E.g., 12/27/2014
E.g., 12/27/2014

Temporary Movement of Labor Fuels GATS Debate

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Temporary Movement of Labor Fuels GATS Debate

An estimated 86 million migrant workers, both legal and unauthorized, are currently economically active in a country other than their own. The only direct attempt to regulate this migration at a global level is called the General Agreement in Trade and Services. Many analysts believe that only the GATS has the regulatory potential to facilitate temporary, short-term movement of individuals for work (as distinct from permanent migration) in an orderly, systematic, and mutually agreed upon manner.

However, organizing the GATS approach has proven even more difficult than systematizing the trade of goods through the World Trade Organization (WTO), of which the GATS is an aspect. There is even resistance to talk of liberalizing the GATS because some countries suspect others of seeking changes for their own benefit. Most of the debate centers on a rather small portion of GATS-regulated movement called Mode 4, by which individuals enter another country's job market to provide services there.

Understanding the debate surrounding Mode 4 requires stepping back to examine the reasons why the GATS is so key at this point in history (see related article), the agreement's goals, and how it works. Against that backdrop, this article will examine the specific concerns about Mode 4, and analyze how the issue may unfold.

Why Mode 4, Why Now?

In recent years, the world's post-industrial economies have gone through considerable economic and structural changes. The development of high-speed communication and lower-cost transport services underpins an increased foreign labor presence in many countries. At present, the service share of GDP in mature economies greatly outweighs that of goods. The corresponding figures for lower-income countries, while substantially less, are steadily increasing.

Economic analysis shows that developed-country populations are aging, their levels of education and training are rising, and that these countries are facing a growing scarcity of less-skilled labor. In this context, while there are still shortages of skilled workers in the private sectors of many destination countries, there is an even greater need for semi-skilled and unskilled workers in sectors such as health care, hotels and restaurants, and construction. Countries such as France, Germany, and the UK have recently made immigration law changes in an effort to address labor shortages.

The limited Mode 4 commitments that have already been made pertain almost totally to highly skilled personnel, in particular to the category of intra-corporate transferees who are basically an adjunct to foreign direct investment. These commitments, at present, have limited utility for developing countries because their "comparative advantage" lies in low and medium-skilled services. Thus, the less skilled have been markedly marginalized in trade negotiations.

In this context, expanding short-term individual movement such as that provided for by Mode 4 has been labeled "key" to the ability of developing countries to tap a competitive advantage in services. Greater commitments on market access could allow developing countries to compete more effectively in cross-border trade, especially when it is not linked to Mode 3 "commercial presence" through ownership or lease of premises abroad to provide a service (for example, domestic subsidiaries of foreign insurance companies or hotel chains).

Developing countries stand to gain the most from the liberalization of trade in services—as much as $6 trillion between 2005 and 2015, according to the World Bank. It is no wonder, then, that so much debate is focused on how such liberalization might come about. And considering the goals of the GATS, it is not surprising that the agreement's Mode 4 has been pivotal in those discussions.

How GATS Works

The GATS, which formally came into effect on January 1, 1995, is an inter-governmental agreement and part of the treaty establishing the World Trade Organization. The GATS is overseen by the WTO's Council for Trade in Services, which is in turn supervised by the WTO's highest decision-making body, the General Council.

While certain bilateral and free trade agreements have provisions that go beyond the GATS on the temporary movement of service suppliers, the GATS is the acknowledged key framework in this area.

According to the GATS, the principal mode of WTO negotiations is by formal requests and offers, which consist of detailed commitments on how much market access a foreign service-provider is allowed and under what conditions. For the purposes of market-opening commitments, the GATS divides services trade into four interdependent modes of supply:

  1. Mode 1 covers cross-border supply, e.g., an electricity company providing services in another country.
  2. Mode 2 covers consumption abroad, e.g., tourism.
  3. Mode 3 covers commercial presence, e.g., setting up a business or a professional establishment (such as a subsidiary corporation, branch, or representative office in another country).
  4. Mode 4 covers the temporary movement of individuals, e.g., those entering another country's job market to provide services in that country.

