity as well as a trend of autonomous liberalization since 1991. Telephone density has primarily grown in cities, with 2006 urban rates at 51.5 per cent and rural areas at 1.85 per cent. The Indian government’s original plans were to increase rural connections to 50 million by the end of 2007 and to 80 million by 2010 to remedy this development gap, using subsidies that primarily aid the mobile telephony infrastructure [See Hajela, S.K., “India—ICT Development Scenario,” Experts Group Meeting of the UN Economic and Social Commission for Asia and the Pacific/Information, Communication, and Space Technology Division, Bangkok, 30 November-1 December 2006].

     In the WTO framework, under the Doha Round of trade negotiations, additional commitments were offered by India, with the most recent revision in 2005 including broad liberalization of the telecoms sector, with a 49 per cent foreign equity cap in all subsectors besides data and message transmission services (i.e., electronic mail, voice mail, et cetera), where 74 per cent foreign investment was allowed. During the approval process, overseen by the Foreign Investment Promotion Board, preference is given to foreign operators willing to transfer technology to Indian joint partners, and upon gaining market access, no subsidies which domestic companies enjoy are afforded to foreign operators. The lack of national treatment in this regard is notable, given the universal service obligation’s ambitions to remedy low rural teledensity rates through the use of subsidies.

      Telecommunications services are not only important economic drivers, but they are also indispensable for trade and development. A liberalization of the telecommunications services sector assists communication infrastructures for businesses and individuals and reduces costs for industry and private users. The case of Morocco demonstrates how liberal domestic policy measures can deliver impressive results. In June 1997, Morocco implemented a broad reform program through its telecom sector law. This law laid the foundations for private participation and competition. This broad-reaching law established the independent regulator and provided for the privatization of the incumbent operator [See Mohammed Ibahrine, “Towards a National Telecommunications Strategy in Morocco,” FIRSTMONDAY.ORG, available at http://www.firstmonday.org/issues/issue9_1/ibahrine/index.html]. In 1999, a second license was awarded to a consortium led by Telefónica and Portugal Telecom for license fees amounting to US $1.1 billion [Björn Wellenius & Carlo Maria Rossotto, “Introducing Telecommunications Competition through a Wireless License: Lessons from Morocco,” Public Policy for the Private Sector, Note No. 199, November 1999, p. 1]. This figure alone was equal to approximately two years of Morocco’s capital inflows [Ibid, at 4]. In addition, the competition induced the incumbent to lower tariffs to almost 50 per cent of its former level within one year and to double its number of subscribers within two years [Ibid, at 3, 4]. Within two years of issuing the license, Morocco had increased its mobile penetration to 5 million [Ibid, at 3]. In December 2000, 35 per cent of Maroc Telecom was sold to Vivendi Universal for 23.3 billion dirhams, a figure which significantly exceeded those from competitor countries [“Vivendi Universal takes 35% stake in Maroc Telecom as part of a comprehensive strategic cooperation” http://www.vivendiuniversal.com/ir/en/press_2000/20001222_Vivendi_Universal_takes_35_stake_in_Maroc_Telecom_as_part_of_a_comprehensive_str.php].

       As for construction services, as they become more globalized, there is a need for large civil engineering companies to export high-quality design as well as engineering and management services. European construction companies are well suited to the globalization trend. Most emerging markets have a high volume of construction activity with a low margin for profit, and European companies are in a strong position to take advantage of the increasing need for infrastructure in emerging economies. The main issues to resolve in construction services are lack of openness, lack of market transparency, market-access barriers, and national treatment concerns. For example, many countries apply high foreign equity requirements needed to underwrite the risk of undertaking construction activities, which discriminates against medium-sized foreign construction companies. There are also many examples of discriminatory licensing and registration procedures. Therefore, an opening of construction markets and government procurement rules in emerging economies would not only benefit EU trade but would also strengthen the capacities of emerging economies.

2. What is India’s Interest in EU-India Trade Relations?

      So what is India interested in? The EU is India’s largest trading partner with 21 per cent of Indian exports [European Commission: “India,” http://ec.europa.eu/trade/issues/bilateral/countries/india/index_en.htm]. India is interested in more access to the EU service market since India is an efficient service supplier in sectors such as IT and software, engineering, and call centers. There is tremendous IT human capital in South Indian cities such as Bangalore and Hyderabad. India has also a great interest in the export of textiles as well as in the pharmaceutical industry.

