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80–457 2013

BENEFITS OF EXPANDING U.S. SERVICES TRADE 

THROUGH AN INTERNATIONAL SERVICES 

AGREEMENT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON TRADE 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

SEPTEMBER 20, 2012

Serial No. 112–TR06 

Printed for the use of the Committee on Ways and Means 

( 


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COMMITTEE ON WAYS AND MEANS 

DAVE CAMP, Michigan, Chairman 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

PETER J. ROSKAM, Illinois 

JIM GERLACH, Pennsylvania 

TOM PRICE, Georgia 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

ERIK PAULSEN, Minnesota 

KENNY MARCHANT, Texas 

RICK BERG, North Dakota 

DIANE BLACK, Tennessee 

TOM REED, New York 

SANDER M. LEVIN, Michigan 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

JENNIFER M. SAFAVIAN, Staff Director and General Counsel 

JANICE MAYS, Minority Chief Cousel 

SUBCOMMITTEE ON TRADE 

KEVIN BRADY, Texas, Chairman 

DAVID G. REICHERT, Washington 

WALLY HERGER, California 

DEVIN NUNES, California 

VERN BUCHANAN, Florida 

ADRIAN SMITH, Nebraska 

AARON SCHOCK, Illinois 

LYNN JENKINS, Kansas 

JIM MCDERMOTT, Washington 

RICHARD E. NEAL, Massachusetts 

LLOYD DOGGETT, Texas 

JOSEPH CROWLEY, New York 

JOHN B. LARSON, Connecticut 


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C O N T E N T S 

Page 

Advisory of September 20, 2012 announcing the hearing .................................... 2 

WITNESSES 

PANEL 1 

Ambassador Michael Punke, Deputy United States Trade Representative and 

Permanent Representative to the World Trade Organization (WTO), Testimony ...................................................................................................................... 7 

PANEL 2 

Dr. J. Bradford Jensen, Professor of Economics and International Business, 

McDonough School of Business, Georgetown University, Testimony .............. 18 

Mr. Thomas Klein, President, Sabre Holdings, Testimony .................................. 31 

Mr. Karl Fessenden, Vice President, Power Generation Services, GE Energy, 

Testimony ............................................................................................................. 40 

Mr. Charles Lake, Chairman, Aflac Japan, Testimony ........................................ 47 

Mr. Daniel Brutto*, President, UPS International, Testimony ........................... 59 

*Mr. Brutto will also testify on behalf of the Coalition of Services Industries 

(CSI). 

SUBMISSIONS FOR THE RECORD 

Coalition of Services Industries 1 ........................................................................... 74 

Coalition of Services Industries 2 ........................................................................... 78 

U.S. Chamber of Commerce .................................................................................... 97 


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(1) 

BENEFITS OF EXPANDING U.S. SERVICES 

TRADE THROUGH AN INTERNATIONAL 

SERVICES AGREEMENT 

THURSDAY, SEPTEMBER 20, 2012 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON WAYS AND MEANS, SUBCOMMITTEE ON TRADE, Washington, DC. 

The Subcommittee met, pursuant to call, at 2:30 p.m., in room 

1100, Longworth House Office Building, the Honorable Kevin 

Brady (Chairman of the Subcommittee) presiding. 

[The advisory of the hearing follows:] 


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HEARING ADVISORY 

Brady Announces Hearing on the Benefits of Expanding U.S. Services Trade Through an International Services Agreement 

Thursday, September 13, 2012 

Congressman Kevin Brady (R–TX), Chairman, Subcommittee on Trade of the 

Committee on Ways and Means, today announced that the Subcommittee will hold 

a hearing on the benefits of expanding U.S. services trade through an international 

services agreement. The hearing will take place on Thursday, September 20, 

2012, in 1100 Longworth House Office Building, beginning at 2:00 P.M. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND: 

On July 5, 2012, the United States and a key group of other World Trade Organization (WTO) Members announced plans to intensify ongoing discussions in Geneva 

on an international services agreement to define ‘‘the contours of an ambitious 

agreement on trade in services.’’ Thus far, twenty economies—both developed and 

developing—are participating, representing a strong majority of global services 

trade: Australia, Canada, Chile, Colombia, Costa Rica, the European Union, Hong 

Kong, Israel, Japan, Korea, Mexico, New Zealand, Norway, Pakistan, Peru, Singapore, Switzerland, Taiwan, Turkey, and the United States. In their July 5 statement, the participating economies noted that the initiative is meant ultimately to 

reinforce and strengthen the multilateral trading system. Participants also stated 

that the agreement should be comprehensive in sectoral scope, contain new and enhanced rules that countries have developed since the WTO General Agreement on 

Trade in Services entered into force in 1995, increase market access commitments 

to be as close as possible to countries’ current practices, and produce new market 

access improvements. 

An international services agreement could generate substantial benefits for the 

U.S. and global economies. The services sector accounts for the largest share of most 

economies, and the United States exports more services than any other country— 

fourteen percent of global services exports. According to a July 2012 report by the 

independent U.S. International Trade Commission (ITC), U.S. cross-border services 

exports totaled $518 billion in 2010, generating a $160 billion trade surplus—the 

world’s largest. Services exports sold by U.S. firms invested abroad totaled $1.1 trillion in 2009. Globally competitive U.S. services firms have very significant market 

shares in many services subsectors, including infrastructure services, movie and television production, engineering, financial services, computing and IT services, consulting, publishing, education, healthcare, retail, tourism, telecommunications, logistics and distribution, agricultural services, and professional services. 

Services trade is a major source of well-paying U.S. jobs. The services sector employs over 80 percent of Americans, according to the ITC. One subset of services 

that is highly tradable—business services, such as industrial design, accounting, 

and legal services—account for approximately a quarter of U.S. private-sector jobs. 

These services are also highly paid, very substantially exceeding average U.S. 

wages. 

Services exports are growing, rising from approximately 8 percent of U.S. exports 

in 2000 to over 12 percent in 2010. U.S. services exports encounter substantial nontariff barriers (NTBs) around the world, however, which keep our services trade 

from reaching its full potential. Traditional barriers to services exports include sectoral prohibitions on foreign participation, foreign equity limitations, discriminatory 


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regulatory requirements, lack of transparency, and nationality requirements for 

service providers. In addition, U.S. services firms are encountering a new generation 

of 21st-century NTBs, including restrictions on data flows, forced localization, and 

unfair competition from state-owned enterprises. The degree of U.S. openness to 

services is far greater than the average around the world. As a result, an international services agreement may create disproportionate opportunities for U.S. services exporters as the United States pushes countries to approach U.S. levels of openness. 

In announcing this hearing, Chairman Brady said, ‘‘Expanding services trade 

means creating good U.S. jobs. I am enthusiastic about the work USTR is 

doing in Geneva to move toward launch of negotiations on an international 

services agreement. A services agreement would reduce barriers abroad for 

U.S. services providers and produce major benefits and job growth here at 

home. By ensuring that benefits are available only to those countries that 

commit themselves to the high standards of the agreement, we can encourage participation by a wide range of developed and developing countries. 

I am also optimistic that a successful agreement will help reinforce the important role of the WTO.’’ 

FOCUS OF THE HEARING: 

The focus of the hearing is on the benefits of expanding U.S. services trade, including by negotiating an international services agreement. The hearing will address the importance of services exports as a source of well-paying U.S. jobs and 

economic growth. In addition, the hearing will examine the current state of ongoing 

discussions concerning an international services agreement and explore how best to 

support a successful initiative. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘Hearings.’’ Select the hearing for which you 

would like to submit, and click on the link entitled, ‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by the close 

of business on Thursday, October 4, 2012. Finally, please note that due to the 

change in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical 

problems, please call (202) 225–6649. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 


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3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available at http:// 

www.waysandmeans.house.gov/. 

f 

Chairman BRADY. Good afternoon. I want to welcome everyone, 

extend a special welcome to Ambassador Michael Punke and our 

private sector witnesses. Welcome, Ambassador. 

Let me also recognize Bob Vastine, the longtime President of The 

Coalition of Service Industries who stepped down yesterday and 

Ambassador Peter Allgeiere, CSI’s newly installed President. These 

are two great leaders. Bob has had a long and distinguished career 

in government and the private sector, and we have all benefited so 

greatly from his tremendous expertise and sound contributions. 

Thank you, Bob. 

And as Co-chair of the Congressional Services Caucus, I join CSI 

and its Members in expressing appreciation for Bob’s work and in 

wishing him well and in welcoming Peter, with whom I look forward to working with in his new role. 

I would also like to take a moment to acknowledge the service 

of Viji Rangaswami, the Ways and Means Minority Chief Trade 

Counsel, who will be leaving the Committee after over a decade of 

service. She has made important contributions in her work on free 

trade agreements, our preference programs, our trade remedy laws, 

trade adjustment assistance, and China policy. Viji, we will miss 

your enormous expertise, your spirit of compromise and your good 

humor. I know that my colleagues join me in wishing you the best 

of luck. 

In this economy creating U.S. jobs must be job number one. That 

is why we are here today to discuss U.S. services trade. We have 

a major opportunity at hand. By negotiating an International Services Agreement that lowers barriers to U.S. service exports, we can 

rev up a great engine of American job creation. 

The service sector accounts for over three-quarters of American 

jobs and economic growth. These are not the stereotypical low 

wage, low skilled jobs that some would scornfully call McJobs. 

Services jobs pay well. For example, our businesses services sector, 

which includes engineering and design, computing and data processing, consulting and other services provided to business, these 

jobs pay nearly 20 percent more on average than jobs in manufacturing, averaging nearly $60,000 a year higher than the national 

average. With over a half trillion dollars in services exports last 

year, America is the world’s most successful services exporter. In 

fact we export more services than the two next largest service exporting countries combined. 

Because American service providers are such strong global leaders across many services sub-sectors, the United States has long 


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generated a large trade surplus in services, which helps offset our 

deficit in goods trade. 

Our global competitiveness is not automatic, however. American 

service providers must be able to maintain a global presence to sell 

our services around the world. Their success depends on having on 

the flexibility to move their data and their know-how around the 

world. Yet U.S. service providers continue to face major trade barriers. For example, countries impose equity caps, restrict data and 

capital flows, dictate the nationality of senior officials and impose 

discriminatory licensing and regulatory requirements. But if we are 

able to lower services trade barriers around the world, our American services providers are well positioned to compete and win and 

will generate major new U.S. employment. 

These employment gains will come not just in the services sector, 

but throughout the American economy. That is because services 

trade facilitates all economic activity. E–Bay recently did an interesting study that found its online auction services have allowed a 

vast number of small businesses in the United States to become exporters. The National Association of Manufacturers and the Farm 

Bureau have produced two papers, and without objection I enter 

them into the record, laying out the many ways their members depend on U.S. services firms’ global operations to design, finance, 

market, transport and service American agriculture and manufacturing exports. 

The papers follow: 

National Association of Manufacturers Paper 

American Farm Bureau Federation Paper 

Chairman BRADY. In short, we focus on services not instead of 

manufacturing and agriculture but to the benefit of manufacturing 

and agriculture. As a result, I am very enthusiastic about the work 

that Ambassador Punke is doing in Geneva on services trade policy. Thanks to his leadership, 19 WTO members, accounting for 

three-quarters of global services trade, agreed in July to intensify 

discussions this fall about an International Services Agreement. 

This is an opportunity to extend to a much broader set of country 

the higher standard services rules from our bilateral trade agreements. By pursuing an ambitious agreement that results in real 

trade gains for participants, we can generate new momentum for 

trade liberalization and ultimately reinvigorate WTO negotiations 

that create incentives for broad Membership. The benefits of the 

agreement should be available to all WTO members that are willing to commit to the agreement’s high standards. 

An International Services Agreement holds great promise for 

American workers and our economy, and I believe it would be met 

with bipartisan enthusiasm in Congress. 

And before yielding to the Ranking Member, without objection 

the opening statement of all Members will be included in the 

record. 

At this time I yield to Mr. McDermott for his opening statement. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Before I read my 

statement I would like to acknowledge Viji’s leaving. As a Member 

who represents a very trade dependent district with a major port 

and a major exporter of the United States and a lot of other large 

exporters operating out of my State, when you become the ranking 


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member on the Ways and Means Committee on the Trade Subcommittee, you ought to know something, but I admit I am a doctor 

and I don’t know very much. But without the assistance of Viji as 

a teacher, I would not be able to do this job. And we will miss her, 

I will miss her, and the committee will miss her. And I want her 

to know it and she didn’t want anybody to say anything publicly 

about her, but Viji, please stand up. She always knew that the 

Member was the one who should be out in front. 

This hearing really is an opportunity to consider the importance 

of trade and services and the prospects of negotiating an International Services Agreement under the auspices of World Trade 

Organization, but before we think about the future prospects I 

would like to briefly recall where we have been the last few years 

with the WTO Doha Round. 

Doha was proceeding slowly to a dead end, yet some in the international community were cheering us on, we are almost there, we 

are almost there. I don’t know how many times I have heard people 

come in my office and say that. But fortunately the USTR wasn’t 

interested in proceeding on a path to a dead end. Ambassador 

Punke, you deserve a great deal of credit for helping steer the WTO 

members onto a more constructive path, one that I think will 

strengthen the WTO as an institution in the long run. 

What is more, our stakeholders and our trading partners appreciate your frank, but respectful and deliberative approach to these 

challenges. Thank you for your work on these issues and for testifying here before us today. 

This new path is just beginning to take shape, but it looks as if 

trade and services, a major and growing component of the world’s 

trade and area where the United States enjoys a trade surplus, will 

be an important part of the path forward. 

In my view, the International Services Agreement under the auspices of WTO is an exciting opportunity. It appears to be the best 

way to achieve two objectives that often compete with one another 

in trade negotiations, ambition and inclusion. We want an ambitious agreement, one that significantly opens new markets for U.S. 

companies and workers. At the same time we want to promote a 

more inclusive international trading system; one that encourages 

the participation of all countries that are willing to make ambitious 

commitments. 

The WTO is the best place, it may be the only place for such an 

agreement to be negotiated. To open new markets we will need to 

tackle new barriers. Among other things, that means ensuring 

state-owned enterprises compete on a level playing field, that data 

flows are not subject to unjustifiable restrictions, and that standards are not used to discriminate against foreign suppliers. 

I hope the United States and other interested WTO members will 

lay the groundwork this fall for a successful negotiation. In particular, I would be interested in getting a better understanding of 

the position of our European partners in this endeavor. At the end 

of the day I am confident that the EU will recognize that a services 

agreement would benefit European service suppliers just as much 

as American suppliers. I also expect Brussels will recognize the 

systemic importance of negotiating an ambitious new agreement 

under the auspices of the WTO. 


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And I commend the chairman for having this hearing. Thank 

you. 

Chairman BRADY. Thank you, Mr. McDermott. And I am very 

pleased to turn to our first witness, Ambassador Punke, who is 

Deputy U.S. Trade Representative and Permanent U.S. Representative to the World Trade Organization. Ambassador, thank you for 

coming today and for the energy, creativity and intelligence that 

you bring to the important work you are doing in Geneva. We look 

forward to hearing from you, and you have 5 minutes. 

STATEMENT OF AMBASSADOR MICHAEL PUNKE, DEPUTY 

UNITED STATES TRADE REPRESENTATIVE AND PERMANENT 

REPRESENTATIVE TO THE WORLD TRADE ORGANIZATION 

(WTO) 

Ambassador PUNKE. Thank you, Mr. Chairman and Members of 

the Committee. I very much appreciate the invitation to speak before the Committee today. My focus will be on our efforts to develop 

a new International Services Agreement, but I want to take a moment to frame the efforts with a brief assessment of the state of 

play in the World Trade Organization. 

The WTO is clearly an institution at a crossroads. After more 

than a decade of unsuccessful negotiations in the Doha Round, the 

collective Membership finally acknowledged last December that the 

round is at impasse. This situation has resulted in a fair amount 

of doomsday predictions in Geneva. But our view is that the WTO 

can’t fix its problems without first acknowledging them. What is 

more our successful effort to turn the page on Doha is creating important new opportunities. It has provided a useful reminder of 

non-Doha aspects of the institution. It has also challenged us to 

learn from our collective mistakes in the Doha negotiation and to 

craft more constructive and productive pathways forward. 

Already only 8 months after the eighth Ministerial Conference 

there is a marked new energy in Geneva. Technical negotiations on 

a multilateral trade facilitation agreement are advancing. Discussions are underway to expand the product coverage of the Information Technology Agreement, or ITA. These efforts are examples of 

how we are pursuing the President’s goal of doubling U.S. exports 

and creating new jobs for America’s farmers, ranchers, workers, 

companies and entrepreneurs. 

And as we look to new pathways in Geneva our work this year 

on services is particularly promising. Over the past several months 

we have been working with a group of like minded WTO members 

to explore new ways forward. This group with the admittedly bad 

name of Really Good Friends of Services, or RGF, first got together 

in the early years of Doha Round as a means for those Members 

with a strong interest in services to coordinate their efforts. A hallmark of the RGF is its diversity. The group includes a mix of developed and developing countries that substantially reflects a cross 

section of the interest of the WTO as a whole. Above all the RGF 

discussion has motivated by the conviction that opening up services 

markets is a critical factor in supporting economic development. 

The genesis of the ISA, the International Services Agreement, 

lies in our hard nosed assessment that we simply will not be able 

to make progress on services trade liberalization any time soon 


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under existing WTO frameworks. The positions of the major players are too firmly entrenched and too closely tied to a web of other 

issues. 

Meanwhile we hear the frustration from stakeholders who are 

understandably fed up with a lack of progress. The world has 

changed and our rules need to catch up. To take but one example 

Internet usage is 500 times greater now than when the Doha 

Round was launched in 2001, bringing with it a multitude of new 

issues related to cross border trade, such as policies that affect 

data flows and storage. Our stakeholders want us to get to work 

in addressing these and a host of other issues. 

Faced with a choice between doing nothing or trying something 

different, we have begun to explore the feasibility of using a new 

multiparty services trade agreement to lay the pathway to further 

globalization services liberalization. 

The most logical place for us to start was to look at the more 

than 100 service agreements that have been notified to the WTO 

in the 18 years since the General Agreement on Trade in Services 

entered into effect, an exercise that we have conducted over the 

past 8 months. Many of these agreements achieve a much higher 

standard for market access and incorporate new or improved rules 

to address real world problems. 

We believe it is time for forward thinking WTO members to consolidate these improvements and lay the foundation for extending 

them to the multilateral system. The first step in achieving our vision is to bring the achievements of these varied agreements under 

a single umbrella, the ISA. Like existing U.S. FTAs, the agreement 

would encompass all service sectors and modes of supply, and impose a high standard for liberalization. The agreement would also 

provide a new platform where we could work to build a stronger 

international consensus on improved rules to address now issues. 

The potential benefits are compelling. By moving to a multiparty 

agreement that reaches across geographic lines, we can create a 

steppingstone from the web of bilateral and regional deals back toward the multilateral system. By establishing high standards for 

market access we can influence the norms of international trade. 

By developing new provisions we can provide leadership to the 

global trading system. 

In addition to these systemic benefits, the ISA also offers the potential to strengthen our economic relationship with the other participants. In just 6 months the RGF group has grown from 16 

Members to 20. The United States currently has FTAs with only 

10 of the 20 Members. The ISA therefore offers a venues to work 

on deeper services integration with partners as diverse as Japan, 

Taiwan, Israel, Pakistan and Turkey. 

Progress to date has been extremely encouraging. Last summer 

we reached agreement on a core set of objectives and agreed to intensify our efforts this fall. Our next step is for the group to develop more specific negotiating parameters so that each participant 

can conduct domestic consultations necessary in order to proceed. 

As for timing we do not have a hard deadline but would like to 

see things move forward as quickly as possible. We are planning 

to have monthly meetings from September through December. 

Throughout this process the administration will continue to consult 


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closely with Congress and stakeholders to develop and refine U.S. 

objectives. 

We very much appreciate this hearing as a part of that process 

and look forward to the conversation today. 

Chairman BRADY. Thank you, Ambassador. 

[The prepared statement of Ambassador Punke follows:] 


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of Services" or RGF, first got together in the early years of the Doha Round as a means for those 

Members with a strong interest in services trade to coordinate efforts. Since then, the RGF 

membership has increased and the group has been instrumental in providing leadership on DDA 

Services as well as WTO services generally. 

A hallmark to the RGF is its diversity. The group includes a mix of developed and developing 

countries that substantially retlects a cross-section ofthe interests of the WTO as a whole. 

Above all, the RGF discussion has been motivated by the conviction that opening up services 

markets is a critical factor in supporting economic development, not just for each Member, but 

globally. Services provide both the infrastructure and the lubricant that makes the global 

economic system work. Many services are key infrastructure industries: Information and 

communications, financial services, distribution and logistics, energy and environmental services 

- networks that are essential for all economic activity. Similarly, professional services like legal 

and accounting services play an important role in enabling markets to function. 

With the continued stalemate of the WTO negotiations, the RGF was a natural place to tum to 

develop new pathways to global services trade. 

The genesis of the ISA - International Services Agreement - lies in our hard-nosed assessment 

that we simply will not be able to make real progress on services trade liberalization any time 

soon under existing WTO frameworks. The positions of the major players are too firmly 

entrenched, and too closely tied to a web of other issues. 

Meanwhile, we hear the frustration from stakeholders who are understandably fed up with the 

lack of progress. The world has changed and our rules need to catch up. To take but one 

example, Internet usage is SOO-times greater now than when the Doha Round was launched in 

2001, bringing with it a multitude of new issues related to cross-border trade, such as policies 

that affect data flows and storage. Our stakeholders want us to get to work in addressing these 

and a host of other issues. 

Faced with a choice between doing nothing or trying something different, we have begun to 

explore the feasibility of using a new multiparty services trade agreement to lay the pathway to 

further global services liberalization. 

The most logical place for us to start was to look at the more than 100 services agreements that 

have been notified to the WTO in the 18 years since the General Agreement on Trade in Services 

(GATS) entered into effect, an exercise that we have conducted over the past eight months. 

Indeed, many of these agreements achieve a much higher standard for market access and 

incorporate new or improved rules to address real-world problems. 

We believe it is time for forward-thinking WTO members to consolidate these improvements 

and lay the foundation for extending them to the multilateral system. The first step in achieving 

our vision is to bring the achievements of these varied agreements under a single umbrella, the 

ISA. Like existing U.S. FTAs, the agreement would encompass all service sectors and modes of 

supply and impose a high standard for liberalization. The agreement also would provide a new 

platfonTI where we could work to build a stronger international consensus on new and improved 

rules to address new issues. 
11 

f 

Chairman BRADY. Members, as we move forward in this round, 

with Mr. McDermott’s permission, we are going to limit questions 

to 3 minutes. Here is the schedule for our witnesses and the audience. We have a classified briefing at 3 o’clock regarding Libya, 

Egypt and other matters with Secretary Clinton. We expect votes 

to occur at the end of that classified hearing around 4 o’clock, 4:15. 

And so at 3 o’clock we will recess until 5 minutes after the last vote 

in that series. 

So Ambassador Punke, I’m very impressed with the large group 

of important WTO members you are bringing to the table for the 

ISA. It appears though several of the leading emerging economies, 

China, India and Brazil for example, don’t seem to be interested in 


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pursuing this agreement. Yet you look at some of the more important emerging economies that are joining, such as Turkey, Pakistan, Panama, Mexico, Costa Rica, Colombia, Peru and Chile, because of how quickly those emerging economies have moved forward, those are real promising markets in services. And so if we 

reach agreement, we have the chance to produce we think some 

real trade benefit. 

And so our challenge is to achieve robust emerging market participation. So the two questions, one I am interested in your views 

in how we keep those countries interested and at the table as you 

move through it. And second, my thought is that we are going to 

be better able to achieve maximum participation to the degree that 

benefits should be available to any WTO member that agrees to 

meet the high standard and available only to those members. And 

so I would like your remarks on that. 

Ambassador PUNKE. Well, thanks for that. I think it is important to emphasize that our preferred method of expanding services 

liberalization was through the Doha Round and through the broadest multilateral configuration possible. The fact of the matter is 

that on an intensive basis for the first 2 years that I was in my 

position in Geneva and long before that, we had been trying to engage in that services conversation and with emerging economies 

and it was not successful. They are not ready to move right now 

on services trade. And so it was only very reluctantly that we came 

to the conclusion that the only decision that we faced was wait for 

them for some indeterminate period of time or to move forward 

with a smaller group of like-minded members. And obviously the 

choice that we have embraced is to move forward with those who 

are ready to move forward now. 

I think what we are seeing is that that is a way of creating momentum. And the worse thing I think that we could do in Geneva 

is have a situation where we have completely ceased to be able to 

conduct trade negotiations anymore. And so I think the path that 

we are pursuing with the plurilateral agreement with the ISA is 

an opportunity to show momentum and then build outward from 

that. 

The other aspect of your question, Congressman, concerning how 

we extend these benefits, I think it has been the very strongly held 

position of the United States that it is not acceptable for major participants to free ride on concessions made by others. And so we 

have been very clear from the beginning that when it comes to 

major participants in the global trading system that we can’t envision an outcome in which countries would have the benefit of concessions without providing obligations themselves. 