WTO members thus engage in negotiations in each service sector (or sub-sector), working to optimize both market access abroad and the regulatory treatment afforded to their own nationals.

Goals of the GATS

The preamble to the GATS states that it aims to establish "a multilateral framework of principles and rules for trade in services with a view to the expansion of such trade under conditions of transparency and progressive liberalization, and as a means of promoting the economic growth of all trading partners and the development of developing countries."

The GATS also aims to facilitate the liberalization of trade in services to the benefit of the world's Least Developed Countries (LDCs) by guaranteeing them special treatment. According to the members of the Council of Trade in Services, the "importance of trade in services for LDCs goes beyond pure economic significance due to the major role services play for achieving social and development objectives and as a means of addressing poverty, upgrading welfare, improving universal availability and access to basic services, and in ensuring sustainable development, including its social dimensions."

The Mode 4 Debate

Within the GATS, Mode 4 is unquestionably the most politicized of all the four modes of service supply. Today, national immigration policy is not only about the individual composition of a single state; it is also an economic policy that is directly linked to increased global trade capacity. Mode 4, despite being originally conceived to deal with trade, not migration, is therefore at the epicenter of national and international debate on the latter.

At the same time, of all the modes, the fourth is the most poorly understood. Basic factual errors and common misconceptions prevent a meaningful comprehension of the economic and social implications of Mode 4 and, for that matter, the GATS. As a recent study by the Organization for Economic Cooperation and Development (OECD) states: "If the economic impact of Mode 4 is difficult to assess, it is essentially because the definition of this mode, and the instruments used to measure it, are very imprecise. In fact, Mode 4 is a fear of the unknown."

In this context, ongoing debate often centers around misunderstandings of Mode 4's:

Scale. The size of migration under Mode 4 is perceived by many to be larger than it is. In reality, 80 percent of global trade in services occurs through modes 1 and 3. According to a 2003 study by L. Alan Winters, Terrie L. Walmsley, Zhen Kun Wang, and Roman Grynberg at the University of Sussex, Mode 4 is by far the smallest mode of service delivery in terms of both trade flows and the volume of commitments that countries have recorded under the GATS. Mode 4 has hardly grown since the GATS took effect and remains insignificant at less than 1.5 percent of total trade in services. In light of these figures, some fears stem from the huge potential impact of Mode 4. Economist L. Alan Winters has calculated potential gains of over $300 billion per year from increased labor mobility across the globe. The University of Sussex study in 2003 concluded that even modest Mode 4 commitments would offer substantial welfare gains. The study finds that mobility equivalent to three percent of the receiving countries' work forces would generate $156 billion per year in extra economic welfare. These gains would be shared between developing and developed countries, although they would owe more to unskilled than to skilled labor mobility.

Potential to facilitate permanent migration. Many countries of destination (particularly in the developed world) are concerned that temporary migration is a path to permanent immigration. However, Mode 4 movement does not mean migrating on a permanent basis nor seeking permanent entry to the labor market of a host country. The GATS specifically excludes permanent migration. Through a process known as "scheduling," each country makes commitments not to impose greater restrictions on the supply of services in the future than what they have already specified. A recent OCED study states that, in practice, most WTO member countries have scheduled commitments ranging from several weeks up to 3-5 years, depending on the countries, sectors, and professions involved.

Chance of increased unauthorized migration. Critics of Mode 4 liberalization feel that more movement of this kind will facilitate unauthorized migration. However, the OECD's analysis suggests that Mode 4 has the inherent capacity to be a means of controlling immigration, if used effectively. Specifically, the study says that Mode 4 could control immigration if the host country adjusts its visa regimes and other regulations to include cross-border service provisions and short-term foreign workers' schemes. Currently, what is undisputed is that many countries do not have special visa categories for short-term business visitors. Service providers, therefore, are forced to choose between a tourist or a permanent migration visa. In addition, it should also be noted that the other service modes present the same risks as Mode 4. Mode 2, for example, allows a tourist to enter a country, opening the possibility of visa overstaying.

