Cross-border Movement of People and Its Critical Role for Services Trade

The importance of cross-border movement of people for services trade and the functioning of global value chains has been amply demonstrated during the COVID-19 crisis. While in normal times – and during the financial crisis in 2008 – services trade has been less volatile than trade in goods, the opposite has been true during the last two years (Figure 1). The largest difference between the two crises is the impact on people crossing borders.

Figure 1. Annual growth in trade, goods and services

Source: WTO

Travel contracted by more than 60% globally from 2019 to 2020 and contributed substantially to the sharp drop in services trade. This reflects not only that international tourism fell off a cliff, but also travel supporting trade in goods and services grinded to a halt. For example, business travel; movement of ship crews to the ports of crew-change; technicians travelling for installing, maintaining, and repairing equipment; or engineers travelling to certify that products comply with standards are essential for the flow of trade in goods and services. The services these travelers provide do not make much of a dent in trade statistics, but without them, many global value chains would suffer significantly.

The fact that services suppliers and the services they provide often cannot be separated in time and space is reflected in international trade rules such as the WTO General Agreement of Trade in Services (GATS). Acknowledging the importance of proximity, the GATS identifies four modes of services supply. These are cross-border supply (mode 1, e.g., an architect from one country delivering a blueprint to a housebuilder in another country), consumption abroad (mode 2, e.g., tourism), commercial establishment (mode 3, e.g., a foreign bank establishing an affiliate in another country) and the temporary movement of natural persons (mode 4, e.g., a technician repairing a solar module in another country). Mode 4 is by far the smallest as measured by value (Figure 2).

Figure 2. Global services trade by mode of supply

Note: data are from 2017, the latest year available and covers global exports

Source: WTO TISMOS database

People crossing borders is a sensitive policy issue raising concerns about migration and its possible impact on labor markets. The GATS mode 4 provisions strike a balance between such concerns and the need for proximity in services trade. It applies to temporary movement of services providers that are employed or self-employed in their home country. It strictly does not apply to people seeking employment abroad (Box 1). Commitments in mode 4 exempt services suppliers from quotas or economic needs tests. In practice this means that countries make a distinction between migration and mode 4 in their legislation.

Box 1: Movement of people in GATS, CETA, CPTPP, and USMCA

The GATS defines mode 4 as the situation when a service provider temporarily travels to another country to supply a service (e.g., training the staff of a new restaurant, or overseeing the construction of a building). Mode 4 excludes people who seek to become employed in the other country’s job market or to stay in the other country permanently. Someone traveling temporarily under mode 4 thus remains legally employed in a country different from the one they are traveling to.

WTO members who make commitments on mode 4 list them in their GATS schedules together with limitations on such liberalization if any, e.g., if they want to limit the number of persons allowed to entry for a specific sector or if they require specific local qualifications from service providers.

The CETA, CPTPP, and USMCA build on the GATS. All three contain a chapter on cross border services trade and an additional chapter on temporary entry which covers all sectors. The services chapter covers modes 1, 2 and 4 in CPTPP and USMCA, while mode 4 is not covered in the services chapter in CETA.

All three agreements differ from the GATS by employing so-called “negative lists” for services sector liberalizations. This means that countries need to explicitly list the sectors where they want to limit liberalization, otherwise they are considered liberalized.

The additional chapter on temporary entry employs a “positive list“ in all three agreements. Thus, countries only ease temporary entry insofar as they explicitly commit to it. Noteworthy in the CPTPP is also the commitment by signatories to enhance the APEC Business Travel Card and to cooperate on visa and border security capabilities. Meanwhile, in the USMCA the signatories commit to work towards the removal of visa requirements for business travel and they explicitly list which requirements may be considered for “temporary entry.”

According to the OECD STRI database, services suppliers that fall under the definition of mode 4 are subject to quotas in nine out of 50 countries, while in 37 countries mode 4 services suppliers are subject to economic needs tests. To illustrate how economic needs tests work, take a hypothetical example. An Indian computer services firm, say, has entered a contract for providing and maintaining a human resource management software with a foreign client. Once set up, the software will run as a cloud service (mode 1), but the Indian firm may need to deploy a person to set up the software and train client staff in using it (mode 4). In the context of an economic needs test, the client would have to document that it could not find a local supplier to do the job. Thus, the Indian services supplier would face similar requirements and limitations as a person seeking employment.

India has pushed for mode 4 liberalization both at the WTO and its trade agreements as a matter of high priority. The OECD STRI shows that recent years have seen a tightening of border controls for mode 4 movement of people. In addition to economic needs tests and quotas, procedures related to obtaining a visa or recognition of qualifications, where needed, have also become more lengthy and costly in many countries, albeit 2021 saw a small improvement. The recent WTO Joint Statement on Services Domestic Regulation aims at reducing trade costs related to recognition of qualifications. It is welcome and will ease mode 4 movements when it enters into force.

To conclude, trade through mode 4 supports services trade through other modes of supply as well as trade in goods and digital products. The mode 4 provisions in the GATS and free trade agreements strike a balance between the aim to control migration while keeping services markets open. The distinction between trade and migration also needs to be reflected in the policy implementation. The STRI reveals many examples of countries that successfully do this. For instance, some countries exempt contractual services suppliers, intra-corporate transferees, and independent services suppliers from labor market tests unless they fill a registered job vacancy. APEC’s Business Travel Card is also a good example of policies that facilitate services trade through movement of people.