Chairman BRADY. I think that is where we hit the right balance 

between ambition of higher standards but also maximum participation. So thank you. 

Mr. McDermott. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. As you are putting this together, some WTO members want to do it, some don’t. 

Those who are sitting out, some of them think that this will weaken WTO as an institution if you would have a subset of people negotiating in this way, and the European Union in some ways is a 

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ing about the negotiation, what it does to the whole WTO to have 

one set willing to negotiate and another set sitting out sort of waiting for I don’t know what, Godot I suppose. So I really would like 

to hear your insider perspective on those negotiations and what is 

going on that they don’t want to participate in the larger negotiation. 

Ambassador PUNKE. Well, to take the Europe piece of your 

question first, we have been engaging over the course of the last 

several months and weeks in an ongoing conversation with our European colleagues to figure out the best way to accommodate our 

mutual interest and needs in this negotiation and others. And the 

line that that conversation takes is not always a straight line, in 

fact it seems to be always a jagged line. But I do feel like in the 

last couple weeks in particular that we have gotten closer to figuring out a pathway that both of us can agree upon for moving in 

particular the ISA forward. 

Congressman, we have our next meeting of the Really Good 

Friends in the first week of October, and I am very hopeful at this 

juncture that we will be in a position then to give more clarity to 

what that path would be. 

But I want to touch briefly on the broader question you asked, 

which is how does the system accommodate at the same time these 

multilateral discussions with discussions in other configurations, 

for example plurilateral discussions. And you would get the sense 

sometimes from listening to the recent debate that this is the first 

time that there has ever been a plurilateral in the history of the 

WTO. And in fact that is decidedly not the case. 

In fact, in December at the ministerial meeting on the opening 

day the members of the WTO ballyhooed as one of their great 

achievements a plurilateral agreement, which by the way happens 

to not be extended on an MFN basis, and it is called the GPA, the 

Government Procurement Agreement. And so we all ballyhooed 

that result on day one of the ministerial meeting last December 

and on the last day of the ministerial in December people were 

gnashing their teeth about a possible plurilateral kite called the 

International Services Agreement that somehow is going to bring 

down the system. 

We think that the system for a long time has been able to accommodate plurilateral agreements, multilateral obligations. Many of 

the countries that are most critical of the ISA for not being multilateral discussions are some of the same countries that are most 

active in pursuing bilateral agreements. And so the fact of the matter I think is that there is a lot of resilience in the system and the 

worst thing we can do in Geneva, as I said before, is to have a situation where no negotiations are taking place. 

Mr. MCDERMOTT. Thank you. 

Chairman BRADY. Mr. Reichert is recognized for 3 minutes. 

Mr. REICHERT. Thank you, Mr. Chairman. Welcome and thank 

you for your testimony, Ambassador. I am a member of the President’s Export Council and also the cochair of the Congressional 

Services Caucus, and part—some of the discussions that we have 

around this issue is how do we emphasize the services sector as an 

enabler of economic activity and a facilitator for trade of manufactured and agricultural goods. And I think—I applaud you for being 


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14 

a champion of this, because more and more people across the country really need to become aware of the fact that the services sector 

is truly a player when it comes to increasing our trade and decreasing our trade deficit. 

So my question is you have discussed in your testimony the WTO 

agreement that focuses on the services, the General Agreement on 

Trade and Services, GATS, and it was negotiated over 16 years 

ago. Since that time economies have evolved and in response we 

have developed important new liberalizing rules for services. So for 

example, our trade agreement with Korea takes steps to ensure 

that countries do not unnecessarily restrict cross border data flows. 

Now we are seeking to further develop those rules in TPP. Could 

you elaborate on the new services trade rules that have been developed since GATS? 

Ambassador PUNKE. I think that the first part of your question 

is something that has really been driven home to me in listening 

to conversations, for example this week as part of the CSI’s summit 

on services, and that is that not only are services important to 

economies for the services that countries export, including the services obviously that we export, but having modern services available 

in your country is a fundamental element of the basic infrastructure of being a modern economy. And as you emphasized and as 

Chairman Brady emphasized, having good services is a critical 

component for conducting successful trade in manufactured goods 

and in agricultural goods. 

In a typical automobile factory, for example, 20 percent of the 

jobs are services jobs, like design and advertising. A car that rolls 

off of the assembly line in Detroit requires 10 million lines of computer programming to run the computer systems on a typical car. 

So this line between services and manufacturing and agriculture, 

as you point out, is one that breaks down pretty quickly when you 

start to look at the real world examples. Yet, as important as services are, and when you think about how quickly technology 

changes, it is phenomenal that we haven’t in a multilateral setting 

updated our agreement for 16 years. 

I mentioned that if you go back to 2001 Internet usage was 500 

times less than what it is today. If you go back to when the GATS 

was signed in 1994 we didn’t have an Internet and yet that is our 

basic document for, our basic multilateral document for establishing the rules on services trade. 

The issue that you raised, data flows and data protection, is one 

of the critical ones that I think many members of the Really Goods 

Friends group are interested in developing new disciplines to address. And I think that is a reflection of the recognition in all of 

our countries that we need to update our rules. 

Mr. REICHERT. I appreciate it. Thank you, Mr. Chairman. 

Chairman BRADY. Thank you. Mr. Herger is recognized. 

Mr. HERGER. Ambassador Punke, I believe the Trans-Pacific 

Partnership is an important vehicle for expanding U.S. services 

trade. I am also enthusiastic about the ongoing high level working 

group with the European Union which I hope will lead among 

other things to important new services trade commitment between 

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tionship among TPP, The EU initiative and an International Services Agreement? 

Ambassador PUNKE. Well, it is an important question and I 

think all three of the four that you are talking about give us different opportunities for promoting the same goal of increasing our 

services trade. I think as a very general matter that when you look 

at bilateral agreements versus regional or plurilateral agreements 

versus multilateral agreements the advantage that you have with 

a multilateral agreement is it that you have the broadest coverage 

in terms of participants, but oftentimes because of that broad participation you get commitments that are not as deep. I think the 

other end of the spectrum is a bilateral agreement, where you have 

a very narrow number of participants, namely two, but you have 

the potential for very deep commitments. 

I think what the ISA gives us is potentially something in between. And on the one hand we have a very significant number of 

participants already. The 20 participants that have begun this discussion comprised about 70 percent of global trade and services already. And yet some of those participants in that group, as I mentioned half of them, are countries that the United States doesn’t 

have Free Trade Agreements with. And many of the important 

ones are not participants in something like TPP. For example, we 

have Turkey and Israel that are participating in the ISA discussion. 

So I think the ISA gives us both an opportunity to negotiate disciplines that might not be covered in other areas and an opportunity to bring participants into the discussion that we otherwise 

wouldn’t be talking to. That is just the significance of the group 

itself. Beyond that systemically I think creating this platform already has drawn the interest of five countries who have decided 

that they want to participate in this formative stage. And I think 

there is even greater potential if we can create this platform in a 

successful way to attract others into what we hope will be an ambitious level of obligation. 

Mr. HERGER. Thank you. 

Chairman BRADY. Mr. Smith is recognized. 

Mr. SMITH. Thank you, Mr. Chairman, and thank you, Ambassador, for coming here today. In early July in a press release the 

WTO members participating in International Services Agreement 

discussions said that they would undertake necessary consultations 

or procedures prior to any negotiations. 

Can you perhaps reflect or share your perspective on the steps 

that USTR or the EU or other countries are taking with respect to 

those consultations or procedures? 

Ambassador PUNKE. Well, I will comment on ours. I think that 

exercises like this hearing obviously are a critical part of our ability to provide transparency to the discussions that we are having. 

In the ISA we are obviously in a very early stage where we haven’t 

yet even agreed specifically on what the architecture of the agreement will be, but we have made a very large effort to reach out to 

members of your staff, you know, going back even to last December 

I think when we were first starting to talk about the potential of 

exploring with other partners in Geneva the possibility of a new 

type of services agreement. We have taken a lot of opportunities to 


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discuss this with various stakeholder groups, including this week 

for example participants in the CSI summit. 

I would anticipate, Congressman, that as this process and the architecture becomes clearer that the formal and informal consultation that we have with Congress and stakeholders will intensify. 

For example, through mechanisms like public hearings and Federal 

Register notices. 

Mr. SMITH. Thank you, I yield back. 

Chairman BRADY. Thank you. Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman. I apologize for being late. 

As you know the full committee is on the floor currently debating 

the TANF legislation. 

Mr. Ambassador, some of the countries currently causing the 

most difficulty for U.S. service suppliers are not participating in 

these negotiations for a plurilateral services agreement. Example, 

Brazil. Recently Brazil implemented very restrictive reinsurance 

limitations requiring insurers to cede more than 40 percent of gross 

written premium to local reinsurers, not unlike China in restricting 

insurers from ceding more than 20 percent of a single line of business to an affiliate. What are the strategies afoot with your office 

to encourage some of our market priority countries, such as Brazil, 

to join these negotiations so that we can actually allow American 

companies to fully compete and participate? 

Ambassador PUNKE. Well, Brazil is a country right now where 

I don’t want to over promise, because frankly we have been addressing this type of issue with Brazil for a long time in the WTO 

context and we have been frustrated in that effort. One of the 

things that was interesting in the discussion that we listened to 

this week in CSI, at the Coalition of Services Industries summit, 

was a discussion by a large number of developing countries that 

see services as an important component of their development strategy, specifically opening up their services market as a component 

of their development strategy. And we heard countries like Costa 

Rica and Mexico talk about how important that that has been for 

them. They have come to that conclusion through their own analysis and process. Brazil seems not to have come to that conclusion 

yet. In many instances China seems not to have come to that conclusion yet. And that is at the end of the day I think the reason 

why we haven’t made more progress multilaterally on services, is 

because major players like India, China and Brazil simply don’t see 

the universe that way yet. 

That is frustrating, but at the same time I think what we have 

decided is that we are not going to let that keep the rest of us from 

pursuing liberalization, for example, through the ISA. In the meantime I think we have to address the type of issue that you are raising, reinsurance in Brazil for example through bilateral opportunities. 

Mr. NEAL. And foreign direct investment in China, that is a 

compelling issue as well, the limitations that they placed on competition. I think that is a considerable issue for this committee. The 

advocacy that we often take is to open markets everywhere only to 

discover some of the trade practices that are embraced down the 

road really don’t level the playing field. 


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Ambassador PUNKE. Well, and China is an interesting example 

and obviously is a very large focus of our efforts in Geneva and 

across the board in terms of our trade policy. We have had one 

small success with China recently in the services area, specifically 

on the investment issue with third party auto insurance. And as 

you know, Congressman, the Chinese opened up that market last 

spring. 

Mr. NEAL. Right. 

Ambassador PUNKE. We have been watching very carefully how 

the implementation of that obligation is taking place. Our initial 

signs are that this is starting to create opportunities for our insurance companies. The Chinese ultimately came to the conclusion 

that it was in their interest to and helpful to them to have that 

competition and to have our high quality services providers in that 

market. 

Obviously we need to be able to succeed ultimately to have more 

countries come to that conclusion, which we see as being a very obvious one, that services are a fundamental part of your infrastructure. 

Mr. NEAL. The 49 percent rule, as you know, is problematic in 

terms of control. 

Chairman BRADY. Thank you, Mr. Neal. Ambassador, clearly 

there is bipartisan interest for this agreement. This is important 

work, you are doing good work, and I appreciate and encourage you 

to continue the consultations with both parties as you go forward 

on this agreement. Thank you for making time on your busy global 

schedule to be with us today. 

As I mentioned, because of a classified briefing the subcommittee 

stands in recess unless 5 minutes after the last vote in the next 

series, which we expect will be somewhere between 4:15 and 4:30. 

[Recess.] 

Chairman BRADY. Folks, with Mr. McDermott’s permission, 

with the vote schedule and all that continues to change today, we 

want to be very respectful of your time. So we are going to continue 

with our second panel of witnesses. We will break for votes, come 

back for questioning. Again, we will try to move through this as 

best we can. Thank you for your patience here. 

I am very pleased to be able to introduce such an impressive set 

of senior representatives from the private sector. They represent a 

wide spectrum of services subsectors, from education, the airline 

optimization, to energy services, to insurance, to express delivery. 

Dr. Brad Jensen is a Professor of Economics and International 

Business at Georgetown University’s McDonough School of Business. He will testify about his groundbreaking research on services 

trade, which the Peterson Institute published to great acclaim last 

August. Dr. Jensen is also prepared to discuss the increasingly dynamic education services sector given his employment in that sector. 

Mr. Tom Klein is President of Sabre Holdings, a leader in providing software and consulting to optimize the efficiency of the airline industry. Sabre’s leadership in the travel services sector, which 

is the largest U.S. services export, is further reinforced by its ownership of Travelocity, the online travel reservation site. 


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As Vice President of GE Energy, Mr. Karl Fessenden leads General Electric’s Power Generation Services business. And I proudly 

represent the Eighth District of Texas, where energy services are 

key to who we are. So I look forward to hearing Mr. Fessenden’s 

testimony. 

Mr. Charles Lake is chairman of Aflac Japan. He is based in 

Tokyo. So I believe he gets the prize for traveling the farthest distance to be able to testify before us today. Financial services, including Aflac’s insurance business, are one of the largest U.S. services exports. So I look forward to hearing Mr. Lake’s testimony. 

And finally, Mr. Dan Brutto is President of UPS International. 

He will speak to us about logistics services, and specifically express 

delivery, which is probably the quintessential example of a service 

that facilitates U.S. trade. 

Gentlemen, thank you for coming to speak with us today. I ask 

that you limit your statements to no more than 5 minutes. So let’s 

start with Dr. Jensen. 

STATEMENT OF DR. J. BRADFORD JENSEN, PROFESSOR OF 

ECONOMICS AND INTERNATIONAL BUSINESS, MCDONOUGH 

SCHOOL OF BUSINESS, GEORGETOWN UNIVERSITY 

Mr. JENSEN. Chairman Brady, Members of the Committee, 

thank you. 

Chairman BRADY. If you could hit that microphone. 

Mr. JENSEN. Chairman Brady and Members of the Committee, 

thank you for the opportunity to testify regarding the significant 

and often overlooked opportunity for growth through exports of 

U.S. business services. I think we all recognize that the service sector is large and diverse, I think too diverse to be analytically tractable. So for my comments today, I would like to focus on what I 

call business services, which are the industries classified by the 

North American Industrial Classification System, starting with 

five. This includes the information sector, which includes importantly software, media industries, telecommunications and Internet; the finance sector, insurance, professional, scientific and technical industries—think accountants, architects, engineers, attorneys—and administrative support sector. 

This might sound niche, but these sectors, what I call the business service sector, accounts for 25 percent of employment in the 

United States labor force. In contrast, the manufacturing sector accounts for 10 percent of employment. So the business service sector 

is two-and-a-half times the size of the manufacturing sector in 

terms of employment. 

In addition, these are good jobs. The wages in tradable business 

in business services are 20 percent higher than the wages in manufacturing. In addition, business services are tradable. U.S. exports 

of services are growing rapidly, and now account for 30 percent of 

U.S. exports. And business services are an important source of this 

growth. 

I would like to understand better what is going on. Unfortunately—— 

Chairman BRADY. Dr. Jensen, if you would—either someone has 

to get up when the alarm is ready to beep, or we are having some 

technical difficulties. Can you punch your microphone off and on 


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again? That is not it. Does someone have a BlackBerry close to the 

microphone? Let’s try it again, Dr. Jensen. You have a great testimony. I just want to make sure it works. Try it again. 

Mr. JENSEN. Thank you. Okay. So U.S. exports in services are 

growing rapidly, now account for 30 percent of U.S. exports. And 

business services, the kinds of things that I classify as business 

services, are an important source of growth. So I would like to understand better what is driving this. Unfortunately, however, official statistics do not provide anywhere near enough detail to examine trade in services adequately. A big part of my research has 

been to develop a methodology that allows us to identify, using the 

geographic distribution of production of services within the United 

States, allows me to identify at a very detailed level what business 

services are traded within the United States, and thus what are at 

least in principle tradable internationally. 

What I can do is then add up at a very detailed level how much 

employment there is in tradable business services. And what we 

see is that there is a big chunk of employment in the United 

States. Fourteen percent of the labor force is in tradable business 

services. This is larger than the entire manufacturing sector. 

Beyond the size of the tradable business service sector, what 

might be more surprising is how different the workers in this sector are. Workers in tradable business services are qualitatively different than either workers in manufacturing or workers in 

nontradable business services. They have much higher educational 

attainment and much higher earnings. Workers in the tradable 

business service sector are twice as likely as workers in either 

manufacturing or nontradable business services to have a college 

degree and an advanced degree. 

Business services are very skill-intensive. The skill intensity of 

business services, combined with the fact that the U.S. is still a relatively skill abundant place, means that the U.S. has comparative 

advantage in these activities. The U.S. consistently runs a trade 

surplus in business services. Yet in spite of comparative advantage 

in services and globally competitive service firms, as represented 

by the other panelists, U.S. business service firm participation in 

exporting lags the manufacturing sector. When we look at the 

share of business service firms that export, it is much lower than 

in the manufacturing sector. Only 5 percent in business services 

compared to about 25 percent in manufacturing. If I look at exports 

to sales ratios in tradable business services, much lower than in 

manufacturing. We should be exporting more. 

The reason is we are—certainly a key contributor to this is, this 

data from the World Bank suggests, is that the large, fast growing 

markets have relatively high barriers to services trade. India, Indonesia, China, Brazil all have high impediments to services trade. 

We need to kick the door down. There is enormous opportunity 

here. And I think my time is up. So thank you. 

Chairman BRADY. Thank you, Dr. Jensen, very much. 

[The prepared statement of Mr. Jensen follows:] 


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Opportunities for U.S. ~;xports of Business Services 

Statement by 

1. Bradford Jensen 

Professor of Economics and [ntel11ational Business 

McDonough School of Business, GeorgetO\\01 University 

Senior Fellow 

Peterson Institute for International Economics 

Senior Policy Scholar 

Georgetown Center [or Business and Public Policy 

to the 

Subcommittee on Trade 

Committee on Ways and Means 

United States House of Representatives 

September 20, 2012 

1l1C United States has a significant opportunity for increased growth through exports of 

business services that is going unrealized because of trade barriers in large, tast-gro\-ving 

countries like India, China, and BraziL I 

l. The U.S. business service sector is large (accounting for 25 percent of the labor force), 

growing rapidly (employment in business services increased roughly 30 percent in the 

decade prior to the tinancial crisis), and pays relatively high \vages (on average more than 

20 percent higher wages than the manufacturing sector). 

2. Many business services are traded within the United States and thus could be traded 

internationally. lVlany service activities-software, architectural services, engineering and 

1 The material in this statemem is taken from my recent book Olobal Trade in Services: Fear Fads, and Off::.horimI 

(2011) and my recent Peterson Institute for [niemationai Economics Policy Brit:I"Fram~work for the lnlernational 

Services Agreement" \vith Gary Hufbauer and Sherry Stephenson. 
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project management services, and insurance as examples······appear to be traded within the 

United States and thus are at least potentially tradable intemationally. Approximately 14 

percent of the workforce is in business service industries Ijudge to be tradable. In 

comparison, only about 10 percent ofthe workforce is in the manufacturing seclOr. 

3. The UniLed States has comparative advanlagc in business services. The U.S. consislently 

11ms a trade surplus in services. Service expoJis now account for almost 30 percent of 

U.s. expons, and about 16 percent of U.S. imports are service imports. The United States 

has consistently maintained a positive trade balance in services. \vith service exports 

exceeding service imports. The trade surplus in services was $172 billion in 2011 (triple 

the surplus in 1992). 

4. In spite of having comparative advantage in business services and globally competitive 

business service finns, U.S. sen'-icc firm participation in exporting lags significantly 

behind export participation in the manufacturing sector. About 25 percent of 

manufacturing plants export; in business services, only 1 in 20 establishments export. 

Looking at exports-to-saJes ratios in manufacturing, about 20 percent ofmanufactlll'ing 

sales are exported; in tradable business services, less than 5 percent of sales are exp011ed. 

5. An important source of the lagging exp011 p~rformance is likely to be the high ban-ieTs to 

services trade imposed by the large, fast-growing emerging markets. India, China, and 

Brazil (countries where U.S. comparative advantage is 1110St pronounced) all have 

relatively high harriers to sen'ices trade. much higher than the U.S. or other developed 

countries. 

6. The United States should be working aggressively to open the large, fast-growing 

econorn-ies to services trade. The International Services Agreement offers an excellent 

opporlunity to initiate the process ofliberalization in the scrvice sector. The U.S. should 

seek to exploit this opportunity ,-md create additional venues to engage the large, fastgrowing economies in services liberalization negotiations. 
22 


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BUSINESS SERVICES ARE IMPORT ANT 

Most observers know that the United States and many developed economies are now "service 

economies," correctly grasping that, depending on which industries are included, services 

account lor 50-80 percent oru.s. cmplo)1nent and close to these levels in most developed 

economies. But le\v obscrvcr~ know how important is the rapidly growing business service 

sector, which I define to include the industry groups in the North American industrial 

Classification System (NAICS) 50s. This group includes the intonnation, finance and insurance, 

rcal estate, professional, scientific, and technical industries; management, administrative Sllpport~ 

and \yaste remediation industry groups; and industries such as software, engineering services. 

architectural sen'-ices, and satellite-imaging services. 

This selection may sound like a set of niche industries, but the notion that business 

services are a niche is incorrect. TIle business service sector accounts for abou125 percent of the 

U.S. labor i{)[ce - two and a half times the size of the manufacluring sector. Moreover, the 

business service sector is gro'wing. Over the past decade or so, manufacturing sector employment 

has decreased by about 20 percent, while business services have increased by about 30 percent. 

And bus.iness service jobs are good jobs: average wages in business services are more than 20 

percent higher than average wages in manufacturing. 

Many people hold an outdated view of the U.S. economy. Just as an example, consider 

the relative size of one service industry, engineering services, relative to tvvo important 

manufacturing industries: the automotive industry (including assembly and parts) and the 

aerospace industry. [t might surplise you to learn that englneering services is the largest in terms 

of employment. Engineering services (NAICS 541330) employed 980,000 people in 2007 -

more than the automotive industry (9 j 0,000) and more than twice as many as aerospace 

(440,000), according to the most recent Economic Census. Average earnings in engineering 

services ($73,000) are significantly higher th311 in auto production ($52,000) or even in 

aerospace (S68,000). 
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BUSINESS SERVICES ARE TRADABLE 

¥/hen we think oftrade~ most of us envision \\.'heat, copper, crude oil, and manufactured good~ 

such as clothing, fUrniture, consumer electronics, cars, andjet aircraft, We need only visit a port, 

border crossing, or big-box superstore to lind an abundance of such goods irom virtually every 

country in the world, 

By contrast, many believe the service sector is largely insulated li'om the international 

economy. Because many services require fa_ce-lo-face interaction between buyer and seller, the 

prevailing assumption 1s that most services are not tradable. 

This belief has always been a misconception, and in today's economy, it is an 

increasingly inappropriate onc. The falling costs of travel and increased case ofcommunicatiollS, 

thanks to the Internet, have vastly expanded 0ppOltunities for services to be traded across long 

distances, including across borders. 

But this misconception is an too easy to understand. On-idal data on services trade is 

woeftllly inadequate to reveal the true potential of U.S. business services. Further, because 

services are intangible, trade in services can be somewhat harder to conceptualize than 

manufacturing. As a helpful guide, the General Agreement on Trade in Services' (GATS) 

definition of trade in services embodies four "modes":' 

M:ode J: cross-border provisioIlj such as software produced in one country and shipped 

via the Intemet to another. 

Mode 2: consmnption abroad, as when a vacationer travels to a resort in anotber country 

and purchases hotel accommodations, meals, and other services there. 

Mode 3: commercial presence in a foreign country. such as a restaurant chain opening a 

branch outside its home COWltry. 

Mode 4: temporary movement of natural persons across borders, such as a business 

consultant visiting a foreign client. 

I will re[i.:, to modes 1, 2, and 4 as "cross-border" trade mld include them in my definition of' 

tradable services, \Vhile M-ode 3. also called tlm;:ign direct investment or commercia! presence, 

'2 The General Al.!reemcnt on Trade in Servit:es can be do\\"nloaded in its cntiretv at 

http://\\,\Y\V.\,,10,7)rg/englishltratop_e/serv_e/gat~intr .... e.htm ~ 

4 
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undoubtedly benet,ts the U.S. and global economy, because most employment associated with 

Mode 3 trade is in the "local" (meaning foreign) market, I will not refer to this as a tradable 

service. It is true that the parent company and its overseas affUiales exchange headquarters 

services, bUlthese types of flows (and the employment associated with them) would be very 

dilliwltto identity with existing data. As a result, [ willleavc Mode 3 trade to the side and locus 

on cross-border trade, 

Cross-border trade in services (both exports and imports) more than doubled from 1997 

to 20 I I. Service exports now account for almost 30 percent of U.S. exp011s, and about 16 percent 

or u.s. imports arc service imports. The United States has consistently maintained a positive 

trade balance in services, "it11 service exports exceeding service imports. The trade surplus in 

services was $172 billion in 2011 (triple the surplus in 1992). This suggests that the United 

States has comparative advantage in tradable services. as we win discuss. 