      Another key issue where India has a great interest is in the so-called Mode 4 of the GATS (temporary migration). For the purpose of this article, a clear semantic and conceptual distinction is acknowledged between temporary migration (i.e., Mode 4 of the GATS) and immigration (which implies permanent residency in a country to which one is not native). Mode 4 commitments allow people to travel to another WTO country to provide services for a short period of time. Mode 4, however, is not about access to local labor markets and should therefore be clearly distinguished from economic immigration. In fact, the GATS Annex on Movement of Natural Persons stipulates that the GATS “shall not apply to measures affecting natural persons seeking access to the employment market of a member, nor shall it apply to measures regarding citizenship, residence or employment on a permanent basis” [Annex on Movement of Natural Persons Supplying Services Under the GATS, para. 2]. Furthermore, the scope of coverage of Mode 4 is limited to the category of “service supplier” [GATS Article I.2.d.]. Therefore, a controversy arises because Mode 4 may be associated with immigration policy since Mode 4 could become the backdoor to immigration and have implications for education, health systems, and other social benefits provided in the EU, for example, that may not exist in other countries. This relationship between the two concepts (Mode 4 and immigration policy), however, does not appear anywhere in the GATS. In this respect, a major success of the Doha Development Agenda would be for the WTO membership to agree conceptually on the scope of Mode 4.

     In the United States, members of the US Congress have warned on several occasions that they will oppose any concessions on Mode 4, arguing that the issue is an immigration issue rather than a trade matter [See BNA International Trade Reporter, “U.S. Signals Possible Movement on Mode 4 in WTO Services Talks,” 24 July 2008, Vol. 25, N. 30, p. 1090]. The US has been under pressure from developing countries to improve its commitments on Mode 4. India in particular wants Washington to allow more of its computer professionals to work temporarily in the United States, but the issue is extremely controversial because of its link to immigration issues, particularly since the September 11, 2001, terrorist attacks and heightened security in the wake of those attacks.

     Since there is no categorization in Mode 4, the only informal requirements are: 1) that the service is temporary, and 2) that the service provider does not seek permanent entry in the labour market of the WTO Member where the service takes place. However, the question remains: which type of service providers will not seek permanent entry in the labour market? Once again, Mode 4 creates a division between developed and developing countries of the WTO in the sense that developed countries do not want Mode 4 to become a substitute for immigration—the argument being that there is already immigration in developed countries—whereas developing countries want a full practice of Mode 4 as temporary migration.

     According to Pascal Lamy, opening Mode 4 may generate benefits for both originating and receiving countries. For originating countries, the benefits are in terms of remittances and the development of human capital. Receiving countries also benefit from the increased mobility of services suppliers. Mode 4 can therefore be a win-win game [See speech by Pascal Lamy, “Why services are crucial for concluding the WTO Doha Round,” European Services Forum and the London School of Economics conference (15 October 2007)]. Yet, it is in this Mode 4 where we find the greatest discrepancy among EU Member States in services trade: some EU countries are in favor of liberalizing Mode 4, whereas others are more reluctant.

     With its extensive use of skilled and unskilled labor, the construction sector is strongly affected by limitations on the movement of persons in WTO Members in general. Nationality and residency requirements or other staffing requirements for persons employed by foreign firms could constitute limitations on market access and national treatment. Requirements to employ and train local staff may place a burden on the supplier. Such requirements, even if imposed on an equal basis on all domestic as well as foreign firms, could still constitute de facto national treatment limitations.

     It is argued that Mode 4 of the GATS remains essentially subject to strict domestic regulations and limitations. Yet, many countries accept the importance of temporary migration as a necessary element to become more competitive in a knowledge-based society in the world. In Europe, a new global approach is needed so that migration strikes the right balance among the risk of labor market shortages, economic impacts, negative social consequences, integration policies, and external policy objectives. Moreover, the changing demands of an ageing society and a labor market in constant evolution have challenged established assumptions about migration from outside the EU [European Commission, “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions,” The European Interest: Succeeding the age of globalization COM (2007) 581 final, 3 October 2007, pp. 4–5].

     As argued above, immigration is different from temporary migration. However, the EU is tackling its lack of temporary migrants with the creation of a new EU immigration pact. EU Member States are expected to devise economic immigration policies and as such become more attractive for highly qualified immigrants, who tend to prefer the United States, Canada, or Australia to the EU. As of 2008, 55 per cent of skilled immigrant labor went to the US and only 5 per cent to the EU. Former commissioner Franco Frattini was instrumental in the creation of an EU Blue Card for permanent legal immigration of highly-skilled workers [EurActiv, “The European Pact on Immigration and Asylum,” 30 September 2008, available at http://www.euractiv.com/en/mobility/european-pact-immigration-asylum/article-175489]. EU leaders are trying to increase the attractiveness of Europe for highly skilled workers, students, and researchers in order to fill its looming demographic crisis and related skills shortage. [Council of EU, Press Release, 2890th Council meeting, Justice and Home Affairs, Brussels, 25 September 2008,12923/08(Presse250),http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/jha/103072.pdf].