Potential to create unfair competition for local service providers. Protectionists fear that a flood of Mode 4 movement will drown local service providers. Curbing the temporary movement of service providers, however, will never insulate a country from international competition and Mode 4 is merely another tool to allow all businesses to more speedily deliver a service. From a competition point of view, Mode 4 poses no problems as it is merely another way of supplying a service in a global economy.

Contribution to "social dumping." In its report, the OECD alluded to many concerns of developed countries. Some of them fear that Mode 4 is merely a form of "social dumping." This phrase hints that, as competition from low-cost foreign labor increases, domestic economic conditions will worsen and unemployment will increase.

According to the University of Sussex study, Mode 4 causes fewer social problems than permanent migration. The authors write that "Unlike with the mass migration of less skilled workers, fears for cultural identity, problems of assimilation and the drain on the public purse are hardly relevant to the temporary movement of natural persons…Skilled workers or migrants integrate more easily with local society, apparently threaten to be less of a burden on the public purse, are less likely to absorb politically sensitive jobs, and bring more obvious commercial benefits."

Potential to cause brain drain. Protectionists cite concerns that expanding Mode 4 would unleash brain drain. These fears, however, are exaggerated, especially in some sectors where the country of origin can actually benefit from foreign skills acquired upon the worker's return. In addition, supporters of Mode 4, including the OECD, suggest that Mode 4 should be viewed more as a solution to brain drain, rather than a principal cause of the malady. As the OECD study states, "by definition, a worker's length of stay is limited…It is up to the home country, then, to produce sufficient inducements for its most highly skilled workers to return."

Relationship to national security. In the wake of the September 11 attacks, security concerns pose a significant challenge to national immigration authorities. Background checks will need to be performed to the same depth and degree as with permanent migrants, and authorities will need greater time and resources to deal with the burden. The main problem, from a trade point of view, is that, by nature, the real advantages to Mode 4 entry lie in its flexibility and speediness. Companies now seek to send more workers abroad, often on short notice, to carry out a service or fill in gaps in another labor market. This sets up a potential clash between security-minded national immigration authorities and businesspeople focused on tight deadlines for moving people.

In light of this wide range of concerns, many parties are resistant to further Mode 4 liberalization. These concerns break down roughly along separate sets for developed and developing countries, though there is some overlap.

On the one hand, receiving countries fear that these migrants may establish themselves permanently, with consequences ranging from strained welfare systems to threatened cultural unity. Labor unions in such countries are concerned that relatively cheap foreign labor could destroy many of their hard-fought gains through social dumping. In fact, to prevent the use of foreign workers as strikebreakers, 22 WTO members have reserved the right to suspend Mode 4 commitments in the event of labor-management disputes. In addition, immigration authorities are resistant to the idea of dealing with more entrants, and domestic politicians may not want to introduce the complicated and sometimes vague concepts of Mode 4 to electorates that are often wary of immigrants.

Sending countries, meanwhile, want Mode 4 to be de-coupled from larger commercial investment undertaken by developed countries, their migrant workers to be protected against all forms of employment discrimination, and their workers to be entitled to receive adequate social security benefits in the host nation.

Mode 4 and Negotiations

How the liberalization of Mode 4 will unfold—or be stifled—hinges mostly on the progress of WTO negotiations.

Following the protests of labor, environment, peace, human-rights, and other groups during the 1999 WTO meeting in Seattle, and coupled with a near-failure of the 2000 trade talks in Doha, the WTO stood in a very precarious situation. Partly as a result of the September 11 attacks soon after, and partly out of a desire to avoid another Seattle scenario, WTO negotiators agreed in November 2001 to dedicate an upcoming round of trade talks in Cancun to development.

To this end, the Doha Ministerial Declaration was formally adopted on November 14, 2001. Its second paragraph states: "The majority of the WTO members are developing countries. We seek to place their needs and interests at the heart of the Work Programme adopted in this Declaration." The agenda reiterates the overall goal of further liberalizing and expanding global trade.

