The part of the HK Ministerial draft attracting most disagreement concerns services. Para 21 on services contains square brackets around the words “and the Objectives, Approaches and Timelines set out in Annex C to this document.” If there had been no brackets, the Ministers would “determined to intensify the negotiations in accordance with the above principles” as well as with Annex C.

The brackets were placed during the General Council meeting of 2 December 2005 as many developing countries (including the ACP and Africa Groups) had pointed out they did not agree with many points in Annex C. Moreover, this Annex was drafted not by Members but by the Chair of the services negotiations (the Ambassador of Mexico) on his own responsibility. Thus, it is not a negotiated document and does not enjoy consensus. Unfortunately this is not clear because there is no explanatory note to this effect in Annex C itself. Also, there is no explanation of this in the main body of the text (unlike the earlier drafts that explained that all annexes, except the annex on trade facilitation, have been drawn up by the Chairs and not the members).

In fact, the services text is highly contentious, having been criticised in most of its parts by a wide range of developing countries.

The unbalanced treatment of the services issue is the biggest flaw of the text. There are many aspects to this imbalance.

Firstly, there is an unbalanced treatment of services vis-à-vis the two other major market access issues, agriculture and NAMA. Annex A on agriculture and Annex B on NAMA are only status reports of the Chairs. This is a suitable format which reflects lack of convergence.

In the services negotiations, there are equally if not more serious disagreements on key issues, and thus the correct form for the annex should also be only a status report, stating the areas and extent of agreement and disagreement. Instead there is a text, purporting to represent consensus, when there is none.

Secondly, the services text contains many operational elements that orientate future negotiations and that obliges members to take on serious new commitments. Developing countries, which have mainly defensive interests, are asked to take on most of the new and onerous commitments. This is unfair.

Developing countries had resisted bringing services into the multilateral trading system, and had eventually agreed only on the assurance that under the GATS structure and principles they had the choice to liberalise at their own chosen pace, through a bottom-up approach and four modes of delivery, and this was written into the agreement. While GATS has provided for a series of negotiations to liberalise beyond initial commitments, the architecture envisages ’bargaining’ and ’trade-offs’ within the services sectors and modes of delivery.

Moreover, the developed countries, which had enjoyed exempting their agriculture from GATT rules for several decades, had agreed to re-integrate agriculture into the multilateral trade system in the Uruguay Round and had exacted a heavy price from developing countries for doing so, as the latter had to agree to introducing TRIPS and services, among others. While the developed countries provided themselves with a long-term reform process, the developing countries paid a heavy price upfront through the TRIPS and GATS, and in strengthened disciplines under the various GATT rules.

Now, it is found out that the same developed countries (through loopholes in the agriculture agreement) have not in fact reduced their high agriculture protection at all under the Marrakesh agreement. And even now, they have not yet committed themselves to any meaningful reductions or to an irreversible and time-bound reform process.

And yet they are demanding that the developing countries pay again, and pay heavily and unreasonably, not only by opening up their services sectors, but by also changing the basic structure of the GATS, in contravention of the Uruguay Round understanding and the terms of the Marrakesh treaty.

Developing countries have paid thrice over already, and there is no reason why they should agree, yet again, to pay a new heavy price, in exchange for the developed countries to undertake in agriculture what they should originally have done without payment in any case. Subsidies for production, protection or exports are not a right under GATT, and the developed countries have no right, even in bargaining, to get a price to give these up. And there is no evidence even now of any commitments on the agriculture front from the developed countries.

Thirdly, there is an unfairness in the text in relation to ambition for Hong Kong. While the level of expectations in terms of achieving modalities has been much lowered for agriculture and NAMA, it has been heightened - artificially — for services. This is doubly unfair, since the modalities for services were already settled in 2001 itself, in the form of the guidelines and procedures for the services negotiations. The focus should thus be on attaining progress on modalities for agriculture and NAMA, the deadlines for which have been missed.

There is thus no need to develop more modalities for services. Yet, ironically, of the three market access subjects, it is services that gets the full modalities treatment.

This is the fourth and most serious of the imbalances and injustices. The draft text and Annex C undermines the existing modalities that have been agreed on, thus disrupting the stability of the negotiations. Even more, Annex C undermines the very nature and architecture of the GATS agreement itself, by eroding the flexibilities for developing countries and countering the principles of strengthening the domestic services of developing countries and increasing their share of world services trade.

Fifthly, the reappearance of the services text in virtually unchanged form - except for one important change, i.e. the deletion of the controversial “quantitative targets and indicators” - shows up the non-transaprent and non-inclusive top-down process by which the Chair, Fernando de Mateo of Mexico, has been conducting the services negotiations.

When the services text and its revised version were discussed at informal services meetings in the previous week, they were severely criticised. (See SUNS reports on 22, 24, 25 November).

Despite repeated opposition by a wide range of countries and groupings (including the African, LDC, Asean and Caribbean groupings and several other countries from Latin and Central America), the text still contains (almost unchanged) commitments to mandatory plurilateral negotiations, and detailed references to qualitative benchmarks (commitments in various modes), to sectoral negotiations and to a possible framework on rules for government procurement.

The appearance of the contested text and the unsatisfactory top-down process have made a mockery of the claim by the director general Pascal Lamy that the drafting has been “bottom up” and inclusive. Having a Chairman drawing up a text, without taking account the views of members, and refusing to depict expressed differences, and submitting it under the pretext that it is under his own responsibility, is hardly democratic. This text was submitted by de Mateo to the Director General Pascal Lamy.

The same text of the services Chair appears in the draft Ministerial text as an annex. Since the main text that gives the context to the annex does not explain it is only a Chair’s draft that does not enjoy consensus, the responsibility of transmitting this contested document as if it had been agreed to now rests with the Director General.