The Bureau of Economic Analysis divides "private services" into five main groups: 

tra"vel, passenger tares, other transportation, royalties and license fees, and "other private 

services," a catchall category that includes education, financial services, insurance services, 

telecommunications, and business, professional. and tcclmical services. Other private services 

roughly encompas~ what I refcr to as business servic-cs. Although all of the categories grc\v fi'om 

1992 to 2007, other private services grew the fastest: both imports and exports more than 

doubled. Other private services also contributed the most to overall service growth, accounting 

for more than half afthe increase in service exports and about half orthe increase in service 

imports. Business services trade is growing rapidly and is increasingly important. 

It ,vauld be desirable to use detailed trade-ill-services data fi'om officia1 statistics agencies 

to bettcr understand "vhere the gro\vth in other-private-services trade (both \vhich industries and 

which countries) is coming from. Unfortunately, clllTently available data fall far short of what is 

needed to adequately analyze the sources or services trade growth, let alone to understand the 

domestic impact oftradc in services. Consider tllat for merchandise trade (i.e., goods), data on 

exports and imports of over 8,000 product categories arc published monthly lor most countries in 

the \vorld. In contrast, only about 30 categories ofservlcc tTade have only recently become 

available for a far more limited set of countries. Prior to 2006, even fewer categories are 

available. Going back to the mid-.1990s, only about a dozen categories of services trade are 

available. 
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Lacking detailed official data, 1 pioneered a novel approach of using the geographic 

concemration of production within the United Slates specifically, where production is 

concentrated and demand is not - to identify industries and occupations that appear to be 

"traded" within the United States. 'TI,e logic for this approach is simple: If the supply of a service 

in one location is greater than consumers in that location arc likely to vvant to consume, then the 

excess services must be being consumed elsewhere, The key advantage of this approach is that 

fairly detailed data for domestic production is avai lable. 

The 11otion of Llsing geographic concentration to identify tradable activities is related to a 

long tradition among geographers and regional economists ofu~ing the geographic concentration 

of economic activity to identify a region's export or manufacturing base. The idea was that if a 

region specializes in a manufacturing activity - think airplanes in Seattle or automobiles in 

Detroit - it is likely to export the product in \vhicb it specializes. 

When trade costs are low and there are reasons to concentrate production in one location 

(such as capitalizing on increasing returns to scale or accessing natural resources or \\:orkcrs with 

specific skills), we will observe concentrations of production that exceed local demand (Detroit 

and cars: Seattlc and airplanes). Instead, if trade costs are large, we will obscrvc producLion 

distributed ubiquitously with demand (think barber shops and grocery stores). 

Geographic concentration of production allows us to identify service activities that are 

tradable at a vcry detailed level - for more detailed than ollicial serviccs trade data allow - and 

add up the amount ofemploymcnt in these tradable activities. 

rhe results are strik.ing. In contrast to traditional characterizations of services as 

predominantly l1ontradable~ a signiticant share of total employment is in tradable service 

industries. Tn the business service scctor alone, more workers are in tradable industries (14 

percent ofthe labor force) Lhan in tradable manufacluring induslries (to percent of the labor 

force). Although it is true that some large service subscctors (such as education, health care, 

personal services, and public administration) have low shares of employment in tradable 

industries, because the service sector is much larger than the manufacturing sector, the number of 

\vorkers potentially engaged in intemational trade in services exceeds the number of\vnrkers 

engaged in manufacturing, 

Even more surprising than the size and scope of tradable services is how different 

\vorkers in these tradable husiness service activities arc from those in either non-tradable 

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business service activities or the manufacturing sector. tn the manufacturing industry, about 24 

percent of workers have a B.A .. and about 7 percent have an advanced degree. Similarly. in nontradable business services, about 29 percent have a B.A., and 7 percent have an advanced degree. 

By contrast. looking at the approximately 18 million workers in tradable business services. about 

50 percenl have a B.A and almost 20 percent have an advanced degree. Moreover. earnings are 

much higher Lhan in manufacturing and non-tradable business services. Even controlling for 

\vorker characteristics snch as age, gender, race, education. industry, sectof, and occupational 

category, occupations in tTadable industries pay about 20 percent more than non-tradable \vork in 

the same sector and the same occupation. 

To recap: many business service activities are tradable. In fact, more Americans \vork in 

the tradable business service sector than in the entire manutactUling sector. The average \vages 

earned in tradable business services are significantly higher tha11 average \vages in the 

manufaeruring sector and in other services sectors. The source or this eamings differential is the 

level of education and skill required to \\:ork in the tradable business service sector. as they 

encompass \iery skill-intensive activities. 

THE UNITED STATES HAS A COMPARATIVE ADVANTAGE IN BUSINESS 

SERVICES 

Comparative advantage tells us that a country will have a comparative advantage in activities 

that are intensive in the use offactors or inputs abundant in that country. For example, the 

production of aluminum, \vhich is sometimes is referred to as solid electricity, is very energy 

intensive. Thus. regions \vhere energy costs are low - because orhydroelcctric producing dams 

or other sources of inexpensive electricity - have a comparative advantage in producing 

aluminum. Indeed, alwninum production tends to be concentrated in areas where electricity is 

chcap. 

One important lactor on which countries dilTer is skilled labor: some countries have 

many highly skilled workers, while others have mostly unskilled workers. Although skill is very 

diftlcult to measure, more educated workers generally possess greater skills. Educational 

attainment call thus be used as a proxy for skill. Data on educational attainment show that even 

compared with other developed economies, the United States has been and remains relatively 
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skill abundant. The United States' skill abundance relative to China and India, two very populous 

countries \vhcrc average educational attainment has been historically 10\\./, though rising, is even 

greater. Because the United States is a relatively skill-abundant country, the tileory of 

comparative advantage suggests that the United States should produce and export skill-intensive 

goods and activities, and should import goods and activities intensive in low-skilled labor. 

To undersland how comparative advanLage shapes the location of production and trade 

flows, let's begin by examining the manufacturing sector, where the data are much better. The 

manufacturing data show that there is considerable variation in skill intensity across industries 

\V'ithin the sector. Some industries have very low average educational attainment: for example, 

only 7 percent of workers in animal slaughtering and processing have a college degree, and only 

I percent have an advanced degree. At the other extreme, 56 percent of workers in the aerospace 

products industry· ha·ve a college degree, and 22 percent have an advanced degree. 

The data also show that average earnings tend to be higher in industries with higher 

educational attainment. Indeed, the relationship is quite strong statistically. This relationship is 

useful for our purposes because some data sources lack 1nfonnation on educational attainment, 

requiring us to usc average \-vages as a proxy for skill. 

When we examine imparL data, \\occ see that imports from lo\\"-wage~ labor-abundant 

countries (like China) are concentrated in low-wage, labor-intensive industries such as apparel, 

leather goods, and furniture. These are the industries in which U.S. firms and workers face stilT 

competition fl·om low-\vagc imports. By contrast, high-wage, high~skill manufacturing industries 

like transportation equipment, chemicals, and petroleum, and coal products (i.e., retining) face 

very little competition from low-wage imports. 

Comparative advantage also shapes which products the United States exports. 

Manufacturing industries that pay relatively high wages (which, again, we interpret as being 

highly skill intensive) tend to export more than lovver-paying industries, consistent with 

comparative advantage. :Indeed, there arc strong positive correlations between export 

participation, whether measured in tenTIS of the expOlts-to-sales ratio or in terms of the share of 

plants that export, and average \vagcs in an industry. These correlations arc consistent \vith the 

notion that the United States has comparative advantage in activities that are skilled-labor 

intensive. 

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Trade in general, and specifically trade with low-vvage, labor-abundant countries such as 

China, has shaped the allocation or economic activity within the U.S. manufacturing sector, and 

even \vithin manufacturing industries, in \vays that are consistent with U,S. comparative 

advantage. The United States tends to import low-wage, labor-intensive products from lowwage, labor-abundant countries and to export products that arc relatively skill intensive. 

So, how will serviecs fare in a glohalizing world? The United States today has a large 

positive trade balance in services, and many tradable services seem consistent with U.S. 

comparative advantage. This suggests that the U.S. service sector is likely to benefit, rather than 

sufTer. from increased trade in services. 

Let's examine ho\v comparative advantage should play out in services. ]n terms of skjJJs 

and earnings, services exhibit similar pattcms as the manufacturing sector. There is significant 

variation across service industries ill the share of 'A·'orkers with a colJ.ege degree. For example, 

only 5 percent of workers in barber shops have a college degree, and only 1 percent have an 

advanced degree. In contrast, 76 percent ofvv'orkers in soHwarc publishing have a college 

degree, and 27 percent have an advanced degree. Again, the relationship between educational 

attainment and wages is also quite strong: industries that use higher shares of college-educated 

workers have higher average earnings. 

Unfortunately, detailed official info1111ation on exp01ts is available for only a subset of 

service industries. In these industries, though, just as in manufacturing, service industries that 

pay higher wages tcnd to havc higher export participation in tcnTIS of higher cxports-to-sales 

ratios, higher exports per workers. and higher shares of exp01iing establishments. The U.S. 

seems to have comparative advantage in high-skill, high-\vage business service activities. 

Data 011 the imp011 side is even more lacking. One might aSSllmc from reading the 

business press that most business, professional, and technical s~rvice U.S. imports com~ from 

India. Yel otTicial statistics show that two-thirds ofservicc imp01is come [rom Canada. Western 

Europe, Japan, Australia, and South Korea - developed eOllntrics similar to the United Statesrather than Irom low-wage, labor-abundant countries. These countries have comparati ve 

advantage in high-skill activities; less developed nations do not. 

The United States runs a persistent trade surplus in services (in marked contrast to its 

large and persistent trade deli cit in goods) and is the world leader in service exports. Many 

service activities require high levels of skill, and the United States has an ahundance of skilled 

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workers. When the United States does import services, it tends to impon them from other highwage, high-skill countries. These facts indicate that the United States and other developed 

economies have comparative advantage in tradable services and would likely benefit from 

increased services trade with the rest of the world. 

CAPITALIZING ON OPPORTUNITIES 

The data suggest that great opp011unities arc availahle for U.S. service providers. Yet despite 

having comparative advantage in services. th0 U.S. service sector is nowhere ncar as globally 

engaged as the manufacturing sector. Looking at plant-level or establishment-level data, about 

25 percent of manufacturing plants export. In services, only 1 in 20 establishments export. 

Looking at exports-ta-sales ratios in manufacturing, about 20 percent of manufacturing sales are 

exported; in services, less than 5 percent of sales are exported. 

fn a sector \\.'here the United States seems to have a comparative advantage, why docs it 

export so little') Research by the World Bank suggests that the United States is already relatively 

open 10 trade in services. In contrast, a number oflarge and last-growing countries, notably 

China, [ndia, Indonesia, and Russia, have relatively high barriers to imports of services. Othl!r 

increasingly impol1ant economies, notably Brazil and Korea, maintain lower but still high 

barners to service imports. 

These impediments arc not in the foml of tariffs. Tnstead, a thicket of domestic 

regulations, policies, and industrial practices abroad make it difficult to provide business services 

in these countries. For example, many countries place requirements for and restrictions on 

"commercial presence." That is, if you're an architect who \vants to vlork ahroad, you need to 

establish an office; however, you can't establish an office until you demonstrate that a need 

exists for your service. This type of Catch-22 - a]ollg \vith economic-needs tests, requirements 

for local joint ventures, licensing accreditation, differential tax treatments, and government 

procurement practices - makes the export or U.S. services diflicuH, irnot impossible. 

The United States should be pushing aggressively to reduce barriers to services trade. 

Service trade liberalization in the fast-growing emerging markets would allow U.S. firms with 

comparative advantage in business service provision to start exporting, or to increase their 

exports, to these countTies. The U,S. economy v,rould benefit from increased national 

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productivity as services production becomes increasingly specialized in high-performing 

business services. So would the economics of other developed countries, like Canada. Japan, and 

many EU countries, all of which are similar in comparative advantage to the United States and 

would likely see their business service expol1s grow as well. The countries that liberalize also 

would benefit lrom the increased productivity that comes [rom being able to import business 

services, as inputs [0 their own production. the world's best quality at the best price. They might 

also then be able to expand t.heir expoJ1S of middle-skilled standardized services, like back-omce 

operations and ca 11 centers. 

As an example of the \vin-\vin naturc orincrcascd tradc in services, consider that the 

world. led by a number of fast-growing developing countries, is about to undertake an 

infrastructure boom of historic proportions. It is estimated that over $40 trillion could he spent on 

infrastructure of all types worldw-ide over the next 25 years, more than 80 percent of it outside 

the United Slates. China and India alone have inti'astrueture needs valued at $10 trillion over that 

period, and even many developed countries are Hlcing huge expenditures to repJacc and refurbish 

their decaying infrastructure systems. All this represents a potential bonanza for construction and 

engineering firms and for international banks and tinaneial service providers. 

Jvlany U.S. service firms are competitive in the types of business services that \vilJ be 

needed for tbese projects and some are already helping to build state-of-the-an infi'astructure in 

emerging markets like India and more developed economics like South Korea. 

Much of the spending 1-or inlrastruclUrc in the coming boom is likely to be controlled or 

tinanced, at least in part, by governments - national, regional, and local. Those governments are 

sure to be subject to domestic political pressure to favor domestic producers in granting contracts 

[or this work. This makes guaranteeing equal treatment in government procurement a crucial 

issue for foreign service providers. The \"TO's Agreement on Government Procurement \-vas 

negotiated during the Tokyo Round of GATT negotiations in the early 1980s with the intention 

of reducing preferences to domestic tirms in public procurement and opening public works 

spcnding to international trade. Its coverage lVas extended teniold in the subsequent Uruguay 

Round and now extends to governme11t purchases totali11g several hU11dred billion dollars 

annually. However, this large sum obscures the fact that, to date, only a relative handful of 

countries have signed the agreement, virtually all of them in the developed world. In particular, 

none of the large developing countries expected to account for the bulk ofinirastTucture 

11 
31 

f 

Chairman BRADY. Mr. Klein. 

STATEMENT OF THOMAS KLEIN, PRESIDENT, SABRE 

HOLDINGS 

Mr. KLEIN. Yes. Mr. Chairman, Members of the Committee, 

thank you for the opportunity today. Our team in South Lake, 

Texas, is honored for this opportunity. Sabre Holdings is a software 

and electronic services distribution company. 

Chairman BRADY. Mr. Klein, can you make sure the microphone 

is on? 


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32 

Mr. KLEIN. Yes, sir. Our company is a software and electronic 

distribution services company serving the global travel industry. 

We employ about 10,000 people, 4,500 in the United States, and do 

business in 135 countries around the world. You may recognize 

Travelocity.com, our consumer brand. Sabre helps airlines be more 

efficient. We make it easier for travelers around the world to visit 

the United States, where tourism and business travel dollars work 

to strengthen our economy and count as exports. 

Although we are a mid-sized company, we believe we can compete with anyone in the world, and we focused intensely on the 

international market. In our fastest growing business, our software 

business, in 2001 just 12 percent of our revenues came from international markets. But we invested heavily to build out our global 

capabilities. It took time, it took money, and we have seen great 

results. Today, we have 65 percent of our revenues from those businesses coming from international markets. That number will increase to about 75 percent over the next 3 years. 

We are meeting the global demand by creating many new high 

paying jobs. Since the beginning of 2010, we have added over 1,400 

positions globally, and more than 800 of these jobs in the United 

States. The average American technology worker at Sabre makes 

$87,000 per year. 

Yet as innovative and world class as our software services become, the international playing field is not always level. It is often 

tilted. In those cases, we find it difficult, if not impossible, to compete. 

We all know that we need update our international legal framework for services. The WTO General Agreement on Trade Services 

is over 15 years old. In that time, we have seen the travel industries change dramatically. We have also seen the technology industry change dramatically. More than ever, individuals are searching 

for and booking travel online. And the biggest growth in consumerdriven travel is outside the United States. Yet the trade rules 

haven’t kept up. Governments take advantage of this vacuum to 

create protective measures and stymie competition. 

An International Services Agreement is a strong step in the right 

direction. And taken at its fullest potential, a high standard agreement will lower barriers to important markets, create much needed 

pressure on other countries that are not participants in this discussion, like China, and will help generate momentum toward liberalization more broadly at the WTO. 

Such an agreement has the potential to help our company in a 

number of ways. One important benefit that a services agreement 

may offer is increased transparency. The more countries play by 

the same rules, and the more we know what those rules are, the 

easier it is to do business and resolve disputes when they arise. 

FTAs have traditionally included strong transparency provisions, 

for example, requirements that countries publish regulations in a 

clear and timely manner, and consult with stakeholders. Replicating these successes on a large scale would only benefit American 

companies, small and large alike, doing business overseas. 

One challenge for companies like ours is that countries often 

deny operating licenses to foreign companies in order to protect 

their own domestic enterprises. For example, China’s state-owned 


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33 

travel distribution monopoly, TravelSky, is the only licensed provider of passenger reservation services and airport departure and 

control systems in that country. Foreign competitors, including 

Sabre, are fully shut out. 

Another challenge in our industry is often called in the technology industry the big data trend, how to store and search and access huge amounts of data in a way that is timely and useful for 

consumers. In a global environment, having control over how that 

data is stored and distributed and used is critically important to 

our business and our customers. An agreement that ensures that 

data can flow freely across borders would be a powerful tool for our 

business. 

The value of trade agreements is proven by our own experience 

in Chile. We have had tremendous success there, including with 

LAN Airlines, which recently chose Sabre as its airline reservation 

system and operation system provider. Our presence in that country before the FTA was much smaller, with a European competitor 

dominating the market. After the FTA was signed, the Chilean 

Government put out an RFP requiring any bidder to use our European competitor’s automation services. We brought that violation to 

the FTA, to the attention of the Department of Commerce, and 

within 2 days our government officials communicated the concerns 

to the Chilean officials, who acknowledged the violation and fixed 

the RFP. It was breathtaking how quickly things can happen when 

there is clarity around what the regulations are. 

What is more, we looked at the numbers, and we also saw a significant increase in visitors to the United States from Chile following the enactment of that FTA. That means more travel and 

tourism dollars going to our local economies to create jobs here at 

home. 

Mr. Chairman, thank you for holding this hearing. As was reported yesterday, the travel industry has been and continues to be 

one of the strongest job creators in the current economy. And our 

view is that a high standard International Services Agreement 

would only help continue that trend. 

I look forward to your questions. 

Chairman BRADY. Thank you, Mr. Klein. 

[The prepared statement of Mr. Klein follows:] 


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Written Testimony of Thomas Klein, President, Sahre Holdings 

House Committee on \Vays and Means. Subcommittee on Trade 

September 20, 2012 

INTRODlJCTION 

Mr. Chairmwl, Congressmwl McDermott, and Members of the Committee: thank you for the 

opportunity to testify today about the potential benefits of a services liberalizing agreement. My 

testimony will cover some of our challenges as an international company competing globally, as 

well as the role travel can playas a services export for oW" country. 

My name is Tom Klein and I am the President of Sabre Holdings based in Southlake, Texas. We 

arc a software and electronic distribution services company serving the global travel industry. 

We employ about 10,000 people (4,500 in the United States) and do business in 135 countries 

around the world. Wc arc a leader in the airline soihvarc business, a top player in hospitality 

industry sollwarc at-ler just seven years in that business, the largest processesor of global 

reservations between travel agents and suppliers. and we own Travelocity.com, a leading online 

consumer travel brand. 

We are a mid-sized company, and representative of the mid-sized sector in the United Slates. 

'vle have great people~ innovative products~ and a belief that we can compete \\'ith anyone in the 

world. We have worked hard to eam that position and I will try to outline a bit of our story. But 

to be clear, the intemational playing field is not always level. It is ollen tilted, and in those cases 

we find it diftlcult if not impossible to compete. 

\Vhile Ollr business cuts across a broad s\vath of the travel and technology sector, I will focus my 

remarks today on Sabre Airline Solutions, our airline software business, and opportunities there 

for international gro\vth, services exports, and job stimulation. 

BACKGROUND ON SABRE AIRLINES SOLUTIONS 

Sabre Airline Solutions sells the world's broadest suite of airline-specific soliware .... irom 

reservations and airport departure control, to airline vvebsites, pricing and revenue management, 

to night operations and crew management - and more. We help airlines be more eftlcient and 

make it easier for travelers around the world to visit the United States, where tourism and 

business travel dollars work to strengthen our economy - and count as exports. 

In 200 I, atier selling an $800 million airline technology business that focused on hardware and 

network technology services primarily in North America, we recast our strategy, keeping our 

sothvare portt;,lio and setting out to be a truly global provider of these high value services. At 

the time, we had just 12% of our revenues coming tram international markets. 
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When we tried to expand internationally we learned quickly that we were viewed as a U.S.-

focllsed supplier trying to do business in an increasingly global marketplace. Many 

international customers did not think our systems, most of which V-,lere developed in the United 

States~ eftectively took into consideration their unique needs. So while we had innovative, 

ground breaking solutions vve often lost business to international competitors that "looked" more 

intemational. Amadeus, a Madrid-based company [ornled by Spanish, German, and French 

partners is one example; Lutlhansa Systems in Germany is another. These companies had a head 

start selling into the global aviation industry. supportive parll1crs commercially, and sometimes, 

local governments wi lling to help them in their effOlis. Over the course of several years Sabre 

invested heavily to build out global capabilities and our own international "look." We set up 

global development and delivery teams, we increased our local sales and account support 

coverage, and most importantly, we started to build sotiware that was more tlexible and 

responsive to the needs of the global marketplace. It took time and it took money - and we 

started to see results. 

Over the past several years we have etTeetively sold our systems across the globe. We have 

provided major technology implementations in Vietnam, Saudi Arabia, Indonesia, Russia, the 

UK, SOllth AfTica, Ethiopia, Brazil, Mexico, and many more places. Our current yearly 

international revenues ~ export dollars for the United States - arc over $320 million, representing 

65% of our total revenues today. The majority of our futLU'c grovvth is projected to be outside the 

United States, with international revenues increasing to 5600 million by 2015 - 75% of $800 

million in total projected revenues. China is an obvious example or incredible growth in 

business and consumer travel, as \',,'-ell as inirastructure. There arc 82 nc\v airports being built 

and 101 ail110rts being expanded around that country. and airline passenger volumes arc 

projected to grow at 7 to 10% for the foreseeable future. 

\Ve are meeting this global demand by creating many new high-paying jobs. Since the beginning 

of201O, we have added over 1,400 positions globally, with more than 800 of these jobs based in 

the United States, where we currently have 450 openings to fill. The average American 

technology worker at Sabre makes $87,000 per year. 

Once challenged by the global marketplace, we adapted, and we are succeeding. Yet as 

innovative and world-class as our sothvare services have become, we often face significant 

challenges in markets abroad that hinder Ollr ability to sell and grow, which limits our export and 

job-creating potential. Despite the explosive growth in the Chinese travel market, for example, 

in some service categories. there is no opportunity for American firms to compete. We are 

simply blocked from selling our services to Chinese companies. 

We recognize the value of strong government leadership in addressing barriers like these while 

working to promote American businesses and vvorkers with partners that are wil1ing to compete. 

In 2008, when Sabre was competing for a contTact with Vietl1am Airlines, the U.S. government, 

led by the Department of Commerce, worked closely with us to ensure we had the best possible 

0PPOltunity to secure that contract - and we did. That next year, our revenue from Vietnam 

increased hy $4 million, and we added 20 new jobs and I () of those in the U.S. 

An international services agreement that opens markets and levels the playing field for U.S. 

businesses like ours competing overseas would create the right kind of opportunities lor us to 

expand our international sales even more. 
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SERVICES LlBERALIZA nON 

We need a new international services agreement. The World Trade Organization (WTO) 

agreement providing the framework for global trade in services - the General Agreement on 

Trade in Services - is over tilteen years old. And efforts to negotiate a new, comprehensive 

WTO agreement through the Doha Rowld have stalled. In the meantime, we have seen the travel 

services industry change dramatically. More than ever, individuals are searching for and 

booking trav'cl online, and the biggest grovvth in consumer-drlven travel is outside the United 

States. 

Yet. the trade mles have not kept up, and as a result, governments take advantage of this vacuum 

to erect artificial barriers and other protectionist measures that stymie competition. An 

international services agreement is a strong step in the right direction. Taken at its fullest 

potential, a high-standard agreement will Im·ver barriers in important markets, create muchneeded pressure on uther countries that arc not participants~ like ChiDa~ and help generate 

momentum toward liberalization more broadly at the WTO. 

An agreement has the potential to help our company in a number of ways, such as addressing 

discriminatory Ecensing practices, increasing transparency, and protecting the flmv of data 

across borders. 

Discriminator.v Licensing. Countries often indiscriminately deny operating licenses to foreign 

companies in order to protect their own domestic or stat.e-o\vned ent.erprises. China's state 

owned travel distribution monopoly, Travc1Sky, lilr example, is the only company licensed to 

provide passenger reservations systems and airport departure control systems in that country. 

Foreign competitors, including Sabre Travel Network, are not allowed to provide giob(-ll 

distribution system services to Chinese airlines and Chinese travel management companies. 