According to the World Bank, a successful Doha Round could raise global income by over $500 billion per year by 2015, with over 60 percent of this going to developing countries. However, given the confusion and the sensitivity around global labor mobility, the cautious reaction to Mode 4 is unsurprising.

However, since the 2001 Doha meeting, individual states have done little to lead critics to soften their criticism of the WTO's ability to deliver on global development issues. In addition, because no agreement came out of the September 2001 Cancun WTO negotiations, many development issues, which had already suffered substantial delays and missed deadlines, remained unsolved. Indeed, even if developing countries enjoy greater income in the Doha Round (including through Mode 4), a wide variation in their individual experiences still seems likely.

Given the lack of multilateral progress in Cancun, the temporary movement of labor in international trade looks likely to be more regulated at a bilateral or regional level. In some ways, the temporary movement of individuals will still undergo an increase, given that these agreements provide for fuller national treatment and market access compared to Mode 4 of the GATS.

Many analysts feel that certain trade issues, such as labor mobility, are a "test" of the Doha Development Agenda. However, close examination of recent bilateral and regional trade agreements reveals that commitments are often restricted to business visitors, intra-corporate transferees, and higher-skilled employees. In that sense, therefore, the Doha Round has not thus far delivered on the expectations of WTO trade theorists and negotiators.

Mode 4's Future

During the current Doha Round, substantive progress on Mode 4 is virtually impossible because of the major stumbling blocks posed by agriculture reforms and what negotiators call the "Singapore issues" (investment, competition policy, transparency in government procurement and trade facilitation). Smaller issues, such as Mode 4, can expect little or no new commitments from WTO member countries so long as these larger, more explosive, issues remain unsolved. In addition, the visceral reaction of many politicians and leaders, as well as the electorate, will likely be hesitation. In order to garner support for this security-sensitive trade device, lobbying efforts need to sharply focus on how Mode 4 differs from permanent migration.

In the event that some progress is made, the proposal for a GATS entry visa seems likely to gain most momentum. India initially suggested the GATS visa, or at least, a special sub-set of administrative rules, to fall within the overall rubric of national immigration policy and regulation. Developing countries will seek to clarify Mode 4 administrative procedures, introduce work permits and obtain the mutual recognition of qualifications.

Between now and the next WTO Ministerial Conference in 2005, member countries have been urged to continue working on outstanding issues so that new commitments can be formally scheduled in the GATS. If this is to happen, difficult concessions from both developed and developing countries will be necessary. Developed countries will have to allow sub-contracting schemes to include the movement of lower-skilled workers and formally distinguish between temporary and permanent labor movement. In turn, developing countries will almost certainly be forced to further liberalize access for the categories of intra-corporate transferees and business visitors.

Sources

Carnegie Endowment for International Peace. 2003. "Decoding Cancun: Hard Decisions for a Development Round." Policy Brief. Washington D.C.

Institute of International Economics. 1999. "The Globalization of Services: What has Happened? What are the Implications?" Working Paper No. 99-12. Washington, DC.

International Organization for Migration. 2003. "Defining Migration Priorities in an Interdependent World." Migration Policy Issues, 1.

Joint WTO-World Bank Symposium on Movement of Natural Persons (Mode 4) under the GATS. April 2002.

OECD. 2003 "Opening up Trade in Services: Opportunities and Gains for Developing Countries." Working Party of the Trade Committee. Paris: OECD

OECD. 2003 "Service Providers on the Move: The Economic Impact of Mode 4." Working Party of the Trade Committee. Paris: OECD

United Nations Conference on Trade and Development. 2003. "Increasing the Participation of Developing Countries through Liberalization of Market Access in GATS Mode 4 for Movement of Natural Persons Supplying Services."

Winters, Alan L. et al. "Negotiating the Liberalisation of the Temporary Movement of Natural Persons." Discussion Papers in Economics. (2002) No. 87. Brighton: University of Sussex.

World Trade Organization web site