An examination of Annex C on services shows the following. On the plus side, the previous reference to “quantitative targets” (a code for requiring members to undertake to commit to liberalise in a percentage of sub-sectors) has been removed. This was unsurprising because the opposition to it was so widespread, and the demands of some the proponents, especially the EU, were so extreme, that even some developed countries were embarrassed and had become aware of the near certainty that its presence in a draft at Hong Kong could destabilize the entire Ministerial.

Nevertheless, the item is far from dead. The EU, for one, has indicated that in Hongkong it will try to re-inject it in Annex C or in para 21, perhaps with a different name. The proposal in “multilateral benchmarking” is that developing countries must commit or increase commitments to liberalise in a certain number of sub-sectors (57% of them, in the EU proposal). This would completely undermine the development-oriented flexibilities in GATS.

Even without “quantitative targets”, the services text contains many elements that have rightly been opposed by a large number of developing countries, because they run counter to the main negotiating procedure (the bilateral request-offer system) and to the development principles and flexibilities of the GATS.

First are the “qualitative benchmarks” in the long paragraph 1 of annex C. The Ministers agree that members should strive to ensure new and improved commitments adhere to a list of objectives. These include “commitments at existing levels of market access” (which means the binding of the existing level of liberalization) in modes 1 (cross border supply) and 2 (consumption abroad); and commitments on enhanced levels of foreign equity participation as well as “allowing greater flexibility on the types of legal entity permitted” in mode 3 (commercial presence).

Agreeing to this, even on a best endeavour basis, would place developing countries under greater pressure and in a weaker bargaining position. Under the present flexibilities, they can choose their own level of commitment in accordance with national policies and priorities.

This includes the option of liberalizing in practice but not making GATS commitments or not to the same degree; and regulating foreign firms and their participation at the appropriate levels of foreign ownership in each sector and the type of legal entity (such as joint ventures with locals). Para 1 of the text erodes these flexibilities.

Para 1 also includes Mode 4 (movement of natural persons), including new and improved commitments in contractual services suppliers, professionals delinked from commercial presence and intra-corporate transferees and business visitors. The inclusion of this can arguably increase the case of developing countries when pressuring developed countries in their mode of interest.

But the scope for improvement is limited (for example, it is the US Congress that decides on the number of visas for professionals); the benefits in these categories will not be evenly spread among developing countries; and the costs from increased pressures on developing countries to open their markets in mode 3 will outweigh the benefits from mode 4, at least for the majority of countries.

Second, in Para 2, references are made to “sectoral and modal objectives” and in a footnote to the report made by the previous Chair on sectoral initiatives. Many developing countries have rejected reference to the sectoral and modal approaches, and specifically to the Chair’s report. They are rightly concerned that these references will upgrade the presently informal and non-mandatory status of the sectoral initiatives, in which groupings of countries that are demandeurs of liberalization in particular sectors join up to pressurize targeted countries.

This practice has increased in recent years, but up to now the targeted countries can choose whether and to what extent to participate. Para 2 and its footnote can be an instrument to legitimize the movement of this so far voluntary practice to a more mandatory participation, thus intensifying the pressure on developing countries to open their markets sector by sector. Despite repeated demands to delete this paragraph, it has been retained.

Third is the imbalance in the treatment of subjects under rule making, in paragraph 4. There is only a general reference to technical and procedural questions on any possible emergency safeguard measures in services (which many developing countries have been advocating), whereas on government procurement (where developed countries have offensive interests) there is reference specifically to greater emphasis on proposals for a “possible framework on government procurement.”

It should be noted that the developing countries successfully fought to remove discussions on “transparency in government procurement” (one of three “Singapore issues” so removed) in the July 2004 package. The discussion on government procurement in services has a much broader scope than transparency as it covers market access as well. Having ejected transparency by the front door, para 4 is building an instrument for bringing a framework on market access in procurement through the side door.

Fourth is the expansion and strengthening of the “plurilateral approach” through paragraph 7. Up to now the bilateral request-offer method is the predominant negotiating method. However, para 7 seeks not so much to complement but to replace this with a plurilateral method in which a member or a group of members present requests in any specific sector or mode of supply, and those members receiving the requests shall enter plurilateral negotiations.

Thus, it is mandatory for those receiving requests to negotiate on a plurilateral basis with groups of countries demanding new or additional commitments. This removes the present right of a developing country not to participate in plurilateral negotiations.

Para 7 on the plurilateral approach is also linked to the sectoral and modal approaches in para 1 and para 2. These two approaches are part of the plurilateral approach. Para 7 makes it mandatory for targeted countries to take part in negotiations on a sectoral and modal basis, even if para 1 and para 2 do not mention that these are mandatory.

The plurilateral approach would greatly expand the opportunity of the big services firms and their governments to form clusters that demand to negotiate with developing countries and pressurize them to increase their level of liberalization commitments, especially in key sectors such as finance, telecommunications, energy, distribution, etc. Such increased commitments would result in great pressure on the business and survival of local service enterprises.

All in all, the services text directs the negotiations in ways that place the developing countries at grave disadvantage, changing the method of negotiating to one that increases the pressures on them to open up. Given the great inequality in supply capacity, it is the developed countries and their firms that will have all the advantage and that will reap the benefit at the expense of developing countries and their firms.

To rectify the unfairness and imbalance in the Ministerial draft, the services text in Annex C has to be drastically amended to remove the elements that do not enjoy consensus, and which are counter to development interests. Or else, the form of the Annex should be changed from that of a consensus and prescriptive text to that of a status report text that reflects the differences of views. Another option is to delete the bracketed words in para 21 of the main text and also to delete Annex C. That does not mean there are no modalities for services, as there are already modalities in place — the 2001 services negotiations guidelines and procedures.