The U.S. Commerce Department, in conjunction with Director General for Trade in Europe, has 

for the last five years urged the CAAC, the Chinese transportation ministry, to create an 

opportunity for u.s. and European travel distribution companies to engage in talks that would 

include technology demonstrations and discussions ahout the benefits to Chinese aviation 01" 

market opening. The CAAC has been unv,·.-illing to engage, and progress tov,lard market opening 

has been painfully slow. 

A recent development? howc,,'-cr, is \\/ort11 mentioning. The CAAC has recently adopted limited 

regulations that purport to allow individual foreign airlines and individual Chinese travel 

agencies to sponsor a foreign g.lobal distribution system (ODS) fur the limited purpose of 

distributing international trips to and from China (but not for domestic travel). There are very 

significant administrative burdens associated with this scheme, but it appears to represent a small 

step l()f\van.L The Chinese domestic travel market, hmvcycr, remains completely offlimits to us. 

Vole recognize that China is not patt of the current services talks. But Vole believe that a 

multilateral services agreement that includes strong protections against discriminatory treatment 

is a strong step f01\.vard toward ensuring that American companies and \vorkers can compete on a 

level playing field. 

Transparency. Another important benefit that a services agreement may otTer is increased 

transparency. The more countrles play by the same rules, and the more \VC kno\v about and have 
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input into those rules, the easler it is to do business - and resolve disputes when they arise. 

U.S. free trade agreements (FTAsl have traditionally included strong transparency provisions-

[or example, requirements that countries publish regulations in a clear and timely manner and 

consult with stakeholders. Replicating these successes on a larger scale would only benetit 

American companies, small and large alike, doing business overseas. 

Data Flows. One challenge tor oW' industry today is what we call "Big Data" - how to store, 

search and access huge amounts of data in a way that is timely and useful for consumers. 

Consider this: just t"\\/O years ago, cntelvrises around the world stored more than seven Exabytes 

of ne\\-'- data ---- equivalent to about 28,000 times the amount of infbrmation that is stored in the 

Library of Congress. And this does not even account for the amount of data generated through 

social media. 

In a global environment, hav'ing control over how this data is stored, distributed, and used is 

critically important to our business - and our customers. If-we knovl/, 1()f example, that if 100 

people searched for a 6am flight to Houston, where only an 8am flight existed, an airline might 

consider adding a 6am flight to meet the demand. An agreement that ensures data can flow 

freely across borders would be a powerful tool. 

A TALE OF TWO COUNTRIES 

The value of trade agreements to U.S. companies is proven by Sabre's dramatically different 

experience in TIVO South American countries: Venezuela, v,:here no such agreement exists and 

our ability to do business suffered enormously, and Chile, \vhere 11 free trade agreement 

facilitated our Olm'kct presence and at least on one occasion, dramatically came to Ollr rescue. 

In Venezuela, U.S. companies have a challenging time doing lousiness. We are subject to 

arhitrary and politically driven applications of local laws and to restrictions on repatriating 

money to the U.S. earned in that country. After years of building ow' market presence in that 

country, for no legitimate reason, the Venezuelan government nullified Sabre's valid contracts 

with local travel agencies, claiming that they were anticompctitivc. This tinding surprised even 

our local lm"'"yers since it v.,ias obviously 1n clear contravention of applicable local lavvs. This 

necessitated making contract modiJ-lcations in order to placate agency ofllcials and re-signing 

some 600 existing customers. This took much time, expense and effort in order to be able to 

continue Sabre's local openltions. 

The cunency control issue further exacerbates the difficulties of doing business in Venezuela. 

Our contracts requiring payment in U.S. dollars for services rendered by Sabre to local airlines, 

for example, are typically delayed due to a required but inconsistent approval process by a 

Venezuelan govenlment agency. Trade agreements addressing these and similar issues would 

give Sabre national treatment status and \vould make doing business much nlOre re\varding for 

us, Ollr customers and the balance or trade. 

In Chile, the story is completely difl'erent. The U.S.-Chile Free Trade Agreement gives 

companies li.ke Sabre national treatment status and \ve have had spectacular success in that 

country. including with LAN Airlines, which recently chose Sabre as the airline's reservation and 

4 
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operational systems solutions provider and entered into a multi-year, full content distribution 

agreement \vith us. This contract resulted in at least 50 ne\v technology johs in the U.S. 

Our presence in Chile before the FTA was much smaller, with a European competitor 

dominating the market After the FTA was sib'ned, a major Chilean government agency put out 

an RFP for travel agency services and required that any bidder use our European competitor's 

automation services, We brought this violation of the FTA to the Department of Commerce's 

attention. Within a matter oft\vo days, Commerce assembled a team from the State Department, 

the United States Trade Representative and embassy offtcials in Santiago, which communicated 

the concern of the lJ,S, Government to the Chilean authorities who acknowledged the violation, 

and the tender favoring our competitor was promptly abandoned, It was breathtaking how well 

the process worked, 

Existing U.S. free trade agreements have made important progress on addressing services 

barriers and ensuring protections for American companies doing business overseas. Replicating 

these successes on a larger, more global scale - such as through a morc expansive services 

agreement with willing WTO partners - would help to strengthen our position as a global leader 

and provide important economic benefits. 

TRA VEL TO THE U.S. AS AN EXPORT 

'Nl,i1C today's hearing locuses on a possible services agreement, it is important - as this 

Committee looks at numerous \\/ays to grow international trade ... to put travel in the broader 

context of US exports, Money spent by foreign travelers counts as exports frol11 the U,S, and 

creates travel industry jobs in the U's, And those are jobs that are staying in the US 

The last year has seen 3n explosion in travel around the world, for business, pleasure, medical 

reasons, education, and family events. Tn 201 L travel \\ias among Lhe Lop 10 industries in 48 

states and the District of Columbia, supporting a total of 14,4 million jobs, Travel-related 

spending totaled $813 billion, leading to $124 billion in tax revenue for federal, state and local 

govenllnents. Additionally, the industry accounted tor 2. 7 percent of our nation '5 GOP. 

However. from 2000-20 I 0, the US share of international travel dropped from 17 percent to 12,4 

percent, despite an overall 40 pereent increase in international travel globally, At the same time, 

travel to the U's, from the majority of U's, FTA partners increased, The number of visitors 

from Australia, for example, doubled in the sevcn years after enactment of the FTA, increasing 

fi'om an average annual growth rate of 3,4% before the FTA to 10,6% aller, 

Regaining our lost share ofintcn1ational -visitors wlll give our economy a much needed boost and 

lead Lo economic gruwth well beyond the travel industry. A return to 17 percent \.vould attract 98 

million more international visitors, create an additional 1.3 million jobs by 2020, and generate 

$859 billion jl" the U,s. economy, An international seryices agreement would only help as we 

work to reach these goals, 
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In an era of hesitant economic recovery, the story around intemational travel has been a bright 

spot over the past several years. 2011 featured the largest trade surplus for travel and tourism 

ever [C)f the United States, at $43 billion dollars. Growth rates throughout 2012 continue to 

outpace 20 II numbers. 

This growth is in part due to significant enhancements by the Department of State in visa 

processing. For instance. in the lirst hall' or2012, visa demand in Brazil was up 48% over 20 II. 

Visa demand in China was up 38%. By expanding personnel (paid for by visa fCes), expanding 

consular service periods, and \vaiving repeat interviews for low-risk travelers. these increases 

have been achieved while visa interview wait times have gone down signilicantly. While these 

times vary, generally visas can be obtained in these high demand countries in less than 10 days. 

In addition, the launch of advertising campaign~ in key travel markets like the United Kingdom 

is sparking additional demand for travel to the U.S. There has been a 14% increase in tl,e 

number of British nationals who intend to travel to the U.S. after the initial marketing campaign 

this year. 

However, the fact that the U.S. is no longer losing ground in the race for international travel does 

not mean lhat our policy problems are solved. There are a number of enhancements to the visa 

and entry process that should be considered \vhich would generate significant increases in the 

number of international travelers and the jobs that support their travel. Among these issues 

include: 

• Erpansiol1 of the Visa Waiver Program (vWP): Two-tllirds of international travelers 

coming ti-OJn beyond the NOlthern Hemisphere arrived in the U.S. lmder the VWI' which 

allows visa-free travel lor up to YO days for business or pleasure for citizens whose 

countries sign bilateral agreements \vith the U.S. to cooperate on a series of stringent 

counter-terrorism measures. Congress enacted temporary changes to the program in 2007 

that allowed the Bush Administration to negotiate the entry of nine new VWP cOllntries, 

most notably South Korea. Ho\vever, ne\v legislation is needed to shin the V~'P's 

eligibility criteria to focus on visa overstays rather than visa refusals, \vhich w-ould allm\' 

countries such as Brazil, Poland, Croatia, Chile, and Israel to be considered for 

admission, Enacting n.R. 5741, the ·'Jobs Originated through Lawlching Travel Act of 

2012," would represent a very important jobs bill - it is worth noting the VWI' language 

is also included in the FYl3 Depmtmcnt of Homeland Security approPliations bill in the 

Senate. The Congressional Budget Office has reported that the JOLT Act would not 

result in any increase in federal spending. 

us. Customs and Border Protection st"ffing: CBP is struggling to fulfill its counterterrorism and facilitation duties due to significant shortfalls in its budget lor front-line 

CBI' omcers. This shortfall is in pan due to reductions in eBI' fees received during the 

economic downturn in 2008-20 I () that would have been used to hire and train more 

ottleers. However, it is also due to a provision in thc 20 I I U.S. - Colombia Free Trade 

Agreement. This agreement increased immigration fees on travelers from Canada, 

Mexico and the Caribbean, but instead of using the additional revenue to support CBP, 

the agreement dedicated those fees to deficit reduction to offset the loss of tariff revenue 
40 

f 

Chairman BRADY. Mr. Fessenden. 

STATEMENT OF KARL FESSENDEN, VICE PRESIDENT, POWER 

GENERATION SERVICES, GE ENERGY 

Mr. FESSENDEN. Chairman Brady, Ranking Member 

McDermott, and distinguished Members of the Committee, thank 

you for the opportunity to testify today on trade and energy services. Just a moment of background on myself. I joined GE in 1996, 

and have had leadership roles in the services side of both the aviation business as well as the energy portfolio over the last several 

years. Today, I will describe my Atlanta-based global organization, 


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41 

Power Generation Services, known as PGS. I will share how we 

provide services across the U.S., across international borders 

through our commercial presence abroad. I will also discuss the 

challenges and opportunities we face and the ways the committee 

can help us overcome them. This subject is key, because removing 

barriers to energy services creates opportunities to grow the U.S. 

economy and to increase U.S. jobs. 

APEC’s recent success capping tariffs on some 54 environmental 

goods shows we can still make progress on trade liberalization. 

Similar efforts should be now undertaken on services, particularly 

energy services. Energy services is crucial to how GE helps our customers to provide clean, efficient, and reliable power. PGS provides 

electric utilities with services to support GE’s gas and steam turbines, as well as other related equipment. Service support begins 

as soon as we install the plant at the inception of the power plant, 

and lasts until it is retired, which could be as long as 30 years. Our 

services span from contractual maintenance and equipment repairs 

to part provisioning and monitoring and diagnostics. We have nearly 7,600 employees in over 100 countries, of which 4,100 are based 

in the U.S., and we have more than 50 GE sites in 15 countries 

on six continents, and are in nine joint ventures. 

GE’s ability to be a large manufacturer in the U.S. is directly 

tied to the services we provide, and is a key reason our customers 

purchase power generation equipment from us. These factors offer 

opportunities and challenges. Gas turbines are GE’s and our country’s biggest clean energy export. We make these turbines in 

Greenville, South Carolina, where we have 3,400 employees. We 

also make steam turbines in Schenectady, New York, where we 

have 1,400 employees. Over 250 small to medium-sized businesses 

in 24 States feed into our supply chain. In the last 2 years, we 

have exported 100 percent of the gas and steam turbines we manufactured in the U.S. Providing services for these turbines is a long 

term repeat business that keeps jobs in the U.S. Clearly, it is key 

that we are able to service this equipment globally. 

However, many countries enact restrictions that prevents or 

delays us from providing these services. The two restrictions that 

most limit my business are entry requirements and forced local 

content requirements. My workforce includes 4,000 employees who 

spend most of their time at our customers’ sites making repairs 

and installing new parts. Today’s environment demands that we 

are able to rapidly deploy these highly specialized energy services 

workers to sites in countries other than their home country. However, entry requirements, such as visa application and work permit 

processes by host nations, impedes us from quickly deploying them 

and delays the host nation from receiving the services they provide. 

The consequences of not responding due to lengthy work permit 

processes or customs delays are power outages and financial losses. 

Local investments can help develop stable, prosperous economies 

by expanding long-term business opportunities. GE knows firsthand the benefits of being a responsible local business. We have 

seen how governments attract investments in local markets by establishing dynamic and entrepreneurial policies. However, in recent years numerous countries have imposed forced local content 

measures which we believe are inefficient and ineffective, and 


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42 

should be avoided. Their widespread adoption may discourage foreign direct investment and inhibit economic growth. 

We believe strongly in the power of free trade and open markets 

to strengthen the countries we trade with and invest in, supporting 

jobs, competitiveness, better governance, and strengthens the 

United States. In 2011, services accounted for almost 30 percent of 

GE’s total revenues. As services grows in GE’s portfolio, we rely on 

our ability to send an employee at a moment’s notice to locations 

around the world. We believe we must establish multilateral agreements on liberalized trade and energy services. We should push for 

incorporating meaningful measurements and commitments in our 

FTAs. And we should develop a model international agreement to 

facilitate movement of highly trained energy services personnel between countries. 

Thank you for the opportunity to speak today. 

Chairman BRADY. Thank you, Mr. Fessenden. 

[The prepared statement of Mr. Fessenden follows:] 


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Testimony before the United States House Ways and Means' Trade Subcommittee on Services 

September 20, 2012 

Karl Fessenden 

Vice President. Power Generation Services 

GE Power & Water 

INTRODUCTION 

Chairman Brody, Ranking Member McDermott and distinguished members of the Committee, thank 

you for the opportunity to testify today on trade in energy services. This is a subject I feel is critically 

important because removing barriers to energy services creates the opportunity to grow the 

American economy - and increase Jobs. We can do this by building multilateral trade commitments 

on energy services, which are locking in the current World Trade Organization services agreement. 

We should also continue to provide commitments in u.s. FTAs to remove restrictions to energy 

services, including those that force localization. One specific step the United States should take is to 

develop a model international agreement to facilitate and increase the international movement of 

highly-trained energy services personnel, who are critical to operating power generation assets 

around the world. 

APEC's recent success in capping tariffs on a list of 54 environmental goods shows progress can still 

be made on trade liberalization. The Office of the United States Trade Representative deserves high 

praise for launching this tariff capping initiative and achieving outstanding results. Similar efforts 

should now be undertaken on services, particularly energy services. 

Just a moment of background about me I was born and raised in Massachusetts. I attended the 

University of Vermont for my bachelor's degree in mechanical engineering and received my 

master's degree in management from Rensselaer Polytechnic Institute. I joined GE in 1996 as part of 

our Aviation business In Cincinnati, and for the post several years, I have held leadership roles with 

the services side of GE's energy portfolio. 

In this statement, I will describe my Atlanta-based global organization - GE's Power Generation 

Services business, known as PGS. I will also discuss how PGS provides services from the United 

States across international borders or through a commercial presence abroad. Finally, I will discuss 

the challenges and opportunities my business faces and ways the Committee can help us 

overcome them. 

GE'S ENERGV SERVICES - POWER GENERATION SERVICES 

Energy services is a core component of GE, playing a crucial role in how our customers provide 

clean, efficient and reliable power to their consumers. My global business provides electric utilities 

with lifecycle services to support GE's heavy duty gas turbines, steam turbines, generators, control 

systems and related balance of plant equipment. This service support begins as soon as we install 

our equipment at the power plant and can lost through the time the equipment is retired, which 

could be as long as 25 to 30 years. Our services can be transactional Ion a case-by-cose basis) or 
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contractual, multi-year agreements. We have approximately 600 contractual agreements, 

predominantly in the United States and Europe. 

With our services, utilities can maximize the performance of their equipment. manage costs and 

reduce risks, ultimately operating their power plants more efficiently and delivering more reliable 

power to their customers. Our services span from contractual maintenance, equipment inspection 

and field engineering senvices to equipment repair, parts provisioning and remote plant monitoring 

and diagnostics. And we can customize solutions, depending on whether our customers want to 

install, upgrade, maintain or optimize their power generation facility. 

My business has nearly 7,600 employees, working in more than 100 countries araund the world -

4.100 of these employees are based in the United States. We have more than 50 GE facilities in 15 

countries on 6 continents, as well as 9 joint ventures. 

ENERGY SERVICES SUPPORT EXPORTS 

The need to be global - and local- along with a technology revolution. has altered the woy we 

think about energy services and the way we operate our global business. Our ability to be a large 

manufacturer in the United States is directly tied to the services we provide. and is a key reason our 

customers purchase power generation equipment from us. These foctors offer opportunities and 

challenges. 

Gas turbines are GE's - and the country's - biggest clean energy export. In the United States, we 

make large gos turbines in Greenville, South Carolina and export these turbines around the world. 

Greenville is one of GE's largest manufacturing facilities in the United States, employing more than 

3,400 people. GE also manufactures steam turbines and generators in Schenectady, New York. 

employing more than 1.400 employees. We have more than 250 small and medium sized 

businesses in 24 states that feed into our supply chain. In the last two years, we exported 100% of 

the heavy duty gas and steam turbines we manufactured in the United States. Providing senvices 

for these turbines is a long-term, repeat business that helps to keep jobs in the United States. As 

part of our service offerings, we ship more than 5 million parts a year around the world from key 

centers in Atlanta, Georgia and Amsterdam in The Netherlands. 

For example, GE's $3 billion 7,000MW power generation agreement with the Government of Iraq 

includes exporting 22 gas turbines made in Greenville and a multi-year senvices agreement to 

install and maintain these turbines. GE's service capabilities helped secure the equipment orders. 

and in turn the services agreement will support U.5.jobs long after GE ships the last turbine. Under 

that services agreement, GE will send both components and people from the United States to the 

power plant sites over the agreement period. 

EXAMPLES OF SERVICING POWER GENERATION ASSETS 

I'd like to share a couple of examples to help illustrate what we do on a daily basis to deploy 

components or people to foreign countries rapidly, often times on very short notice. 
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Last year, on the island of Cyprus, four GE gas turbines were knocked out of service by a huge 

explosion at a nearby naval station. We quickly deployed a GE service team to perform repairs and 

supply parts within days of the disaster. We sent more than 200 repair engineers and other 

technicians, who repaired or replaced more than 10 major turbine components on site. We were 

able to get two turbines bock in service less than a year after the occident. 

In Nigeria, we helped a customer who was having problems with a steam turbine. The original 

equipment manufacturer wanted the customer to ship a component to Asia for repair, significantly 

delaying completion of the work. GE was able to provide an on-site solution by quickly negotiating 

critical logistics issues such as obtaining work permits and visas, and navigating internatianal 

customs to ship equipment to the site. We were able to get the customer up and running in about 

six weeks. 

We are also investing to provide better service to our customers locally. We have invested more 

than $250 million in a new manufacturing technology center in Saudi Arabia that employs 400 

people and has serviced 450 gas turbines that power the Kingdom. GE supports the generation of 

half of the Kingdom's electricity through more than 500 turbines installed at various sites. Many of 

these turbines were manufactured in the United States. The center also provides extended service 

to more than 50 key customers in Saudi Arabia and across the Middle East, Africa and Europe. 

Another important area of energy services is what trade experts call "cross-border supply." My team 

provides international services from the United States without having to physically leave the 

country. From our Generation IQT" Center in Atlanta, we monitor power generation assets 24 hours 

a day, seven days a week around the world. We collect more than 30,000 operating hours of data 

from a fleet of mare than 1,500 deployed gas turbine, steam turbine and generator assets owned 

by utilities. Using a combination of tools, the team analyzes the data and diagnoses problems 

ranging from failed sensors to combustion system contamination .. all withaut leaving Atlanta. 

SERVICES RESTRICTIONS 

The examples of energy services I just provided demonstrate the importance of GE's ability to 

provide services globally. However, many countries enact restrictions that prevent or delay us from 

providing our services. Exports of service, unlike goods, often require the establishment of local 

offices or facilities to be commercially feasible, which means that the right of establishment land 

other related rights) is critical. 

The two restrictions that most impact my business and limit our ability to work obroad are, first, 

entry and visa requirements, and, second, forced loco I content requirements. 

Moving Employees Across Borders 

Today's global, competitive marketplace demands that companies like GE maintain capabilities to 

rapidly deploy highly-specialized energy services workers to job sites in countries other than their 

home country. My workforce is extremely dispersed and diverse. While many employees go to an 
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office or work from home, we have more than 1,200 field engineers located around the world, who 

work in a small service center or at a customer's remote power plant. We have more than 800 plant 

operations and maintenance specialists who work at a customer's site, and we have more than 

2,000 technicians and specialists who travel the world to make repairs and install new ports, often 

times on a moment's notice. Entry requirements by host nations impede GE from rapidly deploying 

these workers and delay the host nation from receiving the services these workers provide. 

Specifically, visa application, work permit and residential permit processes often hinder a 

company's ability to rapidly deploy these workers. For large corporations like GE, the international 

nature of this population further complicates lead-time requirements for entry into host nations. 

Given the specialized nature of the skills our energy services workers perform to maintain the 

thousands of products associated with GE's power generation equipment, it is not economically 

feasible to hire and sufficiently train skilled workers in each country to respond to the array of 

situations our workers and customers face at any given time. 

For example, if 0 key power plant shuts down and electricity stops flowing to consumers, the host 

nation would require immediate repair services to get the plant running. If the equipment was 

purchased from an international supplier, it is likely the service workers would need to travel from 

abroad to conduct the emergency repair. This need could be considered on issue of notional 

security for some situations. And the cost of the shutdown could easily exceed $2 million per day for 

local businesses. 

Forced Localization Measures 

At GE, we believe local investments can help develop stable, prosperous economies and enhance 

shareholder value by expanding long-term business opportunities. GE operates In more than 100 

countries and has more than 300,000 employees, so we know firsthand the benefits of being a 

responsible, locally-focused business. We have seen how governments can aUroct investments in 

local markets by putting policies and regulations in place to foster a dynamic, entrepreneurial 

business environment and to create "win-win" opportunities for investors, local businesses, 

employees and communities. 

In recent years, however, numerous countries have imposed forced local content measures, which 

we believe are ineffective and inefficient, and should be avoided. Their widespread adoption may 

discourage foreign direct investments and inhibit economic growth. These requirements often 

disqualify high-quality, financially secure foreign contractors, ultimately dissuading local 

investments by manufacturing companies. These requirements can also undermine the sourcing 

practices these manufacturers use to ensure product quality and reliability. Local content 

requirements may also be inconsistent with the adopting countries' obligations under the World 

Trade Organization and other trade agreements. 

For us in the energy services sector, forced local content measures appear in the form of laws 

requiring our workers to be nationals of the country imposing the low, requiring specific procedures 

4 
47 

f 

Chairman BRADY. Mr. Lake, because the voting clock is quickly 

winding down, we are going to finish with your testimony, recess 

until 5 minutes after the vote series, which is just two or three, 

and then finish with Mr. Brutto. So Mr. Lake, you are recognized. 

STATEMENT OF CHARLES LAKE, CHAIRMAN, AFLAC JAPAN 

Mr. LAKE. Thank you very much. Mr. Chairman and Members 

of the Subcommittee, thank you for this opportunity to testify. 

Aflac is a major employer in the United States, and a leading exporter of service to Japan. Thanks to the strategic leadership of our 

global CEO, Dan Amos, Aflac has been very successful. In 2011, 


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Aflac, which operates as a branch in Japan, generated $18.4 billion 

in revenues there. It is the number one life insurer in Japan in 

terms of policies in force. 

As U.S. service companies export their products to the world, it 

is critical that our government continues to vigorously enforce existing trade agreements, especially in light of the efforts to address 

new trade challenges. In addition, the United States should lead efforts to craft a WTO-plus International Services Agreement. Such 

an undertaking is a critical complement to efforts already underway to develop new global financial regulatory standards. 

Allow me to explain. Following the global financial crisis, efforts 

to strengthen the global economic and financial regulatory architecture by creating new international rules and standards are underway, being led by the G-20 and the Financial Stability Board. We 

firmly support these efforts, and agree that the global crisis requires global solutions. The work of these entities must be underpinned by the international regime, such as the WTO, which are 

fundamentally defined by the legal authority in their Member governments granted through treaty or through commitments to undertake domestic implementing measures. These commitments contain clear legally binding rights and responsibilities. By contrast, 

institutions such as the G-20 or FSB have been established not 

through formal treaties, but through the political commitments of 

their respective leaders. Consequently, the scope of their activities 

must be limited by the existing authority of their member countries’ executive branches. 

However, in the rush to respond to challenges created by the 

global financial crisis, sometimes institutions overstep these limits. 

