Trade in Services The Next Frontier in Negotiations?

Here are some facts. Today, share of services in global trade stands at about 25 percent. More important, it is the only category of trade that has expanded at a rapid pace since the recession year of 2008. In fact, in the last few years, trade in goods has fallen by about 5 percent and there has been a corresponding increase in the case of services. This pattern is mirrored in the Indian case. According to the Economic Survey, 2024-25, share of services in GVA has increased from around 51 percent in 2014 to around 55 percent now. Further, it is growth in services trade which has kept India’s current account deficit (CAD) at a reasonably healthy 2 percent. Finally, GATT (which regulates commodity trade) successfully led to a dramatic decline in global tariffs. Today, barring for some countries in South Asia, other tariffs are in single digits (in the pre-Trump era!) and the fight today is more about non-tariff barriers.

It is the increasing importance of non-tariff barriers (NTBs) and the stalemate in the WTO in the last two decades that has led many countries to take recourse to Regional Trading Arrangements (RTAs) to expand their trade.

The RTA process has the advantage of going beyond the WTO in new areas. One of these is the rapidly expanding trade in services. The General Agreement on Trade in Services (GATS) was based on the “positive list” approach, where countries only need to come forward with offers when they want to. Consequently, there has been limited forward movement here along the lines of commodity trade negotiations under GATT. While the positive list approach is partly to blame, there is one other factor which is now becoming critical – lack of reliable data.

Services, unlike commodities, have no border restriction like tariffs but are constrained by the internal regulatory process. Further, this regulatory process itself depends on a number of policies. For example, trade in IT services is hampered (in the case of the USA) not only by the visa system (H1-B etc.) but by other regulatory constraints like the totalization agreement (to avoid double taxation via social security payments), agreement on data adequacy rules which affects companies differently in different countries, rules on foreign direct investment etc. Nor are these regulatory constraints the same across countries. Under the WTO there was an attempt to create some international comparison by clubbing services trade under four heads, the so-called Modes 1–4. Unfortunately, the “positive list” approach meant that GATS has been a non-starter.

To cut a long story short, as services trade has increased globally by leaps and bounds, countries are increasingly grappling with the issue of codifying trade in services. As the above discussion indicated, the process will have to begin by recognizing the comparability of services across countries. For example, in trade in education services, we would need mutual recognition agreements, MRAs, to define comparability of degrees. This is easier said than done. In India, education is on the concurrent list and regional regulations would also have to be considered.

Some efforts to achieve some international comparability has started with the WTO classification of services into 12 main sectors and 160 sub-sectors. This was mainly done to allow member countries to categorise their services into 4 modes under GATS. However, since the multilateral negotiations have themselves ground to a halt, it is now for countries to take this forward under various FTAs. The difficulty lies in establishing a single number (like tariffs in the case of commodities) which could establish restrictiveness of services across countries after at least establishing MRAs.

This is particularly important for India whose global strength globally seems to lie in trade in services. Yet, due to all the difficulties listed above for codifying trade in services, India’s experience has been unsatisfactory. One attempt was made in 2005 in the Indo-Singapore FTA called the CECA – there was little forward movement as the issue of MRAs moved nowhere either in banking or in education. Similarly, in 2005 it was agreed that, along with implementing the commodity agreement with ASEAN, an agreement on trade in services would follow. To date no ASEAN country wants to discuss trade in services with India (for obvious reasons).

The issue is how to generate one single number to define restrictiveness in services (a sort of tariff-equivalent) which can form the benchmark for further negotiations on trade in services? There have been some attempts by both the OECD and the World Bank in generating a Services Trade Restrictiveness Index (STRI) but as shown in Pant and Sugandha (EPW, Quantification of Services Trade Restrictions: Some New Results, March, 2022) these indices have some serious statistical shortfalls which can lead to a complete reversal of ranking of sectors in terms of trade restrictiveness. However, this STRI approach seems to be the way forward when (sooner rather than later) India starts serious negotiations on opening up countries to services trade. The current negotiation of RTAs with the US, EU and UK seems the right time to start. What an STRI can do is to begin the negotiations on broad sectoral lines (telecommunications, education, health) and then proceed to granular discussions on specific regulatory issues.

So far India has focussed on Mode 4 (movement of natural persons) as the way of moving forward trade in services. For obvious reasons this has been a failure. As I have argued before, this approach seems a poor attempt at exploiting India’s obvious comparative advantage in services trade.

Manoj Pant
Visiting Professor, Shiv Nadar University