Overview

The General Agreement on Trade in Services (GATS) recognizes 4 modes through which services are   supplied and consumed. These traditional modes are cross border supply of service under mode; consumption abroad under mode 2; commercial presence under mode 3 and finally presence of natural persons under mode 4. This is captured well by  Article 1 of the General Agreement on Trade in Services (GATs).

GATS is one  of the “ Legal Texts” of the  World Trade Organization(WTO ) found in Annex 1B. Article 1 deals with measures that affect trade in services in the areas aforementioned and basically deals with Members Courtiers’ obligations as per their Schedule of Commitments.  

 Lately the debate has raged over the years regarding the expansion of the mentioned modes. There   have been arguments for inclusion of Mode 5 in the services sector. This write-up seeks to address will look into the concept of mode 5 and its main purpose in the multilateral trading system. It will also  look  at the challenges facing mode in the  Multilateral Trading System (MTS).

 The Notion Of Mode 5 Services

Being a new “mode concept” , mode 5 of services has so far not had a clear  definition. As such we can only attempt defining mode 5 from the various sources   that have attempted definition.

 Simply put, mode 5   refers to services which are incorporated into goods which are then traded across international borders. Because of lack of an international agreement  covering mode 5 in the manner that that  traditional modes are covered,  this mode is, in actual sense, governed by the  legal and regulatory framework that governs trade in goods. It is popularly known in trade policy circles as “servicification of trade in goods” and sometimes ‘goods and services in boxes.’

Servicification has been described as  a  “a process whereby non-services sectors (both agricultural and non-agricultural) in the economy buy and produce more services, and also sell and export more services, often as a package deal with the good. This  has been articulated ably by Patrick Low, in the  2016 paper titled . Rethinking Services in a Changing World. E15 Expert Group on Services — Policy Options

To better understand this mode, we may consider an automobile that has certain aspects operating on software. When the car in imported say to Kenya for Germany, the services (software) could be lamped together with the finished care and assessed together as one good. The importer will therefore pay the tariff in the car based on its  ad volarem value  or as  shall have been determined by the customs authorities . On the other  had the software could be freely available over the internet from the open source and therefore meaning it can  be obtained duty free and actually  consumed under Mode 1 of GATs (Cross Border supply). Yet when it is fused with the vehicle it is traded under the General Agreement on Tariffs and Trade. (GATT). Accordingly, we are seeing same transaction with two different modes and indeed regimes. This is what mode 5 seeks to address.  

The Origins of Mode 5

Though appearing as a new concept, the ingredients of mode 5 actually predate the GATS agreement as its elements can be picked from earlier agreements. These agreements include the Customs valuation agreement (CVA), the Information Technology Agreement and the Carrier Media Exception.

The Customs Valuation Agreement indicates that in calculating the customs of goods other aspects need to be taken into account such as engineering, development, artwork, design work, plans and sketches, undertaken elsewhere than in the country of importation and necessary for the production of the imported goods. The Agreement further states that legislation dealing with customs should address cost of transport, loading charges, insurance etc. This seems to be the import  of  Article 8 of the Agreement on Implementation of Article Vii of the General Agreement on Tariffs and Trade 1994 (The WTO Customs Valuation Agreement). What the agreement refers to above are essentially falling under Mode 5 Services.

The Economic Importance of Mode 5

The discussion above clearly point out the   fact that mode 5 has all along been in our midst for as long as there has been trade in goods, and this goes a long way back. That Mode 5 has in fact in operation in spite of lack of a legal framework that formally recognizes it existence and operationalization.

In terms of importance the exact figures are still scattered and hard to come by for any conclusions to be drawn on the importance of mode 5. However, experts have posited that the economic impact of facilitating Mode 5 trade is expected to be important both in terms of GDP gains and job creation. Also, the positive spillover effects that result from the link between Mode 5 and technology should not be underestimated.

It is noteworthy that among the benefits of Mode 5 include enhancing of international trade; creation of employment; trade liberalization among others.

The Challenges Facing The Notion Of Mode 5 Services In The Multilateral Trading System(MTS) .

From available researches  one of the challenges facing Mode 5 is the  that the current trade rules are suboptimal and instead of facilitating services trade along global supply chains, they may stifle them. It has further been suggested that the current rules applicable to mode 5 services subjecting these services to   import tariffs act as an “export tax” on services. The illustration given earlier on of the software and the motor vehicle  succinctly explains this point.

Unclear Definition

Mode 5 still does not a clear definition.  GATS do not define services and simply addresses the measures related to services.  Without definitions therefore it becomes difficult for the inclusion of mod 5 in GATs even in future multilateral negotiations.

The Agreement does state at Articles 1 and 2  that it applies to “measures by members affecting trade in services .The Article further simply talks of how the different modes are to be supplied i.e. the cross-border supply; consumption abroad; commercial presence and movement of  natural persons. Service is in fact loosely defined[ in Article 2(b)] as any service in any sector except services supplied in the exercise of governmental authority.

Lack of a Multilateral Agreement

GATS at the present only covers modes 1 – 4 of services. Given the complexities involved in the multilateral negations it sees impossible for now that an agreement could be reached. Indeed Mode 5 has not been directly addressed by the World Trade Organization and neither is there public information regarding the same. This is quite telling. Yet there are other agreements that have spoken to the concerns of mode 5 albeit indirectly as has been discussed earlier in this write-up. Accordingly, it may be hard to incorporate mode 5   in the current WTO talks.

Inconclusion there seems to be  a consensus  that a multilateral approach to developing Mode 5-friendly rules would be most desirable given the geographically widespread nature of production processes in a globalized world. This argument  has indeed been advanced by Foltea Marina in  the 2018  paper titled “ How to include ‘Mode 5’ services commitments in bilateral free trade agreements and at multilateral stage?”, http://www.europarl.europa.eu/thinktank/en/document.html

This will go a long way in somewhat formalizing mode 5.  At present though, little progress is being witnessed and most of the discussions are informal and mostly common in the European Union trade talks. It is important that further research and analyses be undertaken to bring mode 5 to life more so as the concept of Global Value Chains ( GVCs) is not taking root in global trade.