For example, in late 2011, International Association of Insurance 

Supervisors, or IAIS, began a review of how foreign branches are 

supervised around the world. From the beginning, this IAIS effort 

appeared to be agenda driven, with apparent bias against foreign 

branches, with this workstream leading toward the establishment 

of principles that would allow domestic regulators to force insurance companies to convert their branches into locally incorporated 

subsidiaries. This would be inconsistent with the legally binding 

commitments made by the many IAIS Members to abide by the 

WTO General Agreement on Trade and Services, or GATS. GATS 

prohibits any government measure that restricts the form of legal 

entity through which GATS Member provides services in another 

Member’s territory. 

In Japan, we are starting to see troubling signs in relation to 

this issue. According to a recently released policy statement, FSA 

is forcing—appears to be forcing foreign branches to convert to subsidiaries, which would be at odds with Japan’s GATS commitments. 

Another major challenge facing U.S. companies is that posed by 

state-owned enterprises, or SOEs, that compete with private insurance companies. There are many state-owned life insurance companies in Asia, including China Life Insurance, Life Insurance Corp. 

of India, Korea Post Insurance, and Japan Post Insurance. 

These and other challenges facing the U.S. services industry 

point to a huge need for a strong WTO-plus International Services 

Agreement. For the ISA to have relevance, it must address issues 


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that confront us in the 21st century, while building onto WTO’s 

GATS. There is no question that the G-20, FSB, and IAIS must 

continue their important work to strengthen the global economic 

and financial regulatory architecture. But given that these efforts 

can also lead to dramatic changes in the competitive environment, 

due care must be exercised to ensure that the process is not distorted to achieve the protectionist goals of their respective Member 

governments. 

To this end, achieving a WTO-plus ISA can have a dramatic impact in preventing protectionism and promoting fair and free trade 

in services, while complementing the growing efforts of entities like 

the G-20, FSB, and IAIS. This calls for strong U.S. leadership. And 

to that end, in such efforts we stand ready to support this Subcommittee, the executive branch, and our State governments to 

craft a coherent integrated approach that achieves a win-win outcome for the United States and our trading partners around the 

world. 

Thank you. 

Chairman BRADY. Thank you, Mr. Lake. 

[The prepared statement of Mr. Lake follows:] 


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Testimony before 

Subcommittee on Trade of the 

Committee on Ways and Means 

Charles D. Lake II 

Chairman, Aflac Japan 

Washington, D.C. 

September 20, 2012 

Introduction 

Mr. Chairman and members of the Subcommittee, thank you for the opportunity to 

appear before you today on behalf of Aflac to discuss the benefits of expanding U.S. 

services trade through an International Services Agreement. My name is Charles Lake. I 

am Chairman of Aflac Japan. 

Japan has significant relevance to the issue at hand as the world's 2nd largest life 

insurance market. It is second only to the U.S. and generates approximately $390 billion 

in annual premiums. Moreover, U.S. companies have done well in this market and 

currently account for over 12 percent in tenns of premium income. These statistics 

demonstrate that the Japanese life insurance market is extremely impOltant for U.S. 

insurers in-and-of-itself as a market. Beyond this fact, given that the Japanese insurance 

market constitutes nearly 20 percent of the global insurance market in tenns of gross 

premiums, precedents set in Japan have regional and global ramifications. 

The views that I express here today reflect my experience, not only as a businessman, but 

also as a fonner practicing attorney and as an official at the Office ofthe U.S. Trade 

Representative (USTR) who took part in the negotiations of the General Agreement on 

Trade in Services (GATS) under the World Trade Organization (WTO). In addition, I 

currently serve as the Chairman of the U.S.-Japan Business Council and the 1nternational 

Committee of the American Council of Life Insurers (ACLI) - roles that provide insight 

into issues that confront the broader business community and that go beyond the specific 

scope of Aflac. 

I am sure that many of you are familiar with Aflac through its U.S. operations and of 

course the Aflac duck. Aflac is a major employer in the states of Georgia, Nebraska, 

South Carolina, and New York, and Aflac's more than 75,000 agents sell the Company's 

products to customers throughout the United States. We continue to add jobs to the 

economy. 
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What you may not know is that Atlac is a leading U.S. exporter of services. Af1ac entered 

the Japanese market in 1974 as a branch of its U.S. insurance company now domiciled in 

the State of Nebraska. Thanks to the strategic vision and over twenty years of leadership 

by our global CEO Dan Amos, Aflac has been very successful in Japan, generating $18.4 

billion in revenues in 2011 in that market. Indeed, Aflac is a great example of how 

American companies can, and do, succeed in Japan. We have found Japanese people to 

be extremely fair, willing to buy products from and work as business partners with 

companies like Af1ac that offer the best products with the best value that meet the needs 

of Japanese customers. As a result, Atlac has become the number one life insurer in 

Japan in ternlS of individual insurance policies in-force, reaching a total of22 million 

policies in force as of June 2012. 

The Company's investment in Japan goes much deeper than providing top-quality 

products and services to our customers. Af1ac is fully committed to creating and 

sustaining a work environment in which our employees can grow and perfornl at their 

very best and to participating actively as a good corporate citizen in Japan. Whether it's 

contributing to the Af1ac Cancer and Blood Disorders Center in Atlanta or the Aflac 

Parents Houses in Japan, Aflac is a vital part oflocal communities in both the U.S. and 

Japan. In fact, even as we speak, Dan Amos is in Japan to announce the launching of the 

Tomodachi-Af1ac Japan Medical Fellows Program in partnership with the Tomodachi 

Initiative, a public-private partnership founded in the wake of the Great East Japan 

Earthquake. 

Through this program, Aflac is sending promising Japanese pediatric oncologists 

primarily from the areas devastated by the earthquake and tsunami for study at the 

Atlac Cancer Center in Atlanta, Georgia. The intent is to share best practices and the 

latest treatments and techniques with the next generation of medical practitioners from 

Japan. 

Tackling 21st Century Issues in the Post Global Financial Crisis World 

Atlac's success outside the U.S. market gives us deep insights into what it takes to be an 

effective international company running an operation in a foreign country. We strongly 

believe that we can compete effectively with any company as long as there is a level 

playing field. We do not seek special advantages from our Government as we compete 

with Japanese companies. But to ensure that the playing field is level, U.S. Government 

engagement is frequently necessary to combat protectionist measures designed to favor 

politically inf1uential domestic players. Accordingly, we believe that it is essential that 

the United States continue to rigorously enforce existing trade agreements as well as lead 

the effort to craft a WTO-plus Intemational Services Agreement which is comprehensive 

in sectoral scope and addresses head-on the growing array of "beyond the border" 

barriers that increasingly inhibit business activity. 

The importance of undertaking an energetic etfort to negotiate a WTO-plus International 

Services Agreement is made even more imp0l1ant by the fact that an enormous effort is 

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undenvay to establish new international financial standards that will have significant 

competitive impact on the business environment. In this context, the United States must 

continue to pursue a coherent and integrated strategic approach to engaging international 

financial standards-setting bodies on the one hand and in building a stronger trade and 

investment architecture under the WTO on the other. 

To further elaborate on this point, I would like to first discuss how countries are 

responding to the lessons learned in the post global financial crisis world. Second, I 

would like to highlight some important policy questions raised by the fact that 

international standards-setting bodies are taking an activist approach to developing 

standards that affect the competitive environment. Third, I would like to discuss the 

unique challenge posed by the increasingly dominant role of state-owned enterprises. 

The Enhanced and Increasingly Activist Role of International Standards-Setting 

Bodies 

Following the impact of the financial crisis and Lehman shock, efforts to create new 

international rules and standards setting for the 21 sl century began at the first Group of 

Twenty or G20 Summit on Financial Markets and the World Economy in Washington in 

2008. At that time, individual countries were taking urgent measures to stimulate their 

economies and stabilize their financial markets. As well as working at the national level, 

leaders saw the need to cooperate at the international level in order to restore global 

growth and implement needed reforms in the world's financial system. We firmly 

SUppOlt efforts at the G20 in this regard and fully agree with the maxim that a "global 

crisis requires global solutions." 

Leaders put together an action plan for reform that included actions to strengthen 

transparency and accountability and enhance sound regulation. In their declaration, the 

020 leaders recognized that the reforms would only be successful if grounded in a 

commitment to free market principles, including open trade and investment, competitive 

markets, and efficient, effectively regulated financial systems. 

Today, as the G20 and the Financial Stability Board (FSB) continue their efforts to 

strengthen the global economic and financial regulatory architecture, substantial progress 

is being made in the priority refonn areas such as the Basel capital and liquidity 

requirements, the framework for globally systemically important financial institutions 

(OSIFls), resolution regimes, over-the-counter (OTC) derivatives reforms, shadow 

banking, and compensation practices. In the insurance area, the G20 has tasked the FSB 

in consultation with the Intemational Association of Insurance Supervisors (IAIS) (the 

international insurance standard-setting body) to complete their work on identification of 

and policy measures for global systemically important insurers by April 2013. In addition, 

the IAIS adopted a new set oflnsurance Core Principles (lCPs) in laie 2011 and is 

undertaking a major effort to develop a comprehensive framework and methods to 

address regulatory and risk issues involved in group-wide supervision of so-called 

Intemational1y Active Insurance Groups (IAIG). 

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As this enormous effort continues, companies are being confronted by a number of new 

and old challenges. These challenges include, for example, adjusting business models to 

meet the requirements of the new global financial regulations as wen as confronting new 

fonns of protectionism that have emerged since the crisis. Business leaders and 

policymakers must work together to find ways to address these 21 st century challenges 

that hold the key to unlocking substantial growth and prosperity in the future. 

Balancing the Important Work of International Institutions with the Respect for the 

Authority of Democratically-Elected Legislatures 

I would like to take a moment to highlight a couple of specific policy issues, particularly 

based on my experience as a former international trade negotiator and as an executive on 

the ground in Tokyo. One such issue is the necessity to strike a delicate balance between 

the critical need to make progress in the work of international standard-setting bodies on 

the one hand and ensure that the authority of duly-elected national and state legislatures is 

fully respected on the other. Care must be taken to ensure that the very important work of 

strengthening the global economic and financial regulatory architecture is not misused by 

global bureaucrats to distort the competitive field in favor of domestic champions from 

their horne countries. 

International organizations fundamentally are defined by the legal authority that their 

member governments grant them through treaty, or through commitments to undertake 

domestic implementing measures. The World Trade Organization (WTO) or the 

International Monetary Fund (lMF), for example, are international organizations whose 

scope of authority has been established by sovereign member countries entering into 

binding treaties or other agreements forn1ally ratified and enacted by their governments. 

These agreements contain clear, legally-binding rights and responsibilities. The member 

countries, as sovereign states, agreed to forgo their freedom to act in certain 

circumstances, committing formally to comply with a structure with binding rules and 

consequences. This is one reason why this Subcommittee has been very active in 

exercising its constitutionally mandated oversight of the Executive Branch regarding its 

engagement in international negotiations such as the WTO Doha Round and the TransPacific Partnership negotiations. 

In contrast to the WTO or IMF, other international institutions such as the G20 or the 

International Association of Insurance Supervisors (IAIS), for example, have been 

established, not through fonnal, ratitied treaties, but through the political commitments of 

their respective leaders. Because such institutions lack formal treaties in which member 

countries granted specific authorities, as a matter of international law, the scope of their 

activities must be limited by the existing authority of their member countries' executive 

branches. Anything beyond that scope would require additional legislative action at the 

national level. Given the complexity of having to deal with legislative and policy 

processes in the various member countries, changes in this arena must by necessity be 

evolutionary and not revolutionary. 

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However, in the rush to respond to the daunting challenges created by the global financial 

crisis and now the ongoing situation in Europe, it is easy for these institutions to overstep 

these limits, possibly crossing over into territory best occupied by duly-elected legislators 

or, at a minimum, by regulators and other government ofticials who are accountable to 

such elected legislators. For example, in late 2011, the lArs undeliook an ongoing 

workstream to review the supervisory practices among insurance supervisors with regard 

to how foreign branches are supervised in different jurisdictions around the world. From 

the very beginning the workstream appeared to be agenda-driven with apparent bias 

against foreign branches. Even though statistical analysis regarding the soundness of 

branches relative to mutual or stock companies has yet to be conducted, the lArs 

workstream appears to be headed in the direction of establishing principles that would 

grant local authorities the right to force insurance companies to convert their branches 

into locally-incorporated subsidiaries. 

This trend is inconsistent with the fact that the governments of many rATS members have 

made legally binding commitments to abide by the WTO General Agreement on Trade in 

Services or the GATS as well as the OEeD Code of Liberalization of Current Invisible 

Operations ("OECD Code"), which both strongly protect the ability to operate through 

branches. GATS Article X VI (2) prohibits any government measure which "restricts or 

requires" the form of legal entity - e.g., foreign branch, subsidiary - through which a 

GA TS member supplies a service in the territory of another member. The OECD Code 

meanwhile requires member countries to "ensure equivalent treatment for national 

insurers and insurers from other Members so that the latter shall not be liable to heavier 

burdens than those imposed on national insurers.,,1 It is possible that if this workstream 

were to continue along its current path, the IAIS could ultimately set standards that are 

inconsistent with duly-enacted U.S. laws. 

More specifically in the Japan context, we are starting to see troubling signs in relation to 

this issue. Japan's Financial Services Agency or FSA recently released its "Annual 

Supervisory Objectives for Insurance Companies, etc. for Program Year 2012" which 

covers July 2012 through June 2013. This document sets forth the FSA's top supervisory 

priorities for insurance companies for the coming year. In it, the FSA states that foreign 

branches: 

Both the GATS and the OECD Code permit member countries to take measures 

"for prudential reasons." However, under the GATS, prudential reasons cannot be 

used as a "means of avoiding the Members' commitment or obligations." 

Similarly, the OECD Code limits the scope of "prudential considerations" by 

incorporating the following provision with respect to insurance and private 

pensions: 

Prudential cons iderations. 

Members may take regulatOlJl measures in the field (~f insurance and 

pensions, including the regulation of promotion, in order to protect the 

interests of policyholders and beneficiaries, provided that those measures 

do not discriminate against non-residentproviders ~fsuch services. 

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are directlv or indirectly subordinate to foreign headquarters and holding 

companies that are not subject to Japanese laws and regulations. etc .. and the 

managementicontrol methods. etc .. of some lofthese foreign headquarters and 

holding companiesl cause a risk that overall control in their Japan operation 

may not function fully and properly. Therefore, it is important for their Japan 

operation to be granted sufficient authority and responsibility whereby it can 

establish internal control and management control systems in Japan with a clear 

decision-making process (depending on the size and business content ofthe 

Japan operation. it is appropriate to incorporate branches as local subsidiaries 

offoreign insurance companies). (Emphasis added) 

I have been living on the ground in Tokyo now for thilieen years and have had a great 

working relationship with Japan's FSA during this time. I consider many of its officials 

my personal friends as 1 have known them for more than 20 years, thanks to the 

relationships we formed when I served as the Director of Japan Affairs at USTR. Thus, I 

know based on my own experience that Japan's FSA is a sophisticated world-class 

regulator. However, despite this fact, the current global environment and the speed to 

which regulators must develop and implement new regulatory standards in response to 

the 020, FSB, and lAIS agenda can lead to supervisory policy statements, such as this 

one, that appear to be at odds with legally-binding commitments that its government 

made at the WTO and the OECD. 

1 am optimistic that this issue will be ultimately resolved in a manner consistent with 

sound regulation and compliance with Japan's international obligations. Ifit were not, it 

could set a precedent allowing foreign governments to use the lAlS process to effectively 

renegotiate their international trade commitments. Today, I provide this issue as an 

example of the type of issues that confront the industry and that require a careful watch 

by this Subcommittee and relevant government agencies. 

The Challenge Posed by State-Owned Enterprises 

Another major challenge facing U.S. services companies more generally is that posed by 

state-owned enterprises or SOEs. There is a tendency for people to think that state 

capitalism is mostly an issue for companies operating in China, and certainly the rise of 

China is fuelling an increase in the power and influence of state-owned enterprises. 

However, businesses can also find the playing field skewed in favor of state-owned or 

suppOlied enterprises in democracies such as Korea, Brazil, India, and also in Japan. In 

Japan, an increasingly important challenge for foreign and domestic companies is the 

need to compete with a huge, government-owned, controlled, and favored insurance 

company - Japan Post Insurance. Japan Post Insurance is the largest insurance 

company in the world and, along with Japan Post Bank, is part of the world's largest 

financial institution. It holds nearly a third of all assets in the industry, wOlih 96.8 trillion 

yen, and received 7.3 trillion in premium income in 2010 - approximately a quarter of 

the industry total. 

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Unlike the trade friction years of the 1980s and 1990s, what makes this issue unique is 

that there is total consensus between the private sector companies from Japan, the United 

States, Europe and Canada that a level playing field must be established between private 

insurance companies and Japan Post. To this end, the Life fnsurance Association of 

Japan (LIAJ) and eight other banking industry associations in Japan have issued 

statements calling for a level playing field just as the ACLI, the Coalition of Services 

Industries (CST) and other U.S. trade associations have done. 

In my view, the challenge the private sector faces is not only in the domestic regulatory 

environment where Japan Post receives different and more lax regulation and oversight, 

but also in the favorable treatment of Japan Post with regard to international standards 

and global best practices. For example, the IAIS recently revised its Insurance Core 

Principles, which provide a globally-accepted framework for the supervision of the 

insurance sector and is intended to apply to insurance supervision in all jurisdictions 

regardless of the level of development or sophistication of the insurance markets and the 

type of insurance products or services being supervised. 

Despite the fact that the IAIS has explicitly set forth that the Insurance Core Principles 

are intended for all insurance companies in all jurisdictions, including for SOEs, in many 

cases SOEs are not subject to the same level of scrutiny regarding their compliance with 

the principles as private sector companies. State-owned insurers compete with private 

insurance suppliers, and because the state-owned companies are often "national 

champions," they enjoy special privileges beyond more lax regulation, which distorts the 

competitive environment. 

Given their size and role in the market, policymakers will be unable to properly reform 

the global regulatory system and ensure the strength of the international financial system 

if state-owned enterprises, some of the world's largest and systemically important 

financial institutions, are not subject to the same international regulatory oversight and 

domestic enforcement as their private sector counterparts. 

State-Owned Insurers Are Often Overlooked by the International Regulatory 

Regime 

Looking at the practical application of supervisory standards, where the rubber hits the 

road, the IMF and World Bank use IAIS Insurance Core Principles as the metric for 

conducting audits of national regulatory and supervisory systems for insurance pursuant 

to the Financial Sector Assessment Program (FSAP). These audits are a cornerstone of 

the FSB's efforts to ensure global financial stability by providing meaningful information 

to policymakers. They can have a substantial impact on the enactment of legislation and 

regulations in subject countries, and represent an important tool for refonn. 

But I must point out that when the IMF or World Bank conducts an FSAP - whose 

stated aim is to apply IAIS standards in examining national insurance marketscountries can avoid the IAIS prescriptions by excluding celiain insurance providers from 

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stress tests and other forms of scrutiny on the grounds that they are subject to different 

regulatory schemes than ordinary private insurers. 

For example, in the IMF's 2012 FSAP review of Japan, Japan Post Insurance was 

exempted from the stress test applied to other FSA-supervised insurance companies. The 

omission of such a major insurer from full FSAP review highlights the disconnect 

between lAIS standards and the way they are being applied in FSAP audits and reported 

back to policymakers. 

To develop a sense of the scope of this problem, the ACLI has suggested that lAIS 

consider a thematic review and ask all of its members to report any insurance supplier 

that is not within the scope of the domestic insurance regulatory authority and, therefore, 

is able to slip away from international scrutiny. As emerging economies with statecapitalist tendencies playa bigger and more important role in the global financial system, 

in addition to distorting competition in the market place, the massive hole in the global 

financial services regulatory architecture could potentially provide a major source of 

systemic risk. 

There are many state-owned life insurance companies operating in Asia. Examples of 

other major players include China Life Insurance (Group), the Life Insurance Corporation 

of India, and Korea Post Insurance. These entities are frequently supervised and regulated 

in a more lenient manner than private companies. Reflecting on lax supervision, they 

mayor may not maintain internal controls and risk management systems comparable to 

those of private insurance suppliers. In other words, they sometimes operate in 

supervisory blind spots and represent risks to the financial system of unknown 

dimensions. Efforts to ensure a stable global financial regulatory system and to deepen 

economic integration in a bid to bolster growth are, therefore, being undermined by the 

emergence of state capitalism in increasingly imp01iant economies. 

In 2011, 106 SOEs were featured in the Fortune 500 list of the world's largest companies. 

Four of the top ten largest companies in the world are SOEs, three Chinese and the other 

Japan Post. With emerging economies in Asia experiencing rapid grmvth, they have 

become more integrated in the global trading system and, in turn, have become 

increasingly imp01iant players in the global economy. 

For companies operating in the Asia-Pacific region, SOEs are proving to be a formidable 

force posing a serious threat to fair competition in the marketplace and providing 

challenges as the regional trade, investment and regulatory architecture evolves. 

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58 

f 

Chairman BRADY. The Committee stands in recess until 5 minutes after the last vote, which should be very soon. Thank you. 

[Recess.] 

Chairman BRADY. The hearing is called back to order. Thank 

you again for your patience, all of you. Mr. Brutto, you are recognized. 


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59 

STATEMENT OF DANIEL BRUTTO, PRESIDENT, UPS INTERNATIONAL, ON BEHALF OF THE COALITION OF SERVICE INDUSTRIES 

Mr. BRUTTO. Chairman Brady, members of the Trade Subcommittee, on behalf of UPS and the Coalition of Service Industries, thank you for the opportunity to address the critical issue of 

removing obstacles to global trade in services. As President of UPS 

International responsible for our company’s global expansion, I can 

think of no trade issue that affects the U.S. economy more profoundly than the services sector. The U.S. is the world’s most successful services exporter, so expanding service trade through an 

International Services Agreement would greatly benefit the United 

States. 

Services are the lifeblood of our economy and of global commerce, 

the indispensable enabler of everything from trade in agriculture 

and manufacturing to the development and sale of high-tech products. If you want to make it, move it, buy it, or sell it, you need 

services. Professional, financial, retail, and of course delivery and 

logistics services to get products to market. The beneficiaries of efficient, unrestricted express delivery services are not just Fortune 

500 manufacturers with global supply chains that depend on fastcycle logistics. There are also millions of small and medium-sized 

enterprises trying to ensure their products cost-effectively reach 

the shelves of the global marketplace, or to the doorsteps of their 

customers in Beijing and Berlin, as well as Beaumont and Berea. 

At UPS, we have been working in a partnership with the U.S. 

Commercial Service for the last 5 years to support U.S. companies 

in exporting to countries around the world. In 2010, we launched 

the Beyond One: New Export Markets initiative to support efforts 

to expand the global reach of businesses that currently export to 

only one country. This is an issue that rises to the very top of our 

organization. Our Chairman and chief executive officer, Scott 

Davis, serves on the President’s Export Council, and UPS has supported the national export initiative since its inception in 2010. 

The U.S. leads the world in services. This sector accounts for 

more than three-quarters of our Nation’s private sector GDP, and 

over 83 percent of our private sector employment. That is the good 

news. The problem is that we face significant barriers from complex customs processes, limited market access, to new areas like 

forced localization and unfair advantages given to state-owned enterprises. 

A recent study by GeorgetownUniversity international trade 

economist and this panel’s first witness, Brad Jensen, suggests that 

removing these barriers would create three million more jobs in the 

U.S. So how do we create these jobs? A range of initiatives hold 

promise. Allow me to identify a few. 

First, the U.S. can and should continue to support the development of an international agreement on trade and services. And we 

applaud the work of the previous panel’s witness, Ambassador Michael Punke, who is leading the ISA effort in Geneva. Although the 

world has witnessed rapid cross-border growth in services in trade 

and investment, the Doha Round after a decade has made little 

progress in liberalizing this sector on a multilateral global basis. 

That is why we need the negotiation of an ISA. An ISA that is open 


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60 

to like-minded WTO members will help achieve a high standard 

agreement that provides nondiscriminatory market access, most favored nation, and national treatment. Ultimately, such an agreement would strengthen the WTO itself. 

In addition to supporting international service agreements, regional plurilateral agreement like the TPP offer an important pathway to move the ball forward on services liberalization. We are 

glad to see that Mexico and Canada are on track to join the TPP, 

and we hope Japan will make the necessary commitments to join 

in the near future. These three countries alone buy almost 25 percent of the U.S. service exports. Other regional trading partners 

who share our liberalization should also have a way to join. Overall, the current TPP Member countries’ efforts to include high 

standards services commitments will make this an important 

agreement for trade and services. 

Third, there are bilateral opportunities for advancing open trade 

and services, including express delivery services. The U.S.-European Union High-Level Working Group is an important venue for 

that work. UPS is very supportive of the possible launch of negotiations of a U.S.-EU Free Trade Agreement to strengthen our strategic economic partnership across the Atlantic. We see strengthening the U.S.-EU trade relationship as a cornerstone of our own 

success. 

