3 days ago
Manoj Pant: Let's prepare well for negotiations on trade in services
Here are some facts. Today, the share of services in global trade stands at about 25%. More importantly, it is the only category of trade that has expanded at a rapid pace since the financial crisis year of 2008. In recent years, the share of goods in trade has fallen by about 5 percentage points and there has been a corresponding increase in the case of services.
This pattern is mirrored in India's case. According to the Economic Survey 2024-25, the share of services in terms of export gross value added (GVA) has increased from around 51% in 2014-15 to around 55% now. Further, it is growth in services trade which has kept India's current account deficit (CAD) at a manageable 2% of GDP.
It was the General Agreement of Tariffs and Trade (GATT) that led to a decline in global tariffs. Till recently, except some countries in South Asia, import tariffs were in single digits (before Donald Trump took office in the US). And today, international arguments increasingly revolve around non-tariff barriers (NTBs).
Also Read: Services led exports are a mixed blessing for the Indian economy
It was a stalemate over NTBs at the World Trade Organization (WTO) that led many countries to take recourse to regional trading arrangements to expand their trade over the last two decades. This has the advantage of going beyond the WTO in new areas. One of these is trade in services.
The General Agreement on Trade in Services (GATS) was based on a 'positive list' approach, where countries only need to make offers when they want to. But this has meant very little forward movement here along the lines of commodity trade negotiations under GATT. Another critical hold-back is the lack of reliable data.
Unlike commodities, services have no border restrictions like tariffs, but are constrained by internal regulation that can be complex. For example, trade in infotech services is hampered not only by visa systems (as in the US), but also by other regulatory constraints like data adequacy rules, FDI norms and totalization agreements (to avoid double taxation via social security payments). Nor are these regulatory constraints the same across countries.
Also Read: Ajit Ranade: India must diversify its exports of manufactured goods
Under the WTO, there was an attempt to create a template for international comparison by clubbing services trade under four heads—or so-called 'modes.' Unfortunately, the 'positive list' approach has 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 indicates, the process will have to begin by recognizing the comparability of services across countries. For example, in educational 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 for the Centre and states to legislate on, and regional regulations would also have to be considered.
An effort to achieve a degree of international comparability has started with the WTO's classification of services into 12 main sectors and 160 sub-sectors. This was mainly done to allow member countries to categorize their services into four 'modes' under the GATS. However, since these multilateral negotiations have ground to a halt, it is now for countries to take this forward under various free trade agreements (FTAs). The difficulty lies in establishing a single measure (like tariffs in the case of commodities) that could establish restrictiveness of services across countries after MRAs are signed.
Also Read: Special trade ties with America aren't India's only export game
This is particularly important for India, whose global strength 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. In 2005, such an attempt was made in the India-Singapore Comprehensive Economic Cooperation Agreement, but there was little progress as the issue of MRAs moved nowhere either in banking or in education.
Similarly, in the case of India's trade relations with Asean, it was agreed in 2005 that an agreement on trade in services would follow the deal struck on goods, but so far no discussions have been held with Asean countries on this.
Also Read: Will the WTO get crushed under an avalanche of bilateral trade deals?
As mentioned earlier, the issue is how to generate a single number to define restrictiveness in services that can form a benchmark for further negotiations on trade in services.
There have some attempts by both the Organization for Economic Cooperation and Development and World Bank to create a Services Trade Restrictiveness Index (STRI), but as shown in 'Quantification of Services Trade Restrictions: Some New Results' (Pant and Sugandha, March 2022) published in the Economic and Political Weekly, these indices have serious statistical shortfalls that can lead to a complete reversal of sectoral rankings by trade restrictiveness.
Yet, this STRI approach seems to offer a way forward for India to hold talks on market access for services. It could feature in talks underway with the US and EU. The STRI can help begin negotiations on broad sectoral lines before proceeding to granular talks on specific regulatory issues.
So far, India has focused on Mode 4 (the movement of natural persons) to enhance trade in services. This effort, however, has largely been a failure. As I have argued before, such a narrow approach seems like too weak an attempt at exploiting India's comparative advantage in services. We need a better researched approach.
The author is visiting professor, Shiv Nadar University.
