South-South Preferential Trade Agreements in Services – Economic Potential Lying Idle

Imagine the Central African Republic and Cameroon investing in the compatibility and quality of their railway tracks, and eventually merging their railways altogether. The producers in the Central African Republic would get easy access to the sea, while Cameroon’s railway and ports would benefit from more turnover. SMEs in both countries could more easily engage in value-added production, and transportation costs for railways would eventually decrease and allow the general public to better access more regular, more reliable and cheaper transportation.

This is a little tale of the economic theory underpinning the benefit of South-South economic integration – particularly in services. Economic integration between developing countries – in order to be exclusive and mutually beneficial between the partners – legally needs to be based on a trade agreement.

Preferential Trade Agreements (PTAs) in services between a small number of countries (at least two) are generally viewed with scepticism at the multilateral WTO, as they prioritize trade relations with a selected group of countries and possibly divert trade away from others. However, GATS Art. V permits the conclusion of PTAs if they are likely to foster net trade creation. More specifically, such PTAs must a) substantially cover all the trade, b) cover all modes of services supply, and c) eliminate substantially all barriers to trade. While in practice these conditions may be rarely met by any PTA in services, it is generally agreed that PTAs in services considered to be WTO-plus (more commitments than in GATS, no general exclusion of sectors or modes of supply) are in line with these requirements.

However, economic theory of South-South services trade liberalisation suggests that not all services and services sectors are equally suitable and beneficial for South-South services trade liberalisation. Normally, it would be expected that liberalisation in particular of transportation, communication, business and financial services along with modes 3 (commercial presence) and 4 (temporary movement of persons) is particularly beneficial. Generally, the service sectors that are of interest to the partner countries – sectors that promise healthy competition and an increase in value-added production – depend largely on the geography, culture and structure of the economies involved in the agreement. This contradicts however, the requirements established by GATS Art. V regarding PTAs in services, since theory suggests that instead of agreements ‘covering substantially all the services trade‘, sectoral agreements would indeed seem wiser in many instances of potential South-South cooperation.

Examining the regulatory scope for sectoral services trade agreements in more detail in my book Developing Countries and Preferential Services Trade [2016, Cambridge University Press: Cambridge], I argue that GATS Art. V:3 provides the flexibility for developing countries to do just that: a PTA in services between two or more developing countries can be permissible under WTO law even if it only covers a few services sectors of particular interest, resulting de facto in a sectoral agreement. This means that contrary to other WTO Members and in the interest of economic development, developing countries may negotiate quasi-sectoral agreements in services trade liberalization with other developing countries.

Nonetheless, there are only very few substantial PTAs in services between developing countries worldwide. Geographically, South-South trade liberalisation in services is more or less limited to Central and Latin America today, with some new initiatives in Asia and across continents (see Figure). Moreover, existing agreements between developing countries – surprisingly – tend to be even more ambitious with regard to fulfilling the requirements of GATS Art. V than agreements involving industrialised countries. This results in South-South PTAs in services covering most of the services sectors and all modes of supply, that, however, do not introduce substantially more liberalisation between the partner countries than GATS.

In 2014, there were 30 PTAs in services worldwide between developing countries that indeed liberalised services trade to some extent. The analysis, however, shows that the sectors, which were liberalised the most, are not the sectors, which are considered to be most beneficial to long-term economic growth: construction and education. Contrary to what economic theory would suggest, liberalisation in transportation, communication, business and financial services in South-South PTAs remains more or less on GATS-levels.

Interestingly, however, the 30 South-South PTAs in services tend to liberalise aspects of investment along with the temporary movement of natural persons beyond GATS-levels: The PTAs are relatively liberal with regard to the right to establishment and foreign direct investment, as well as with regard to labour migration. This finding suggests that countries are nevertheless aware of the economic potential of South-South services trade liberalisation and are indeed prepared to make meaningful commitments. Nevertheless, the analysis shows clearly that South-South PTAs in services are not using the full scope of flexibility as provided by WTO law and as suggested by economic theory.

WTO law offers a number of avenues for developing countries – and LDCs in particular – to increase the prospects for long-term, sustainable economic growth. One avenue that tends to be overlooked by policy makers worldwide is the conclusion of tailor-made services trade agreements in the global South. While the economic potential of South-South sectoral PTAs in services remains undisputed in theory, it has not yet been fully explored in practice. Among many, one reason for this could potentially be found in the fact that the scope of flexibility for South-South sectoral PTAs in services as provided by WTO law is not yet well known.