In fact, our pending acquisition of Netherlands-based TNT Express underscores our commitment to supporting the growth of 

trans-Atlantic trade in helping the U.S. and European customers 

better tap the global market. This acquisition, our largest in our 

105-year history, broadens UPS’ global footprint. When you take a 

strong European brand and you combine it with a great American 

brand, the winners are the customers. And UPS is especially excited about the possibilities what a combined brand means to our 

customers here in the U.S. So a stronger partnership in trade between the U.S. and EU in time will bring tremendous benefits for 

both the U.S. and European exporters alike. 

In difficult economic times, it is all too easy to become protectionist, but that policy never leads to economic growth or job creation. We have seen a growing list of restrictions being introduced 

abroad on trade services. We cannot afford to ignore these if we 

seek robust economic growth. Especially at this critical juncture in 

the global economic recovery, the U.S. must continue to provide an 

open market for trade and services on all fronts. An International 

Services Agreement holds great promise for expanding U.S. services exports and strengthening the WTO, as do each of the other 

initiatives I have discussed. Now is the time to pursue these to further stimulate U.S. growth and job creation. Thank you for the opportunity to testify. 

Chairman BRADY. Thank you, Mr. Brutto. 

[The prepared statement of Mr. Brutto follows:] 


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Written Testimony of Daniel J. Brutto 

President, UPS International 

Before the 

United States House of Representatives 

Committee on Ways and Means 

Trade Subcommittee 

Benefits of Expanding U.S. Services Trade Through an International Services 

Agreement 

September 20, 2012 

Chairman Brady, Ranking Member McDermott. Members of the Trade Subcommittee, thank you 

for the opportunity to testify on the benefits of expanding U,S, services trade through an 

international services agreement (lSA), 

I am testifying today on behalf of UPS, and as a member of the Coalition of Service Industries 

(CSI), which represents the interests of the dynamic American service economy and has 

shaped domestic and international economic policies on behalf of the services sector. CSI has 

been interested in an ISA for a long time, and has been a strong proponent of engaging in 

negotiations for an I SA since it became clear that success in the Doha Round was beyond our 

reach, 

UPS is a global leader in logistics, offering a broad range of solutions including the 

transportation of packages and freight; the facilitation of international trade, and the deployment 

of advanced technology to more efficiently manage the world of business, UPS employs 

approximately 324,000 employees in the United States and 74,300 employees internationally, 

In my written testimony, I will outline the importance of the services sector, elaborate on the role 

of express delivery services in facilitating trade, and highlight a number of opportunities, 

including an ISA, and challenges impacting the services trade, 

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SERVICES IN THE U.S. ECONOMY 

The U.S. enjoys a strong comparative advantage in services. Services accounted for 78% of US 

private sector GDP in 2011, or $11.8 trillion - roughly comparable to the combined economies 

of Japan, Germany, and the United Kingdom. Services jobs accounted for over 83% of US 

private sector employment, in fields ranging from highly·paid blue·collar work in construction 

and telecommunications, to summer jobs that help teens get ready for productive careers, to 

scientific research and engineering, financial services, arts and entertainment, and the 

professions. Across this wide range of industries, services jobs pay an average of $60,608 per 

year. In addition, workers in export·intensive services industries earn 15-20% more than 

comparable workers in other service industries. 

The U.S. remains the single strongest exporter of services in the world. Our services exports in 

2011 reached $588 billion with a surplus of $193.5 billion. Both figures are new annual records. 

Total exports are likely, as in past years, to be more than twice the total of the 2'" and 3'd_ 

ranking nations, and have grown by roughly $100 billion since the economic crisis of 2008-2009. 

This export growth has enabled U.S.-based companies to keep up employment during a period 

of depressed domestic demand and slow growth. 

Although U.S. services exports are strong, the U.S. still has the potential to export far more 

services. In a recent study, Dr. Brad Jensen of Georgetown University's Center for Business 

and Public Policy, my fellow panelist, estimated that U.S. services exports could be about $860 

billion more than they are now. Technological change, in particular widening Internet access 

worldwide - make this entirely realistic. This suggests about 3 million more US jobs could be 

created just from increased cross-border trade, if we can remove the many, complex barriers to 

our services trade. In UPS's experience, the primary barriers to international commerce and 

export growth are: navigating complex customs processes, access to capital, and finding global 

opportunities. With 87 percent of global economic growth over the next five years taking place 

outside the U.S., essential to increasing exports, is access to foreign markets through the 

negotiation and approval of new trade agreements such as an ISA. 

While services trade is significant in itself, services are essential to enabling all international 

trade, including agricultural and manufacturing trade. High-tech services enable the research 

and development. Professional and financial services provide the support needed for the 

development and sale of products. Retail services provide the venue for the sale of products. 

And of course logistics and delivery services get products - auto parts, fresh food, specialized 

semiconductor chips - to and from the market. In short, services are the lifeblood of the 

economy. If you want to make it, buy it, move it or sell it, you need services. 

THE ROLE OF EXPRESS DELIVERY SERVICES IN FACILITATING TRADE 

UPS and other express delivery service (EDS) companies and their logistics operations are 

enablers of economic growth, providing fast, reliable, secure, door-to-door delivery of packages 

and documents to manufacturers, service providers, small and medium-sized enterprises 

(SMEs) and consumers. EDS are crucial to fast-cycle logistiCS, e-commerce and the efficient 

functioning of international supply chains, enhancing the movement of goods across borders 

and providing increased access to international markets, especially for SMEs, businesses in 

rural and reservation districts, and individuals or families using Internet auction sites to become 

exporters. By the same token, EDS companies make on-line shopping for consumers possible, 

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creating much greater choice, extending leisure time for families at home, and improving prices. 

The competitiveness and efficiency of the EDS sector is critical to developing worldwide value 

chains and supporting key industry growth in: research and development, manufacturing, 

distribution, transportation, retail and after-sale services and repair. Therefore, encouraging 

investment in and parity for global EDS companies will enhance global competitiveness and 

productivity. 

Using UPS's expertise in trade promotion is an important part of our corporate engagement with 

the U.S. Government. In 2007, UPS became a strategic partner of the U.S. Commercial 

Service (USCS). Since the partnership's inception, UPS has counseled more than 18,000 

customers regarding USCS' offerings. UPS and USCS also have convened more than 70 

export-related customer seminars. With trade professionals in over 100 U.S. cities and in nearly 

80 countries the USCS helps U.S. companies get started exporting to increase sales to new 

global markets. 

In 2010, UPS launched the "Beyond One: New Export Markets" initiative. The objective of this 

initiative is to leverage UPS's USCS partnership to help single-rnarket exporters - roughly 58 

percent of the U.S.' 293,000 exporting companies as of 2010 - reach additional markets. UPS 

and USCS are also developing a suite of special programs to help boost exports. These 

programs include a UPS landing webpage and industry-specific pages, as well as the 

assignment of personnel specifically to handle companies looking to enter new markets. 

One way the Congress can support the U.S. EDS industry immediately is to raise the customs 

de minimis level. The current de minimis level has not been changed since 1993. It does not 

reflect inflation and is an impediment to commerce, including online commerce. If the de 

minimis level were to be raised, the U.S. EDS industry would benefit from expedited deliveries 

of time-sensitive shipments and reduced costs. 

POLICY CHALLENGES (1): MARKET ACCESS AND NATIONAL TREATMENT 

The potential for addressing services trade and investment issues in an ISA is very 

encouraging. There is no lack of traditional services trade issues to be addressed, and new 

issues are emerging. 

In all services negotiations in which the U.S. participates, a foundational objective is to achieve 

access to foreign markets. For services, the keystone is to achieve the right to establish your 

business in a foreign market, to own it fully, and to establish in the corporate form most suitable 

to your business, UPS has had some challenging experiences in this area, including our pursuit 

of a domestic license in China to provide competitive parcel delivery services within the Chinese 

domestic market - one of the largest untapped business markets worldwide. 

Hand in hand with the right of establishment is the right to the same treatment that a local 

company receives, which is the freedom from discrimination by government and regulatory 

authorities (also known as 'national treatment'). This is particularly important for services 

companies, which are typically highly regulated, and where authorities may enforce onerous 

licensing requirements that stifle growth and tip the playing field toward local participants. 

POLICY CHALLENGES (2): 21" CENTURY ISSUES 

Together with these longstanding challenges, it is imperative that an ISA address some of the 

emerging 21" century issues faced by U.S. services companies around the world. These are 

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issues that have manifested themselves more recently, and thus are not covered adequately in 

existing trade agreements. 

State-Owned Enterprises (SOEs) 

One of the most important 21" century issues is that of foreign government policies that favor 

state-owned enterprises (SOEs) and state-supported enterprises (SSEs). These entities are 

sponsored as national champions, and they create major competitive distortions in markets 

around the world. 

These market distortions take many different forms. Regulatory favoritism takes place when 

governments use policy instruments - such as regulations and subsidies - to change market 

results. 

For instance, governments sometimes provide preferential market access to SOEs and SSEs, 

which adversely affects foreign companies selling to or competing with these favored domestic 

businesses. As noted earlier, the importance of promoting competitive neutrality with SOEs is 

particularly important to EDS providers that compete with national postal services. 

Governments should ensure that there is a level playing field for all businesses, irrespective of 

ownerShip, and not confer competitive advantages on SOEs and SSEs at the expense of private 

business, including U.S. competitors. 

Data Flows 

Cross-border trade in services has grown in recent years, due in large part to the internet, which 

has allowed worldwide electronic delivery of previously untraded services. In the current global 

economic climate, it is more essential than ever for this growth, and the jobs created by it, to be 

sustained. 

Knowledge-based services, including logistiCS services, business services, financial services, 

computer and information services, insurance services, audiovisual services, 

telecommunication, and professional services, can readily be delivered around the world via 

advanced communication networks. As stated in a recent article of The Economist, "services, 

which account for only 20% of world trade but are more important on a value-added basis, have 

hardly been liberalized at all." U.S. digitally-enabled trade in services was $116 billion in surplus 

last year. 

Such growth opportunities in ICT-enabled services are threatened, however, by the potential for 

restrictions on cross-border data flows. Many countries are considering restrictions on the 

location of storage and processing for various types of data, a problem that existing trade 

agreements do not address. For example, exceptions in the World Trade Organization General 

Agreement on Trade in Services give countries the right to regulate for national security, 

privacy, compliance with regulations, protection of public safety, and the prevention of 

fraudulent practices, to ensure the integrity of the financial system, among other reasons. Any 

of these reasons might be used as an excuse to block data flows and effectively create barriers 

to insurance and other forms of services trade. 

While governments have the right to regulate, they should rely on market forces, voluntary best 

practices and public-private partnerships whenever possible. When regulation is necessary, it 

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should be done in the most narrowly tailored, least-trade-restrictive way possible to redress the 

specific and demonstrable policy concerns. 

It is in the interest of the U.S. to address these cross-border data issues in all bilateral, regional 

and intergovernmental negotiations and organizations. For instance, an initiative could build on 

the U.S.-EU Trade Principles for ICT Services and the OECD Internet Policy Principles, and be 

added to the work on e-commerce and services trade in ongoing free trade agreement 

negotiations. 

Forced Localization 

Forced localization occurs when a country requires multinational companies to conduct their 

business activities domestically, or requires that business processes or hiring be conducted "incountry". While most companies prefer to source locally whenever it is reasonable to do so, 

forced localization is a growing impediment to economic efficiency and commerce. Forced 

localization can take many forms and reach across many services sectors. Examples include 

mandating in-country data processing centers, mandating that national systems are used for all 

electronic payments, requiring that national banks and depositories be used for financial 

transactions, and requiring that percentages of employees in sectors such as oil and gas 

exploration be nationals of the host country, among others. 

As is the case with other forms of protectionism, forced localization in one country only 

encourages the spread of forced localization to other countries, to the detriment of global 

commerce and domestic economies alike. 

THE SERVICES TRADE NEGOTIATIONS AGENDA 

How do we address these challenges, and so take full advantage of our strength in services? 

believe that an ISA presents an enormous opportunity for doing so. 

The past year has seen remarkable achievements in trade liberalization, with the passage of 

free trade agreements with Korea, Panama and Colombia. We hope Congress will act soon to 

grant Russia permanent Normal Trade Relations tariff status with Russia's accession to the 

WTO last month. 

Going forward, the new agenda over the next years offers a remarkable chance to open new 

opportunities in our relationships with the developed economies that now account for most of 

our services trade, and with rapidly growing developing regions. In addition to an ISA, the 

Trans-Pacific Partnership, the US-E.U. High Level Working Group, and the Trade and 

Investment Partnership for the Middle East and North Africa (MENA), and bilateral investment 

treaties (BITs) and bilateral trade and investment framework agreements (TIFAs) offer 

tremendous opportunities for expanding trade in services. 

International Services Agreement (ISA or "pJurilateral") 

Perhaps the most exciting opportunity for expanding services trade and investment is an ISA. 

The current members of the "Really Good Friends of Services (RGF) represent well more than 

70% of global services trade, and we expect that as more progress is made toward making the 

ISA a reality, more countries will join. The RGF must fashion an agreement that will take the 

best elements of the FTAs already negotiated and address the "21'1 century" issues" described 

above in one agreement. I was encouraged by the July statement of the RGF stating their 

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common purpose, and I urge the RGF members to push forward with negotiations, What is 

clear to us in the services sector is that an ISA must be the result of a high level of ambition and 

must be a high-standard agreement 

We applaud the work of USTR, especially Ambassador Michael Punke, who is leading this effort 

in Geneva, The ISA offers an important opportunity to establish a global standard ensuring the 

right to establish, and freedom from discrimination, in a transparent regulatory context 

Trans-Pacific Pannership (TPP) 

The TPP provides another very important opportunity to liberalize global trade and investment in 

services, Our government is actively supporting disciplines on state-owned and state-supported 

enterprises (SOEs and SSEs) and the free flow of information in the TPP among other important 

endeavors, Of special concern to express delivery operators is the ability to compete on a level 

playing field with national postal operators that are SOEs and SSEs, 

We are pleased that Mexico and Canada are on track to join the TPP, and hope that Japan will 

make the necessary commitments to join the TPP sometime in the near future, The three 

together have in recent years accounted for nearly 25 percent of U,S, services exports -

including $4.5 billion out of $20 billion in freight receipts, by the Commerce Department's count 

of services trade - and are all among the top five markets for U.s. services exports, TPP should 

be open to all regional trading partners who wish to join it and can (1) accept the high standards 

being developed in this agreement, and (2) ensure that the negotiations will not be slowed 

down to accommodate their participation, 

United States - European Union High-Level Working Group 

The U,S,-EU High-Level Working Group presents an opportunity to increase cooperation and 

services trade between our two giant services-based economies, Our services trade 

relationship with the 27 European Union members is vast, accounting for $300 billion of $900 

billion in total U,S, services trade, and nearly 10 percent of all world services trade, UPS is very 

supportive of the launch of the negotiation of a potential U,S,-EU Free Trade Agreement to 

strengthen our strategic economic partnership across the Atlantic, We see strengthening and 

deepening the U,S,-EU trade relationship as a cornerstone of our own success and our pending 

acquisition of Netherlands-based TNT Express underscores our own commitment to the 

European market and global trade more generally, This acquisition - our largest in our 105-

year history - broadens UPS' global footprint When you take a strong European brand and you 

combine it with a great U,S, brand, the winners are the customers, UPS is excited about the 

possibilities of what a combined brand means to our customers, So too a stronger partnership in 

trade between the U,S, and the EU will bring tremendous benefits for U,S, and Europeans 

exporters alike, 

The U,S, and the EU share a common outlook and a similar determination to maintain open 

markets, Both enjoy the benefits of liberalized services trade regimes, Both have cooperated in 

the WTO and other forums to expand their open approach to trade in services to other markets, 

Increased cooperation and communication between the U,S, and EU through the High-Level 

Working Group could expand opportunities for services trade between the two economies, 

improve the position our economies in relation to third parties, and define a path for policy in the 

global trading system, 

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Harmonizing transportation security requirements between the US and the EU must be a priority 

of the dialogue. The aim of harmonization should be to end up with "one-stop-security": if a 

package is screened in the EU, it should not need to be re-screened along its route as long as 

the supply chain remains secure. We applaud U.S. and EU efforts to complete the preparatory 

work on mutual recognition of trade partnership programs, namely the U.S. Customs-Trade 

Partnership Against Terrorism (C-TPAT) and the EU Authorized Economic Operator (AEO) 

programs. We support trusted-trader programs, but ask that regulatory authorities recognize 

the efforts and costs behind the requirements and accordingly, ascribe commercially useful 

benefits to carriers and shippers as an acknowledgement of such cooperation and increased 

network safety. Both markets have agreed on the need for pre-landing information for air cargo 

and to work towards making this principle an international standard through the World Customs 

Organization (WCO). However, we hope that both governments will note that the most 

successful program to date is best evidenced in the U.S. Department of Homeland Security's 

(DHS) Air Cargo Advance Screening (ACAS) program. It is our understanding that EU 

authorities are examining a very similar program and it is our hope that such a carrier-initiated, 

risk-based system is employed on both sides of the Atlantic. 

We support a common customs policy that adopts a reasonable de minimis value threshold for 

the imposition of duties and customs requirements. As I mentioned earlier, modernizing the de 

minimis level is important for making the EDS sector more competitive. Currently, the EU de 

minimis value is significantly below that of the U.S., creating barriers for small and mediumsized exporters. Harmonizing and raising the de minimis level would benefit shippers in both 

markets. 

The U.S. and EU should avoid unilateral actions that could harm trade in services. Currently, 

the EU and the US are at odds regarding the imposition of a European Emissions Trading 

Scheme (ETS) designed to affect direct air carriers serving the EU. This dispute has the 

potential to adversely affect trade in services, particularly global transportation of goods and 

passengers, and it is of significance to our EDS industry. We urge the negotiating parties on 

both sides of the Atlantic to continue useful dialogue regardless of forum, and move forward 

constructively to harmonize efforts to reduce greenhouse gases. In doing so, the U.S. and EU 

must avoid any result that may serve to harm a transportation provider's ability to effectively and 

efficiently serve its customers in either market. 

Trade and Investment Partnership for the Middle East and North Africa (MENA) 

The Trade and Investment Partnership for the Middle East and North Africa was launched last 

year by the Administration to strengthen business ties between the U.S. and the MENA region. 

Though the U.S. Government does not intend for the initiative to lead to trade negotiations, the 

goal of government agencies in developing a roadmap to encourage MENA economic activity 

should be to move incrementally toward our trade and investment goals. I believe that the 

delivery and logistics services offered by UPS and other EDS providers can playa significant 

role in supporting economic growth in the MENA region, whose economies and people have 

suffered over decades from fragmentation, high internal trade barriers, and consequently low 

growth and in many countries falling living standards. 

Bilateral Investment Treaties (BITs) and Trade and Investment Framework Agreements (TIFAs) 

The U.S. government recently announced the conclusion of the Model BIT review, This marks 

an important milestone and provides the U.S. with another tool to address some of the 

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68 

f 

Chairman BRADY. We will start member questions of 3 minutes. 

One of the key takeaways from the testimony is how facilitating 

services exports helps our small and medium-sized business exports and helps our manufacturing and agriculture sectors as well. 

So this is all complementary. Mr. Brutto, real quickly, do you have 

any metrics at UPS to show how when you export more it helps 

facilitate small and medium-owned businesses do the same? 

Mr. BRUTTO. Yeah, absolutely. And I can tell you that our most 

recent free trade agreements, our volume for small and mediumsized businesses is up over 20 percent. So our trade to South Korea 

with U.S. exports, our trade to Colombia, to Panama, we have seen 


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that growth. That gives our U.S. exporters access to those markets. 

The major inhibitor, though, is the complexity of duties and taxes 

and customs. The second is access to capital and understanding the 

markets, and sometimes a different currency. And three is the ability to sell the products in those foreign markets. And certainly the 

U.S. Commercial Service is working with us. It has helped many 

small and medium-sized customers. In fact, we have educated well 

over 2,000 small and medium-sized customers so they can effectively get into multiple markets. 

Chairman BRADY. Right. And certainly Dr. Jensen’s testimony 

is that the upside potential on this is remarkable for us. Mr. 

Fessenden, how does the export of GE’s energy services help drive 

demand for GE’s manufacturing side? 

Mr. FESSENDEN. Well, certainly as I spoke our services is a 

revenue stream for 20 to 30 years after the initial transaction. But 

that initial transaction, of course, and the services are all based 

upon—or a lot of it is based upon our manufacturing of parts and 

repairs that comes out of the United States in support of our global 

business. So we are very tied to continuing to grow the manufacturing sector through the service support. It is very important. 

Chairman BRADY. All right. Thank you, sir. Dr. Jensen, I know 

it is always a challenge to measure services on trade data. Government data is frankly not very good for services trade. I fear we 

often make policy decisions with a fraction of real time data. But 

to conclude, what have researchers found about facilitating services 

exports as far as helping manufacturing and ag become more competitive as well? 

Mr. JENSEN. So the research is limited because the data impediments are large. 

Chairman BRADY. Yeah. 

Mr. JENSEN. There has been work that the World Bank has 

done that has looked at countries that have liberalized their services sector and find that it does increase productivity in the manufacturing sector. Work that I have been involved with the OECD 

suggests that increased business service imports increases exports’ 

share of output, particularly in commodity-type manufacturing 

products. So I think, you know, we think of business services as facilitating manufacturing trade and also increasing the value of 

manufacturing trade. 

Chairman BRADY. Right. Thank you, Mr. Jensen. Mr. 

McDermott. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Klein, I noticed when I was reading your testimony you were talking about 

a provision in the Colombia implementation bill that gives you 

some problems with Customs and the whole Customs funding. 

Could you explain a little bit more in depth what you are talking 

about and why it makes a difference to Sabre? I don’t know what 

exactly your business model is, but I don’t understand how you and 

Customs get tangled up. 

Mr. KLEIN. Sure. I think it really affects the travel industry and 

the tourism industry into the U.S. And let me explain. There were 

some numbers released yesterday that suggest that the tourism to 

the United States drives about $153 billion of exports. That is up 

8 percent in 2011 versus 2010. Customs staffing and efficiency at 


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the airports is a barrier to people wanting to come to the United 

States. The expectation across the travel industry, and our view is, 

that we should have world class services in our airports, that we 

should do the best job of anybody in the world of moving people 

and welcoming guests into the country, in that there is significant 

job creation and export benefit when we do. That problem is about 

to get bigger. We had a long term, almost a 10-year loss in tourism 

market share, global tourism market share in the United States. 

We went from 17 percent of global tourism to 12.5 percent. And we 

are back on the upswing. Again, big growth number last year. We 

are going to continue to grow. The budget for the CBP is tight, and 

they are not going to be able to add officers with this current budget. The view is they won’t be able to add officers at the rate they 

are going to need to to deal with the growth in tourism. And over 

time, that will hurt our ability to drive exports in the country. 

So, look, it is—there is a bit of impact on our company. I think 

this is a broader issue for the tourism industry and for export and 

jobs growth in the United States because of the impact of international tourism. 

Mr. MCDERMOTT. How do you measure the amount that standing in line impacts people’s desire to come to the United States? 

I now have the global entry thing, which I suspect all of you do 

who are tooling around on the international scene. You walk 

through, put your fingerprints down, and away you go. And I 

watched those long lines at Seattle when I came back the last time, 

and I wondered how you measure the impact of that. People say 

I am not going to the United States because I have to stand in 

line? 

Mr. KLEIN. That is a very fair question, Congressman. I think 

there is two things here. And I think from an industry perspective, 

the view would be in the United States we should be able to do this 

really well, and we should welcome guests into the country. And 

people are coming here, they are spending about $4,000 a day. And 

when they get here, it drives jobs. We think the numbers are 

around for every 33 visitors we get, there is a job creation, one job 

created for every 33 visitors. To measure the exact impact is difficult. But the industry has done research around barriers to wanting to visit the United States. And one of them is perception of 

whether we want people to come here, and whether we are welcoming them, and then what the experience is when they get here, 

what the hassle factor is in coming through Customs and Immigration. And it is a factor in people’s decisions when they have choice. 

Mr. MCDERMOTT. Thank you. 

Chairman BRADY. Thank you, Mr. McDermott. Mr. Reichert. 

Mr. REICHERT. Thank you, Mr. Chairman. And thank you for 

your testimony and your patience this afternoon. As I mentioned 

earlier, I am on the President’s Export Council, and the cochair of 

the Goods Movement Caucus. And there is a challenge in educating 

people on the need—well, on the benefit that services provides and 

enables and facilitates trade of manufacturing goods and agricultural goods. So I want to focus a little bit on how services exports 

facilitate trade in other U.S. sectors. 

And so just to Mr. Klein real quick, you have explained how services such as those offered by Sabre enhance the efficiency of airVerDate Mar 15 2010 03:57 May 29, 2013 Jkt 080457 PO 00000 Frm 00074 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\80457.XXX GPO1 PsN: 80457

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lines, and how this both aids U.S. airlines exports and facilitates 

tourism and travel to the United States. But how could a services 

environment help a company like we have in Washington State 

called Boeing? 

