Statement Services Trade Development in Economic Globalization Norman R. Sorensen Chairman, Coalition of Service Industries of the United States Forum on World Trade in Services: Opening, Cooperation, Development Shanghai, June 9, 2005 It is my great pleasure to participate in this important conference on services and economic globalization. It is vital to improve public understanding of the importance of services, which now dominate the global economy. It is regrettable but true that policy makers in most countries think of their economies in terms of agriculture and goods, and unfortunately, make policy decisions that reflect this misconception. Until the 1980’s trade in services was considered "invisible". The scope of the services economy, and of trade in services, was crudely and incompletely measured. There was no set of rules governing services trade, as there was for goods and agriculture. One of the great contributions of the Uruguay Round was that it created the General Agreement on Trade in Services (GATS), which establishes the essential rules that WTO Member countries should apply to services trade. The New Dominance of Services Services, I am happy to report, are no longer "invisible". In fact they account for the lion’s share of the global economy. In 2002, services comprised 68% of world GDP. In the United States, services account for about 80 percent of private sector employment and GDP. For some economies, like Hong Kong, services comprise more than 90% of GDP. Even in low and middle income countries, the services share rose from 46% in 1990 to 55% of GDP in 2002. Global trade in services has also grown. Before the WTO General Agreement on Trade in Services (GATS) was adopted in 1994, services exports were only $940 billion. Since then, these exports have grown by 190% to $1.7 trillion. Commercial services exports of low and middle income countries experienced even greater growth of 290%, to $267 billion in 2002. In spite of this growth services exports are small in relation to the global economy. While services account for 68% of the global economy, they only account for 23% of world exports. By this measure we have only begun to realize the benefits of global services trade. Why is this? One reason certainly is that the movement toward trade liberalization in this sector is in its infancy. True, the GATS was written and adopted in the Uruguay Round in 1994, 10 years ago. But most Members at that time took relatively few commitments - that is, they subscribed to the rules, but did not apply the rules to their economies. Thus, according to a study by the WTO secretariat, Members have taken on average only about 30% of all possible GATS commitments. The major advanced economies have taken about 60% of possible commitments; many developing countries have taken far less, sometimes as low as 5%. The point is that we are only at the beginning of realizing the tremendous benefits that liberalization in services trade will bring to growth, employment, and global prosperity. The Contributions of Services to Global Growth Services are key inputs to manufacturing and agricultural production in all economies, and the price and quality of services influence cost and productivity in those sectors. A wide range of services is integral to, and embedded along the entire value chain of virtually all products. The point has been reached when many great manufacturing companies are simultaneously providing many and varied services inside their companies, and to consumers. Services trade liberalization, combined with technological advancements, will drive innovation and efficiency. For example, the demand for "just-in-time" services and customized products led to the development of the logistics and supply chain management services upon which global commerce depends. Express delivery companies have become a formidable engine of growth in world goods trade, overcoming often complex border restraints to deliver inputs to the production process as well as outputs to the consumer. At the same time, they are major enablers of electronic commerce. That is why trade facilitation is now of such concern to us in the services sector. Given the potential contribution of the service sector to economic development, we must obtain commercially meaningful commitments to improved market access and national treatment in the ongoing Doha Round negotiations. And it is here that we see a very important role for China. China’s Critical Role in the Doha Round Two months ago, I led a business delegation to Beijing to meet with ministers, senior government officials, and private sector leaders to discuss the increasingly worrisome state of the WTO Doha Round negotiations. In all our meetings, it was acknowledged that the services negotiations lag significantly behind other elements on the Doha Round agenda, and indeed, were approaching a point of crisis. We therefore encouraged China to take a leadership role at the WTO commensurate with its increasing economic strength as one of the world's largest trading powers, and a major beneficiary of the WTO rules-based trading system. It is clear that the old power structure that guided the WTO, the so-called "Quad" of the EU, Canada, Japan and the US, no longer reflects the reality in the WTO. It is time to broaden the group of leadership countries, certainly to include India and Brazil, but also China. By taking on such a leadership role, China is in a position to exercise positive influence with other developing countries, particularly in making the case to them that it is in their own interest to pursue further services trade and investment liberalization. Failure to reach a strong Doha Round services agreement will be very damaging to the economic interests of developed and developing countries alike. According to a Michigan University study, the global welfare gains from reducing services trade barriers one third will equal $414 billion. Furthermore, China’s liberalization in services will be seen as a sign that China is willing to redress the uneven trade balance with the US and ease pressure at home for actions that could damage our economic relations. At the same time, it would lead to further development of China’s own services sector, which accounts only for 33% of the country’s GDP, and which has the capacity to generate tremendous additional economic growth and jobs for Chinese. We urge China to submit a revised services offer, which we hope will substantially raise the bar for liberalization. We also hope that China will join US efforts to encourage other WTO members to provide ambitious offers and help promote the Doha Round negotiating agenda among emerging economies. A Proposal to Move the Services Negotiations Forward In order to propel those negotiations forward, CSI proposes that all WTO members undertake to make commitments in all services sectors in the GATS. If we can accept that as a starting point, the improved negotiating environment that will result will allow negotiators to focus on the depth, scope, and quality of commitments. Those commitments, we believe, should at least capture WTO Members’ current levels of liberalization. However, further negotiations must then be conducted to bring Members' commitments up to the level reflected in the schedules of those countries that have done the most to liberalize their services sectors. We believe this approach will bring a focus to the negotiations that they have, to date, lacked. Conclusion At the same time, of course, we must ask that China continue the difficult process of implementing its WTO commitments in services. Much progress has been made, but more remains to be made. For example, joining the Government Procurement Agreement would be an extremely constructive step. The Doha Round negotiations are the first significant opportunity since the end of the Uruguay Round in 1994 to lower services trade barriers on a multilateral basis across all service sectors. China, the US, and all WTO members must make the most of it. Thank you. 1 The lock up rules pose regulatory compliance issues for mutual funds, which are required to meet redemptions at all times. As a result, most US mutual funds obtain exposure to China not under the QFII rules, but by investing in Chinese securities available in Hong Kong.