     Although not legally binding, the pact builds upon the EU Blue Card initiative, approved by the European Parliament in November 2008, and the European Commission’s Policy Plan on Legal Migration [European Commission, “Policy Plan on Legal Migration” (SEC(2005) 1680), COM/2005/0669 final, Brussels, 21 December 2005]. The Blue Card, which is the EU’s main policy initiative in the global competition for the best, highly mobile brains, aims to make it easier for skilled migrants to come to the EU by replacing 27 different national visa regimes with a single European regime. The aim is to create a single application procedure for non-EU workers to reside and work within the EU. The proposal aims to attract up to 20 million highly skilled workers from outside the EU.

     EU Member States seem to disagree on the definition of highly skilled worker for the purpose of the EU Blue Card. In the end, it was agreed that to qualify for a European Blue Card, immigrants must find an employer that offers a salary at least 1.5 times higher than the average pay in the host country, with derogations to lower the pay to 1.2 times the national average for sectors with acute labor shortages [EurActiv, “EU eyes higher pay for skilled immigrants,” 24 September 2008, available at http://www.euractiv.com/en/justice/eu-eyes-higher-pay-skilled-immigrants/article-175649]. EU governments also seem to disagree on how quickly the Blue Card should be handed out following the date of application. The aim is to do it as soon as possible. For some, this means 30 days, but for others 60 or even 90 days. Businesses, by contrast, say they can wait two weeks at most. They therefore lament that the Blue Card scheme remains rather unattractive from a business point of view and call for a more ambitious plan.

     However, in the UK, a study published by the House of Lords concluded that immigration has very small impact on GDP per capita, whether positive or negative. This conclusion is in line with findings of studies of the economic impacts of immigration in other countries including the US. Furthermore, the report found no systematic empirical evidence to suggest that net immigration creates significant dynamic benefits for the resident population in the UK. Moreover, it is possible that there are also negative dynamic and wider welfare effects [House of Lords, “The Economic Impact of Immigration,” Volume I: Report, Select Committee on Economic Affairs, First Report of Session 2007-08, April 2008, pp. 58-59]. These conclusions are, in my opinion, unfortunate as immigrants tend to be better workers than natives, willing to work more for less.

3. What the EU Can Offer

What can the EU offer India? The EU is prepared to offer predominantly business services such as financial services or telecommunications (in the latter case, by providing mobiles in rural India, for example), which appears feasible to some extent. Services are critical for any economy. The services sector currently contributes more to economic growth and job creation worldwide than any other sector. In Europe, services account for over 77 per cent of GDP and employment. Despite this, services currently still represent less than 30 per cent of European external trade [European Services Forum, “Position Paper on EU Free Trade Agreements,” 28 February 2008, p. 2]. This demonstrates that trade liberalization in the services sector is of great importance for the EU. Furthermore, in a speech given by Lord Vallance of the European Services Forum to the EU-India Business Summit on 12 October 2006, he said that developed and developing countries will miss out on enormous potential economic gains because services have once again been taken hostage by agriculture even though the latter represents only 8 per cent of world trade and 2 per cent of developed countries’ economies [Lord Vallance of Tummel speech at the Seventh EU-India Business Summit in Helsinki (12 October 2006)].

4. Conclusions

The EU is India’s largest trading partner. The European Commission’s Directorate-General for external trade is already very active in its trade relations with India. So, few new initiatives seem possible. Nevertheless, there is some, although limited, room for trade policy concessions at the multilateral level with India regarding the resistance with Mode 4 of the GATS. The EU could offer additional incentives to India by granting larger concessions or demanding fewer concessions than would be the case in a purely reciprocal give-and-take situation. However, even if the EU concessions were possible, what would the EU want to obtain in return? Market access is the answer. This is what trade negotiations are about. The European Commission’s Directorate-General for external trade would come under pressure if EU concessions were not used to enhance market access for European exporters in growing and important emerging markets such as India. Also, the European Commission should negotiate more constructively, without patronizing, and instead accepting India as an equal player in the current multi-polar framework of global economic governance. India is not yet an economic superpower; it is only starting to grow into a more powerful role. The EU should try to foster this positive development in a cooperative stance establishing trust.