Mr. KLEIN. Sure. Thank you, Congressman. I think there is a 

couple ways. One, the optimization software that we sell to airlines 

helps them either optimize revenues or reduce costs. And healthier 

airlines are more likely to either refleet, modernize their fleet, or 

hopefully in a best case scenario, grow their fleet. I have a current 

example, a recent example at Aerolineas in Argentina, where they 

frankly didn’t have the capability internally with their current systems to make some of those long-term fleet planning decisions and 

to decide what markets, what new markets might be profitable to 

fly into. We installed a series of operations software there, we put 

consultants on the ground to help them use it, and they now do 

have a fleet plan that also led to a commercial decision to join the 

Sky Team Alliance, which Delta is the big partner in that alliance, 

which adds 4,000 destinations in Argentina for Sky Team. It adds 

lots of options for Aerolineas coming north. Aerolineas is primarily 

a Boeing fleet. They do have a small aircraft fleet 190 or so 

Embraers who all have GE engines on them. And they are going 

to be in the process now of modernizing and also expanding their 

fleet in response to some of the intelligence they have gotten out 

of the systems we have provided. Those are just decisions they 

wouldn’t have been able to make without our tools or potentially 

some of our competitors’ tools. 

Mr. REICHERT. I think it is important to note that I think Mr. 

Fessenden said that 30 percent of your business is services. So your 

employees understand it, and I think most of the employees at the 

companies that you represent understand that services is a key 

part of your business. How do we get that message out to the rest 

of the country is my question. And I don’t have time for you to answer it. But I look forward to visiting with you maybe in the future. 

Thank you, Mr. Chairman. 

Chairman BRADY. Thanks, Mr. Reichert. 

Mr. HERGER. 

Mr. HERGER. Thank you, Mr. Chairman. I appreciate hearing 

the panel’s experience on the role foreign direct investment plays 

in allowing your companies to export around the world, and how 

it impacts jobs in the United States. And in your experience, have 

you found that making investments abroad has helped or hurt your 

ability to create jobs here at home? 

Mr. BRUTTO. I guess I will answer that. Simple. For UPS, every 

22 packages that we export out of the U.S. creates a full-time U.S. 

job. So the simple math. The more we export out of the U.S.—and 

by the way, we started our international business essentially in 

1975 in Canada, and in 1976 in Germany. And we he have created 

literally thousands of U.S. jobs. And it is simple. I am overseas all 

the time. That is where I spend most of my time. I primarily work 

with companies to accept U.S. packages, as well as send their packages to the U.S. market. But a simple thing for us is 22 packages 

equals a full-time job. 

Mr. HERGER. Anyone else? 


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Mr. KLEIN. Yes, at our company, in our software business most 

of our growth is international growth, ex-U.S. growth. On a 20 percent growth rate, we will increase jobs by about 10 percent. Half 

of that 10 percent will be in the United States. And as I said, those 

are $87,000 a year jobs on average. So it is good job growth whenever we get points of growth outside the U.S. 

Mr. FESSENDEN. Congressman, I would just like to add that, 

as I mentioned, 100 percent of our gas turbines and steam turbines 

manufactured in Schenectady, New York, and Greenville, South 

Carolina, and the 250 small and medium businesses that support 

our supply chain in the U.S. all were exported. And then we have 

20 to 30 years of service revenue that will take parts that are manufactured from that supply chain and export them. So it is extremely important and supportive of U.S. jobs. 

Mr. LAKE. If I may just jump in to make a comment on this as 

well. As I mentioned, in Japan we are generating $18.4 billion in 

revenue. Of that, pretax operating earnings that same year is $3.8 

billion. Of that, 80 percent on average we repatriate back to the 

United States, which are reinvested in building our infrastructure 

here as well. So that is how we generate jobs as a company, as 

Aflac agents, and so on. 

Mr. HERGER. You know, I might mention something that you 

are already aware of. What you have just said is not getting out 

to the American people. You know, when they hear and are aware 

of jobs going abroad, they assume we are losing American jobs. So 

I don’t know what it is collectively we need do as businesses to get 

this message out, but it is imperative to be able to allow us in the 

Congress—some of us are already with you—but certainly in the 

Congress to be able to make sure that we do this. Maybe a last 

very quick one. I am interested in hearing from the panel about the 

types of nontariff barriers you encounter that undermine your ability to export services. 

Maybe specifically, Mr. Lake, would you start off with what Aflac 

faces in Japan? 

Mr. LAKE. I mentioned in my testimony two issues with respect 

to inside the border measures that affect our business. Certainly 

the state-owned enterprise issues that go beyond banking, insurance, express delivery as well, and how in an integrated way they 

create challenges for us. And I think that the key to understanding 

that is it is not even foreign versus domestic, it is private sector 

versus government-owned entities. That Banking Association of 

Japan, Life Insurance Association of Japan all very much want the 

same outcome, which is level playing field. And so this is very different from the kind of trade friction issues that we had 20, 30 

years ago that warrants a strategic approach. And it is, again, not 

only in Japan, but it is in Korea and China. So those are the examples that I would cite. 

Mr. HERGER. A very important hearing, Mr. Chairman. Thank 

you very much. But these are certainly issues that we as a Congress need to really concentrate. And of course we are talking with 

our allies, with our good friends, but yet we need a level playing 

field. Certainly the American people are demanding that. So thank 

you very much. 


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Chairman BRADY. No, thank you, Mr. Herger. Mr. McDermott 

is recognized for a deeply probing question. 

Mr. MCDERMOTT. I don’t know if I can rise to that level. 

Mr. Lake, I want to hear about Japan Post. I have been over 

there and I have talked to them and talked to the Japanese Members of the Diet about these whole issues. From your point of view, 

explain to us what it is that makes it hard for you to do business, 

a service business in Japan in competition with the Japan Post. 

Mr. LAKE. We as a company believe that we can compete with 

anybody as long as the playing field is level. And from that point 

of view, what are the advantages that Japan Post has that we do 

not? Japan Post is allowed to operate a banking holding company, 

insurance holding company in a way that we certainly wouldn’t. 

There are a number of measures that are applied to Japan Post in 

a way that they are not applied to any other private sector, not 

only Aflac. So at the end of the day, if you go through all these 

measures that are applied, they are gaining advantages that no 

private sector company has, which gives them, with respect to capital, with respect to regulation, with respect to operating throughout Japan, the kind of advantages that no one has. 

So it is not a question of ownership, but it is the specific measures that are applied to help then gain the competitive advantages 

that they have. That is part of the reason why, as I mentioned earlier, that domestic companies just last week as well as this week 

issued statements again calling for level playing field, and not allowing expansion of business because it is so huge, it is so difficult 

to compete with those advantages that I just talked about. And I 

think, as you know better than anybody else, this Committee has 

expressed concerns the past 10 years. The executive branch has as 

well. And I think we are coming to that point, in which they are 

about to expand further, that warrants appropriate response of this 

Committee as well as the United States Government, in our view, 

to deal with those issues. 

Mr. MCDERMOTT. Thank you. 

Chairman BRADY. All right. Thank you, Mr. McDermott. I think 

I speak for more than myself in saying this hearing has been very 

helpful in helping us document what a great opportunity you have 

at hand. By negotiating an International Services Agreement, we 

can expand our services sales around the world and rev up this 

great engine of U.S. job creation. 

I want to thank each of the witnesses for their patience, for their 

insight, and for your ongoing work in keeping America globally 

competitive. I want to invite all of you to join me in enthusiastically supporting the work the USTR is doing to move forward with 

establishing an ISA. 

Our record is open through October 4, 2012. I urge interested 

parties to submit statements for the record. On that, this hearing 

is adjourned. 

[Whereupon, at 5:45 p.m., the Subcommittee was adjourned.] 

[Submissions for the Record follow:] 

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Coalition of Services Industries 1 


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I Coalition of Service Industries 

FOR THE RECORD 

An International Services Agreement 

Advancing Uberalization Using a Next-Generation Plurilateral Approach 

January 19, 2012 

The enormous promise of open global markets for services trade and investment remains to be 

fulfilled. It is imperative that the international community now actively formulate an effective 

strategy to deliver new services trade and investment liberalization as part of a broader strategy 

to renew global economic growth. Two fundamental changes require this new and more focused 

approach. 

First, ways and means of doing business in the 21" century global economy - and new barriersare evolving much faster than the ability of traditional multilateral trade and investment 

negotiations to keep pace. For example, the Internet integrates services and manufacturing 

and, as a result, adds value throughout global supply chains and creates tremendous growth in 

cross border trade. 

Traditional barriers to services trade are stili very important. Equally important is creating an 

environment which enables technology-driven services trade and investment For example, 

securing the ability to send and receive data over reliable networks is essential to facilitating 

cross-border trade in services since most such trade is, at its essence, the exchange of data. 

Manufacturing also depends on the transfer of data across borders. Other complex issues like 

the role of state-owned enterprises and regulatory coherence must also be addressed. 

The very great promise for the US economy of open global markets for services direct 

investment, supported by a recent working paper by the US International Trade Commission 

staff, is only partially fulfilied. The international community must now devise an effective vehicle 

for delivering new services trade and investment liberalization that responds to the realities of 

this century's global business. 

Second, it has become clear that the traditional approach to services liberalization through 

multilateral negotiations in the WTO is not welcomed by ali its Members at this time. The WTO 

does, however, provide a useful framework on which those who are interested in moving 

forward can build. 

These two fundamental factors mean that the United States and others committed to 

liberalization in the international community must find additional global pathways to develop 21" 

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century trade and investment rules for services. While the U.S. is vigorously pursuing cutting 

edge services liberalization in very important bilateral and regional free trade negotiations. these 

efforts should be complemented by exploring how to bring together the largest group of 

countries willing to work on the services trade and investment issues that spring from the 

realities of the new economy. 

Alternative Pathway 

In its January. 2009 paper titled "Forging the Way to Growth: Expanding World Markets for 

Services". CSI supported the Doha Round but recognized that if it could not fulfill its promise for 

services. "alternative pathways" should be considered. including under the auspices of the 

World Trade Organization and the General Agreement on Trade in Services (GATS). One of the 

most promising of these is the idea of a services "plurilateral" agreement pursuant to Article V of 

the GATS. 

What Do We Mean by"Plurilateral"'? 

This type of plurilateral (the term can refer to several types of agreements) is an agreementessentially an FTA - among a group of countries. the benefits of which apply only to the 

participants, not to all WTO members. Article V permits such preferential agreements if they 

satisfy several baseline standards: the agreement (1) provides substantial sectoral coverage, 

(2) makes no a priori exclusion of any sector or mode of supply, (3) provides for the elimination 

of existing discrimination, and (4) restricts the introduction of new discriminatory measures. To 

help meet the Article V requirement that the agreement cover "substantially all" service sectors, 

negotiations would use a negative list approach where all services are covered by the rules of 

the agreement, unless specifically excluded. This would be a major advance above current 

practice under the GATS where services commitments are based on a positive list approach 

which allows countries to bind selected sectors while excluding a tremendous amount of 

services trade from GATS disciplines. The agreement would of course be open to all who wish 

to join it provided that they can meet its standards and satisfy any other requirements 

established by the parties to the new agreement. 

The Advantages and Scope of a Such an Agreement 

Such a plurilateral, which we call an International Services Agreement (ISA), would be a means 

of achieving, with a number of countries representing a very substantial volume of services 

trade, multiple objectives which cannot be achieved through WTO negotiations in the 

foreseeable future: 

Providing additional motivation for compliance with current WTO obligations 

Legally securing or "binding" existing, "autonomous" liberalization among the parties. 

Obtaining new, bound market access, using the deeper commitments obtained by FTA 

agreements. 
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The ability to pursue on a broader global basis, the new, more complex "next generation" 

issues that have grown in importance over the past 10 years, that we are currently 

pursuing in bilateral and regional agreements, including provisions to address 

restrictions on flows of data, the location of the infrastructure necessary to facilitate 

these flows, forced localization of business functions that can best be provided globally, 

and the increasing problems of competing with state-owned enterprises engaged in 

commercial activity, 

Achieving a Critical Mass of Participants 

An ISA would create a new dynamic to attract willing countries to a services agreement that is 

more comprehensive, and with deeper liberalization commitments. If the participating countries 

represent a large majority of global services trade, they would constitute a critical mass that 

would be a powerful incentive for some of the recalcitrant emerging market economies to join. 

This is the phenomenon that is now occurring in the TPP. The initial group of 5 countries has 

grown to 9. and now Japan. Mexico and Canada have expressed interest in joining the 

negotiating group. It is our hope that this plurilateral will help convince the emerging markets of 

the value of service trade and investment liberalization and provide an incentive not to be 

excluded. 

Importantly. an ISA would complement and supplement efforts to achieve high level 

commitments on services and investment issues in TPP and other comprehensive FTAs by 

"plurilateralizing" with a larger group of countries the best of what we have and are achieving in 

bilateral and regional agreements. This, in turn, could create a more dynamic and positive 

environment in WTO negotiations and new FTA negotiations. By consolidating the 

achievements from the myriad of bilateral FTAs into a single, multiparty framework, it would 

establish an FTA-plus level of market access as the norm rather than the exception. It would 

also demonstrate that open markets can be achieved quickly rather than incrementally. 

The ISA would be a major step toward integrating a very large number of existing FTAs. When 

negotiated among an initial group of countries, it could provide a platform which would create 

economies of scale in global services liberalization whereby new members could secure the 

benefits of liberalization of many FTAs through a single negotiation. The plurilateral agreement 

should be structured in such a way as to facilitate the entry of additional members over time, 

such as by using WTO-agreed provisions wherever possible and clearly identifying those steps 

necessary to dock into the agreement." 

With EXisting and Growing Support 

Finally, this idea has been endorsed by the APEC Business Advisory Council (ABAC), which 

called on APEC to incubate the idea of stand-alone services negotiations, and to build the 

critical mass necessary for them to commence. The Pacific Economic Cooperation Council and 

the Asian Development Bank Institute (PECCIADBI) Taskforce on Services has likewise called 

for future services negotiations to be organized on a stand-alone, plurilateral basis, noting that 
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78 

Coalition of Services Industries 2 


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FOR THE RECORD 

Submitted by: The Coalition of Service Industries 

1090 Vermont Ave., NW; Washington, DC 20008 

289-7460 

Services Trade Liberalization as a Foundation of Global Recovery 

Edward Gresser 

Director, Progressive Economy Project, Global Works Foundation 

for the Coalition of Service Industries 

February 24, 2012 

Searching for growth in the aftermath of the 2008 financial crisis, governments, 

businesses, and academics often see exports and trade as central to a healthy 

recovery. But policy has struggled to respond, and the world's major negotiating 

forum - the WTO's Doha Round - has been stalemated for a decade. In these 

circumstances, the world needs an agenda uniting major economies willing to work 

together for their own benefit and for the common good. A determined effort to 

open services trade is an attractive option, holding potential to: 

Spark growth by helping exporters in the United States and elsewhere tap 

pent-up demand for information, innovative health and financial services, 

and promote investment in communications, physical infrastructure, and 

other high-employment, productivity-increasing parts of the economy; 

Bolster market confidence during a period of global economic weakness; 

Over the long term, promote employment through direct investment, support 

development as low-income farmers and entrepreneurs get easier access to 

customers and capital, and raise living standards by reducing transactional 

costs that raise prices for families. 

This hope rests on simple facts about the global economy and the global trading 

system. Since the world's services sector is so big - responsible for 70 percent of 

world output, and employing a similar share of workers - a policy that helps 

services grow will be a good way to create growth and jobs in general. And since 

WTO rules today do less to guarantee predictability and open markets in services 

than in manufacturing, farming, or resource industry, opening services trade and 

investment can be a powerful way to help services grow. 

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This paper aims to help create the intellectual case for such an initiative, rather than 

to define a detailed agenda. But the outlines of a program for both mid-term 

recovery from crisis and long-term growth are not dim cult to suggest in principle. 

By topic, it would address both traditional negotiating topics and emerging 21"-

century issues related to the Internet and trade facilitation. By venue, it would rest 

upon a plurilateral agreement under Article V of the General Agreement on Trade in 

Services, but also extend to ongoing trade negotiations, for example in the TransPacific Partnership talks, the Obama administration's initiative for the Middle East 

and North Africa, the Transatlantic Economic Council with the European Union, and 

other fora as welL In general it would set four goals: 

Open markets, or at minimum preserve existing level of openness to trade in 

services; refrain from introducing new discriminatory measures, including 

nationality or local content requirements; and address a 'negative list' of 

sectors, that is all services industries other than those participants 

specifically decide to exclude. 

Commit to provide transparent, impartial services regulatory regimes, 

including competitive neutrality in regulation of state-owned and statesupported enterprises. 

Seek open, non-discriminatory services investment climates with no 

restrictions on foreign equity, juridical form or number of service suppliers; 

Create strong rules to ease the flow of services and data across borders. 

To make this case, this paper draws on new research examining American services 

industries, but illuminating opportunities common to many countries. It addresses 

the following topics: The scale of services as employers, producers, and exporters; 

the tradeability of services and the nature of cross-border services trade; the 

implications of foreign direct investment in services; and the barriers to services 

trade and options for addressing them. 

I: SERVICES IN THE GLOBAL ECONOMY 

{1J Scale: First, services are a powerful opportunity for growth and job creation 

because they are so big_ They account for most of the world economy, and they 

employ most of the world's workers. They are also a powerful indirect way to 

promote healthy manufacturing, resource, and agricultural industries, because any 

complex goods-producing industry needs an efficient services sector to succeed. 

Services make up most of the world economy: The World Bank's annual World 

Development Indicators survey reports that services account for 70 percent of 

world GDP, up from S9 percent in 1990, and 64 percent in the millennial year 

2000. ' This is true for the United States as well as the world at large. 

American private-sector services output was $9.95 trillion in 2010 - 80 

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percent of America's private-sector GDP,' and fully 16 percent of world 

economic output.' Figures differ only by degree between rich, middleincome, and poor countries - services are smaller shares of developing 

economies, but above 60 percent of economic output for tbe developing 

world as a whole and rarely below 50 percent for any individual country, 

Services are the world's main employers and create most new jobs: Of the 

world's 3,2 billion-strong labor force, about 60 percent of men and 70 

percent of women work in services, Services industries employ 95 million of 

America's 110 million private-sector workers - again about 80 percent of the 

total, and more than 75 percent of workers in every Congressional district4 -

in jobs at all levels, from teenagers taking their first jobs in hotels and 

restaurants, to skilled blue-collar workers in logistics and 

telecommunications, to professional work in engineering, the professions, 

tinance, and science. And as we will see below, at least in the United States 

exporting services industries employ more people than work in factories, 

farms, and mines combined. 

(2) Complementarities with industry: Second, efficient services industries are 

essential to efficient goods production. 

Services help produce advanced consumer goods: The 1958 essay "I, Pencil: 

My Family Tree," hoping to educate the public on the complexity of global 

manufacturing, defined a first-grader's pencil as a combination of graphite 

from Sri Lanka, rapeseed oil from Java, cedar wood from Oregon, and pumice 

from Italy, all processed in a California factDlY - and brought together by a 

sophisticated shipping and logistical industry; shaped by machines designed 

by researchers and engineers to shape wood, insert molten graphite, and 

shape a device easily used by the fingers; and kept stable by the financial 

services and telecommunications that provide credit and coordinate delivery. 

Important to manufacturing then, services are all the more so today. The 

global economy of Eisenhower's age, complicated as it may have been, was a 

world of one container ship able to carry 58 standard shipping containers, 

five satellites, and a single copper transatlantic telephone cable able to carry 

36 telephone calls simultaneously. The modern world is linked by 5,000 

communications satellites, tiber-optic cables to every continent, thousands of 

daily air-cargo flights, and a shipping industry moving 14 million containers 

every day. And the 6-year-old of 1958, drawing witb a pencil on paper, is the 

technophile Baby Boomer of today. Her tablet computer is a small, 

apparently solid device - but actually a combination of extraordinarily 

complex software and parts fitted preCisely together. 

To produce such a thing requires a services system as far beyond that of her 

childhood as a tablet is beyond a pencil. The device is a symbiosis of 

American engineering, software and design, Taiwanese manufacturing 

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technique, Chinese assembly - and a logistical network involving trucking, air 

cargo and sea freight, coordinated by computer to deliver of millions of tiny 

parts at precise times each day, pick up completed goods from factories, 

convey them to ports and container ships in time to meet inventory 

schedules set by retailers worldwide, monitor production and delivery 

through 'cloud' computing, and coordinate credit and payment across a value 

chain using hundreds of firms. 

Services bring the world high-quality food: Modern agriculture likewise 

requires a sophisticated system of services. With an efficient logistics 

network - air and sea transport, computerized deliveries, cold-storage chains 

linking farms, ports, and buyers - American wheat and pork arrive daily in 

China for noodles and soups, Colombian flowers reach Chicago florist shops 

for Valentine's Day, and Norwegian smoked salmon appears in Bangkok 

hotels. Without competitive logistical services, a third of India's fruit and 

vegetable crop - for example, 10 million of 26 million tons of bananas -spoils 

between farm and market. This means lost income for hundreds of millions 

of Indian farm families, coupled with high food prices for India's urban poor, 

who spend pay 49 percent of their income on food.' 

(3) Services help raise living standards: And just as closed services markets and 

monopolies otten mean lower incomes and higher costs of living, the capacity to tap 

information flows, capital, and logistics are powerful ways to improve life for the 

poor and the middle class. 

Services promote development: Fishermen and farmers in poor countries and 

small island states use PDAs (personal digital assistants) to tap the Internet 

to track the weather and fishing stocks to avoid delays in marketing their 

goods, take out insurance poliCies on boats and small equipment purchases, 

or find micro-credit from on-line charities. Families in rural areas and urban 

slums, with a cell phone and a suhscription, can maintain constant contacts 

with clinics when a child or elderly relative is sick and requires monitoring 

over time, or alert caregivers to an accident. In these circumstances, market 

opening often brings rapid and large scale results; one consequence of Indian 

liberalization in insurance, for example, is that 42 million Indians have taken 

private life insurance policies since the sector opened in 2000. Governments 

too use sophisticated services to improve public services while reducing cost: 

Brasilia's capital police force, for example, uses cloud computing to create an 

'electronic police station' that allows the public to instantly report accidents 

and crimes, with the information routed immediately to police on duty.6 

Services help middle-class families and shoppers: For middle-class families in 

rich and poor countries alike, cloud computing, express-delivery firms, and 

technical innovation all unite to stretch family budgets an improve peoples' 

lives. On-line auctions and stores enable individuals and families to compare 

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prices not only in local stores but also world-wide, find in minutes precisely 

the gift or necessity they need, and have it delivered to their home. 

II. "TRADEABILITY" OF SERVICES AND CROSS-BORDER TRADE 

Services are big; services are important; services have value for the poor and the 

middle class. How do services trade and services trade policy help them grow? 

Services trade in fact has great potential to drive growth - both through exports and 

through the release of pent-up domestic demand - and services trade policy has 

great potential to increase trade. 

A. Many Services are Highly "Tradeable" 

Many assume that services industries are not natural exporters. This is normal, 

since many of the services businesses one meets in daily life don't export. While a 

few restaurants, construction companies, hospitals, retail stores, and private schools 

are large enough to operate on global scales, most such businesses will always be 

local, relying on a small base of personally familiar customers. But many of these 

businesses can export as a secondary matter. A university can use on-line courses 

to teach students through distance education, while a hospital can offer radiological 

readings and monitor prescription use via telemedicine. And industries such as 

entertainment, financial services, computer and data services, and many others are 

as natural exporters as are car factories and wineries. 

A rigorous look at services trade, done in 2011 by Dr. Bradford Jensen of 

Georgetown University explains in detail. Jensen's Global Trade in Services: Fear, 

Facts, and OfJshoring defines and categorizes easily exported services in a strikingly 

original way, using a relative concept of "tradability" by looking at services which, 

within the United States, are bought throughout the country but produced in great 

quantities in a few places. If services are often bought in places where they are not 

made, they can also be sold across borders and are natural exporters. 

By way of physical-goods analogy, clothes are worn and bricks used everywhere in 

the world, but clothes are highly tradeable and bricks less so. China and Vietnam 

make clothes in larger quantities than they need; Danes and Australians wear lots of 

clothes but make few. The production and use patterns show that clothes are highly 

tradable, and suggest (correctly) that Danes and Australians often wear clothes 

made in China and Vietnam. But bricks - in the United States as in Bangladesh, 

Paraguay and elsewhere - are usually made close to sites at which they will be used, 

as bricks are heavy, cheap, and relatively costly to ship over distances. The United 

States imports only 1 percent of the bricks it uses, and exports only 2 percent of the 

bricks it makes. 7 

Services are no different in principle, even if their output is weightless. Beauty 

services, produced everywhere and used at the point of production, are difficult to 

trade. Movies and news programs, often filmed in Los Angeles and New York, are 

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viewed nationwide in digital and broadcast form and are easy to export, assuming 

an open world market and a sophisticated telecommunications system. 

Jensen identifies 27 especially easily traded services industries, with 6 receiving 

ratings of "3," meaning most easily exported. These are movies, music, software, 

"other information services" (dominated by Internet service providers), high-level 

financial services such as secnrities trading and mutual fuud management, scientific 

research and development. Another 21 industries receive a "2" rating, meaning 

moderately tradable. These include insnrance, architecture, independent artists, 

advertising, telecommunications, and many others. Altogether, Jensen finds that 

these industries employ 18.4 million Americans, about 3 million more than work in 

manufactnring, agriculture, and resonrce industries combined. 

TABLE 1 

Industry 

S%vare: 

internet Services Providers: 

Finollcial Services: 

Motion pictures: 

Call centers, travel baokiflg: 

SOME HIGHLY TRADEABLE SERVICES INDUSTRIES 

Production Centers 

Production concentrated in Seattle, Boston, 

San Francisco/Silicon Valley, Raleigh-Durham 

San Francisco/Silicon Valley 

New York, Boston 

Los Angeles 

North Dakota, South Dakota 

JelJsen, Global Trade in ServiCt'~' rt'ar, Facts, and Offshonng, Peterwm lnstitut" jiJr lnternatinnul F:collomics, 2(Jll. pg, 45. 

These tradeable services industries, incidentally, turn out to be very good places to 

work: they are large employers, pay well, offer safe places to work, and weathered 

the Hnandal crisis better than most businesses. They pay their workers an average 

annual salary of$66,540, which is about 20 percent above the $53,000 national 

private-sector average. 8 They suffer less than half the rate of on-the-job illnesses 

and accidents than America's economy-wide average. 9 And their record as jobcreators - especially the six industries rated "3" - has been strikingly good during a 

difficult period for the U.s. economy. 

TABLE 2 TRADEABLE SERVICES INDUSTRIES AND U.s. EMPLOYMENT, 2007·2012 

Industry Jan. 2007 Jan. 2012 Change 

All pnvate-sector 115.0 million 109.9 million -5.1 million / -4.5% 

"2" services industries 13,66 million 13.24 million -OA2 million I -3.0% 

"3" services industries 2.11milIion 2.18 million +70,000! +3.3% 

Softvofare publishing 248,000 270,000 +22,000 

Sccunticsfcommodlty trading 837,000 802,000 -35,000 

Sncntiflc R&D 528,000 573,000 +45,000 

Movies & sound fecording 378,000 371,000 -7,000 

"Other information services" 120.000 165,000 +45,000 

All other industries 99.2 million 945 million "4.7 million / -4.7% 

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ii. Services Exports are Growing 

Many services industries therefore are highly tradeable in principle. The rapid 

development of global telecommunications and the Internet is making them steadily 

more so. Each year, services trade via the Internet grows cheaper and easier, as 

communications technology, the lnternet, and cloud computing systems all improve 

and the global on-line public - the equivalent of the world market for digitally 

transferred information - grows larger. 

The international phone call, in essence a small cross-border transfer of data, 

provides a simple and convenient measurement. Since the year 2000 - a rough date 

for replacement of the old copper-cable network by modern fiber-optics - the cost 

of an international phone call from the United States has dropped from 50 cents to a 

dime per minute, or by 80 percent. 10 As capacity has grown and prices fallen, the 

world's on-line public has grown from 300 million to over 2 billion, and information 

flows have grown at rates said by academic studies to be at 20 to 30 percent per 

year. These are the digitized versions of the images and sound that make up news 

and entertainment, payment of insurance claims and premiums, and the ecommerce orders between manufacturers or between shoppers and retailers. 

The results are anecdotally obvious in industry and daily life alike. iTunes 

downloads, diagnoses delivered via telemedicine, news alerts arriving at computer 

terminals or TV screens, architectural blueprints bought by real-estate developers 

in Dubai and Shenzhen, pension accounts managed by New York financial 

industries, are all examples. How significant are they? Systematic data from the 

U.S. Department of Commerce and the World Trade Organization, published for the 

U.S. since 1986 and the world since 1999, suggest two points of reference. 

(1) Services exports are growing. For the United States, cross-border exports of 

business services have risen by about $200 billion, or from 8 percent of total exports 

in 2000 to 12.5 percent in 2010. For the world, growth as a share of world output 

has been only slightly slower, with business-service exports rising from 8.3 percent 

of the global total to 10.9%. The United States, as the largest exporter of business 

services, has had the most growth in absolute terms. But American export growth 

has been essentially average for the world, and export totals for many developing 

countries have grown even faster. India receives the most publicity but services 

exports from the Philippines, Morocco, Kenya, Georgia, Panama, and others have 

grown almost as rapidly as India's. 

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TABLE 3 U.S. Services Trade Growth 1990-2010 

1990 2000 2005 

US GDP $5,800 $9,950 $12,625 

Total Exports $535 $1,075 $1,285 

Services Exports $148 $281 $363 

Transport $43 $46 $53 

"Business services" $42 $80 $140 

"Business services" export share 8% 8% 11 % 

Source: Bureau of Economic Analysis, at http://www.bea.gov/internatianal/internationatservices.htm 

TABLE 3a World Commercial Services Trade Growth 2000-2010 

2000 2005 2010 

WorldGDP $32,216 $45,525 $62,911 

Total Exports $7,669 $12,655 $18,045 

Services Exports $1,483 $2,496 $3,695 

"Business services" $640 $1,160 $1,968 

India $16 $52 $123 

Georgia $0.2 $0.6 $1.5 

Morocco $3 $7 $12 

Philippines $3 $5 $13 

Panama $2 $3 $6 

Kenya $1 $1.5 $3 

United States $80 $140 $230 

Thailand $13 $20 $34 

Costa Rica $1.9 $2.6 $4.4 

South Africa $5 $11 $14 

United Kingdom $119 $204 $227 

Jamaica $2.0 $2.3 $2.7 

"Business services" export share 8.3% 9.2% 10.9% Source: World Trade Organization, trade statistics reports for 2001, 2006, and 2011. 

2010 

$14,525 

$1,835 

$530 

$70 

$230 

12.5% 

Growth 00/10 

95% 

135% 

150% 

210% 

670% 

650% 

300% 

330% 

200% 

200% 

190% 

160% 

130% 

130% 

110% 

35% 

(2) But services exports are low: Big as these numbers seem, though, they are 

smaller than they ought to be. America's $530 billion in services exports is a large 

figure - more than the combined total of 2nd -ranked Germany and 3rd -ranked Britain 

- but it is less than 3 percent of America's $16 trillion in gross services output. The 

$230 billion in exports of finance and insurance, information, business, professional, 

and technical services is only slightly higher, a bit above 3 percent of the $6 trillion 

in gross business-service output. By contrast, manufacturing exports run at 18 

percent of gross output for America, and agriculture's figure is close to 30 percent. 

Global breakdowns by industry-sector are not so fine and less easily tracked by 

gross output, but appear similar. 

TABLE 4 

Sector 

U.S. Private-Sector: 

Agriculture/fishing 

Manufacturing 

Services total 

Business Services 

Resources 

U.S. Output and Exports: Services, Manufacturing, and Agriculture 

Gross Output, 2010 

$25.81 trillion 

$0.37 trillion 

$4.83 trillion 

$16.37 trillion 

$6.13 trillion 

$4.24 trillion 

Exports 2010 

$1.820 trillion 

$105 billion 

$885 billion 

$530 billion 

$230 billion 

$42 billion 

Export Share of Output 

7.0% 

28.0% 

18.0% 

3.2% 

3.8% 

1.0% * Bureau afEconomic Analysis for Gross Output by Industry and for services exports; Census tor agricultural, manufacturing, and 

resource trade data. Note that "Gross Output" is not a value-added measure, but the output by value of each part ofa sector. Thus 

it is larger than GDP. 

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TABLE4a 

Sector 

World GOP 

Manufachlring 

Agriculture 

Services 

GDP. 

World Output and Exports: Services, Manufacturin~ and Agriculture 

GDP2010 Exports 2010 Export Ratio 

$74.4 trillion $18.05 trillion 24% 

$15.6 trillion $9.96 trillion 64q/o 

$2.2 trillion $1.36 trillion 61% 

$52,1 trillion $3,70 trillion 7,0% 

Thus services exports remain far below their potentiaL Jensen estimates that if the 

tradeable services industries exported in proportion to this potentia\, US services 

exports could be about $860 billion above their current level - that is, roughly $1-4 

trillion, rather than the $530 billion recorded for 2010, Employment-to-output 

ratios suggest that this would likely mean a net addition of about three million more 

jobs, A similar calculation for the world as a whole yields a figure of $15 trillion in 

exports - roughly a quarter of current world economic output, and a massive 

stimulus for employment in Europe, India, high-income Asia, the Philippines, the 

Caribbean, and many other parts of the world, 

III. SERVICES AS CROSS-BORDER INVESTORS 

This potential for growth in cross-border exports is intimately linked to crossborder services investment, and a successful services initiative will need to address 

both, 

i. Scale of Cross-Border Services Investment 

The large role of services in cross-border investment is again familiar from daily life 

- and perhaps more so than cross-border services trade, An American household 

may choose to subscribe to a French cable channel, and an American company may 

arrange a relationship with Taiwanese researchers - but either requires an act of 

will and a conscious choice. Contact with foreign services investors, by contrast, 

often proceeds entirely unnoticed - as Americans deposit paychecks in Britishowned banks, buy groceries from Australian-owned shopping malls, and place calls 

via Scandinavian telecommunications networks, American services investment 

abroad is similar, ranging from the American Hospital of Dubai's specialist care in 

the United Arab Emirates, to management courses at the Johns Hopkins University 

Nanjing campus and lingerie sales at the Victoria's Secret shops in Toronto's Eaton 

Mall and Yorkdale Shopping Centre. 

Again more systematic figures back up impressions from daily life, The basic data 

here are from the Commerce Department's Bureau of Economic Analysis for the 

United States, and from UNCTAD for the globe. UNCTAD's figures find world 

services direct investment stock at $113 trillion in 2010, or nearly two-thirds of the 

world's $18 trillion in total FDI stock, as against $4.6 trillion in manufacturing and 

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$1.4 trillion in mining and energy. This fraction appears to be stable overtime. 

World FDI flows io 2010 were $1.75 trillion. with $1.11 trillion of this coming from 

services industries. Most of this is in rich countries - UNCTAD's figures find 

developed-world markets holding over 70 percent of services FDI and much of the 

rest in wealthy "developing" destinations including Hong Kong, Korea, Taiwan, and 

Singapore.!! 

TABLE 5 World FDI by Sector 

Total 

World $17.95 

United States outward $3.91 

United States inward $2.34 UNCTA.D, World Investment Report 2011 

Services 

$11.30 

$1.62 

$1.59 

Manufacturing Energy 

$4.96 $1.69 

$0.59 $0.16 

$0.75 n/a 

BEA's figures for the United States track this global pattern. (With the 

methodological difference that BEA counts 'holding companies,' which can operate 

affiliates in a number of different sectors in a separate category accounting for $1.6 

trillion out of$3.9 trillion in FDI stock abroad.) Of the total, natural-resource 

investment stock is $0.18 trillion, manufacturing $0.59 trillion, services $1.62 

trillion, with the largest shares going to financial services and information 

industries, and holding companies at $1.6 trillion.'" Foreign investment patterns in 

the United States are similar, though with a slightly higher share for manufacturing. 

Measured by sales and employment, these projects are large parts of tho world 

economy. BEA's annual report finds U.s.-based services companies operating about 

25,000 subsidiaries abroad, and selling about $1.16 trillion worth of services to 

foreign customers in 2009. This is the eqUivalent of8.3 percent of American GOP, 

and almost 2 percent of world GDP. Most are in rich countries, with western Europe 

in particular accounting for 53 percent of America's overseas direct investment 

stock in services and $623 billion of the $1.16 trillion in sales. 13 

TABLE 6: Sales by U.S. Services-Industry Affiliates Overseas (2009) 

U.S. Ovenieas Services Sales $1.160 trillion 

U.S. Goods Exports $1.070 trillion 

U.S. Services Exports $0.505 trillion 

it Economic Implications of Services Investment Abroad 

What effect do these projects have? Most obviously, they are job creators. BEA 

estimates that foreign services-sector investors employ 3.7 million Americans (in 

2009, the most recent data availahle at this writing). This total includes 84,000 

workers in computer systems design, 400,000 in financial services, 90,000 in 

publishing and 60,000 in telecommunications. Their employers, mainly hased in 

Europe, Canada and Japan, paid $240 billion in wages and benetlts to Americans (an 

average of$65,000 per worker per year), and conducted $10 billion in research and 

development in the United States. 14 

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Equally interesting, services investments seem to have a good effect for employment 

in the investing country as well as the host. Some of this is natural, as new services 

industries often create many associated jobs. The development of on-line auction 

sites, for example, has spurred growth and employment in the express-delivelY 

firms which bring the items one purchases on line to the home. 

An August, 2011, working paper by the International Trade Commission staff 

suggests that FOl-based services sales have another effect - that is, they can be net 

creators of employment at horne as well as abroad, because overseas investment 

projects are bases for large exports of services from parent companies to foreign 

subsidiaries, 

How does one account for thlS positive association between increased affiliate activity and 

domestic employment in U.S. multinational service tinns? Intrafirm exports appear to be a 

key part of the answer. Such exports are conduits for the transfer of intellectual property 

and business services that support day-ta-day operations and production of the final 

services sold to affiliates' local consumers. U.S. parent firms' exports of servIces to foreign 

affiliates totaled $101),1 billion in 2009, or 22.5 percent of total cross-border service exports. 

The majority of these exports were in the form of intangible intellectual property. 

Management and consulting services; research, development, and testing services; and 

financial services were other large SOllrces of intra firm export earnings. 15 

These exports are diverse, ranging from copyright and patent royalty payments 

from foreign subsidiary to home company, to revenue from management and 

consulting, research and development, financial services and so on, The total 

includes $7 billion in telecommunications, or nearly half of total telecom services 

exports; $9.3 billion in exports of research and development, more than a third of 

the $21 billion total; and similar fractions for advertising, management, computer 

services, and other industries, These exports amount to nearly a quarter of 

American services exports. In other words, foreign subsidiaries are some of the 

main buyers of the cross-border services exports discussed above, 

This makes them a stabilizing factor during periods of low demand and recession at 

horne, as services exports remain strong, In good times, they are significant net job 

creators, During the period of the ITC working paper, overseas services investment 

implied a net increase in US employment of 697,000 jobs across fourteen services 

sectors employing about 64 million Americans at home, Thus, if the lTC's computer 

model is reasonably close, their operations abroad meant a net employment gain of 

1 percent at home, This seems credible placed against real-world performanceBEA reports that services businesses with overseas operations added a net of 1.4 

million jobs in the United States between 1999 and 2009, J6 rising from 14.5 million 

workers to 15,9 million workers, as employment elsewhere in the private sector fell 

from 98 million to 96 million, or by about 25 percent, The comparison suggests 

that export earnings from successful foreign operations help to stabilize 

employment at American services providers during a period of slow growth, 

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Beyond the ITCs report, many overseas services subsidiaries are also large 

importers of goods. Health, telecommunications, and retailing are all examples. 

American retailers like Wal-Mart and Limited Brands - or European chains like 

Tesco and Carrdour - operate in dozens of countries, using established and trusted 

suppliers of consumer goods, medicines, and foods in the United States as well as 

local sources. Likewise US-based hospitals have strong relationships with 

American manufacturers of medical devices, medical furniture, pharmaceuticals, 

and likely to use them for their foreign operations. 

A final striking example comes from architecture and building. Specialized New 

York and Chicago architectural firms design most of the world's ultra-tall 

skyscrapers, such as Shanghai World Financial Center, Taipei 101, Burj Khalifa in 

the United Arab Emirates, and Freedom Tower in New York These firms have 

designed 25 of the 37 ultra-tall skyscrapers opening around the world between 

2008 and 2015. J 7 Their long-standing relationships with U.S.-based suppliers of 

glass, hydraulics, and specialized building materials boost exports of these goods 

during construction and afterwards in maintenance. 

iii. Market Barriers and Pent-up Demand 

But the very low level of cross-border services investments in lower-income 

countries suggests that as large as it may appear, global services investment is much 

lower than it could be. Here we find one of the world's major growth opportunities: 

a vast pent-up demand for sophisticated services, which in an opening world could 

Simultaneously contribute to global growth and improve lives within developing 

countries. Three examples: 

India imposes across-the-board foreign equity limits on telecom service 

provision and bans investment in retailing and many transport sectors. Such 

poliCies have direct links to the rural poverty and food spoilage noted earlier. 

Poorer telecom quality means low-income and rural people cannot cheaply 

get information about daily-life needs - from weather reports to on-line 

conversations with hospitals. Limits on insurance trade likewise mean few 

farms, homes, and small businesses in developing countries are insured 

against floods or other natural disasters, which not only raises risks but 

limits entrepreneurialism and business formation. And of course the lack of 

sophisticated retailing and transport services industries, with their 

knowledge of supply-chain management and cold-storage transport of foods, 

is the main reason India suffers the high spoilage of food - and consequently 

the unnecessarily low rural incomes and high urban food costs referenced 

earlier.!8 

Ethiopia bans foreign direct investment in micro-credit, a form of financial 

services directly designed to help the poor in urban slums and rural 

districts. '9 

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Egypt limits foreign equity in construction and transport, meanwhile, are 

deterrents to investment in a labor-intensive sector, in a country where high 

unemployment and weak job creation helped to prompt a revolution in 2011. 

These hlockages are comprehensible in political terms as the result of contlicts of 

interest between relatively small, focused monopoly industries serving as pressure 

groups on one hand, and the much larger but less focused interests oflow-income 

fanners, consumers, and small entrepreneurs on the other. But in practice they are 

powerful ways to frustrate demand for investment in critical sectors, and to reduce 

tlows of capital to people and businesses which could use them well. 

IV: THE INADEQUATE SERVICES TRADE REGIME 

To recapitulate: services are the global economy's largest sector and the largest 

employer. They are essential to the health of modern agriculture and the modern 

manufacturing value chain. The development of information and communications 

technology has reduced the cost of exporting services. And the pent-up demand for 

services of all types can be a principal driver of growth, not only in the United States 

but worldwide, for decades to come. And with services trade and services 

investment alike smaller than they should be, we come to policy. 

Services trade agreements are no longer new and unfamiliar subjects for the world's 

trade negotiators. To brietly recap, negotiators have been working on services n-ade 

since the 1980s, and have some notable achievements: 

The WTO's General Agreement on Trade in Services (GATS) of 1994, which 

created definitions and sets out a rules framework somewhat like the GATT 

agreement of 1947 did for goods, with some limited success in liberalization; 

The WTO's agreements on Financial Services and Basic Telecommunications, 

respectively dating to 1997 and 1998; 

A 'moratorium' on application of tariffs to electronic transmissions over 

networks including the Internet, first agreed upon in 1998 and extended 

continuously since then. 

15 agreements on WTO accession since the conclusion of these two 

agreements. These often (and unlike the GATS commitments of existing 

members) have stronger and more detailed provisions on services market 

access, and cover a series of signiflcant trading economies - including China, 

Taiwan, Saudi Arabia, Vietnam, and Russia - which together cover about 8 

percent of u.s. services trade anel about 12 percent of world services 

imports. 2o 

And separately, the 17 FTA relationships the U.s. has developed over the past 

decade, which generally contain detailed services-trade chapters, create 

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obligations on a 'negative list' basis that include the whole of the services 

sector, and apply to about 10 percent of U.S. services trade. 

These accomplishments provide an important hase of rules and obligations. But 

they remain modest and flimsy in comparison to agreement, covering trade in 

goods - and are growing weaker, as the rapid development of the Internet and cloud 

computing creates new forms of trade. WTO agreements have done less to reduce 

barriers to trade in services - whether border barriers or investment - than for 

manufactured goods or agriculture. Thus large economies otten retain quite closed 

markets. Many economies have missed opportunities to ease access to information, 

improve local and international marketing of farm products and manufactured 

goods. And with the advance of technology, as services trade depends on reliable 

and predictable data flows, data storage, and data transfer, a set of agreements 

dating to the mid-1990s look antiquated. 

i. High and Persistent Market Barriers 

Aaditya Mattoo, lngo Borchert and Batshur Gotiiz of the World Bank have made a 

remarkable attempt to categorize services trade barriers and compare tbeir severity 

across countries. Looking at the information available for five sectors - financial 

services, telecommunications, transport, retailing, and professional services such as 

medicine, architecture, and engineering - and examining barriers to entry, 

operations within a country, and the regulatory environment, they rate 103 

countries on a scale from a to laO of 'openness' to services, with 'zero' entirely 

open and laO fully closed. 

By subject area, the three authors find formal barriers most common with respect to 

direct investment. These range from full bans on investment, to limits based on 

equity caps - that is, legal limits on foreign owners to (say) 49 percent ofa business 

- or numerical and geographical limits, which would mean a service can operate 

only 10 branches or in only 3 of 20 cities. Fewer formal barriers exist to block crosshorder flows of services - but on the other hand, few countries have accepted trade 

obligations in the tleld, meaning restrictions can be applied quickly and 

predictability is absent. 

By country type, the three find rich countries very open to trade and investment in 

tlnance, telecom, transport, and retailing, but often retaining relatively high barriers 

in professional services. Latin American services-trade policy is often comparable to 

rich-world policy (though some individual countries remain quite closed) except in 

telecommunications and financial services. East Asia and Athca are less open in 

general, and especially limited in telecommunications, while South Asia and the 

Middle East are most closed. By country, some samples: 

0-20 - The most open countries land many of the highest-income countries) 

have scores in this range. This range includes United States, Japan, Great 

Britain and New Zealand, all with scores around 20. Interestingly, these are 

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still viewed as more 'closed' than Trinidad and Ecuador, likely because of 

professional standards-setting and limits on temporary migration. 

20-40 - Relatively closed countries include several European states, in 

particular France and Italy, as well as Mexico, Russia, Korea, and a number of 

sub-Saharan African countries such as Uganda, Mozambique, and Lesotbo. 

40-50; More extensively closed economies include Egypt, China, and some 

major Persian Gulf economies such as Kuwait and Saudi Arabia. 

50 and above - These are extenSively closed markets, and include several 

more Gulf economies, and two large ASEAN states. (The Philippines and 

Indonesia). Five countries score above 60, implying that they are the world's 

most closed services markets at least among tbe 103 surveyed countries; 

Ethiopia, India, Iran, Qatar, and Zimbabwe. 

Services trade negotiations, so far, have made little impact on these barriers. The 

1994 GATS agreement largely defined industries and modes of transmission across 

borders. The two agreements on Financial Services and Basic Telecom created 

'floors' beneath which market access would not fall, more often than they actually 

opened markets. The same has been true for most WTO accession agreements 

since, though tbe networks of obligations these created for new members covered 

more industries. And the WTO's Doha Round talks, over ten years, offered strikingly 

little in tbe way of changing this landscape. The Bank's Aaditya Mattoo and Bernard 

Hoekman comment; 

"As they stand today, Doha offers on services do not offer any liberalization 

of actual policy. Furthermore, two of the currently most protected areas in 

both industrial and developing countries, transport and professional 

services, are either not being negotiated at all or not with any degree of 

seriousness." 21 

Beyond this, the prominence of state-owned and state-supported enterprises in a 

number of emerging-market economies - that is, businesses owned or supported by 

governments, but acting as actors in private-sector markets rather than purely as 

providers of public services - raises newer questions which earlier agreements 

addressed only in passing, from regulatory favoritism to procurement and 

intellectual property protection. 

ii. Absence of Rules to Protect Flows of Information 

Thus the world services market remains relatively closed, with investment in poor 

countries depressed well below a 'natural' level and cross-border exports far less 

than they could be. And perhaps even more troubling than this is a widening gap in 

trade rules - the lack of protection for digital flows of info rmati all - which leaves the 

future of cross-border services trade highly uncertain. 

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Cross-border exports of business services, under formal definitions, proceed 

through several different "modes" - visits by individual businessmen and -women, 

mailed agreements and documents, and so on. But though formal data are lacking, it 

is likely that most cross-border services transactions - and very likely almost all 

growth in cross-border trade - reflects the transfers of information in digital form 

over the Internet. This is how nlost news, music, and audiovisual services reach 

buyers, how most financial transactions proceed, and how manufacturers and 

logistics industries coordinate production and delivery schedules for complex value 

chains. But though technology has made digital trade a large part of daily life, trade 

rules have not caught up. 

Ideally, the WTO would have a binding agreement on data flows mirroring in virtual 

form the GATT agreement rules for tangible goods - that is, barring arbitrary 

blockages of data or requirements of "forced localization" of data within countries; 

creating exceptions to ensure the right to regulate in the public interest, whether for 

public safety, privacy, national concepts of public morals, or national security; and 

ensuring that these exceptions are invoked for good-faith regulatory poliCies which 

are non-discriminatory and apply to locally and internationally based information 

alike. 

But very few such guidelines exist. No WTO agreement - and in fact no free trade 

agreement but the US-Korea FTA - has rules to help make data transfer policy as 

stable and predictable as goods flows. The only applicable multilateral rule is the 

temporary (though regularly renewed) 1998 WTO Ministerial Declaration on global 

electronic commerce, which stipulates that electronic transmissions should not be 

subject to tariffs.22 

This leaves movements of data far more vulnerable than movements of tangible 

goods, whether to arbitrary blocks on cross-border flows to investment-forcing 

poliCies that require businesses to locate servers and data within borders. 

Kazakhstan has experimented with such regulations for Internet search engines, 

Russia with requirements that all credit-card transactions be processed within the 

Russian Federation. These raise questions about both privacy rights and due 

process about information relating to individuals, and practical issues about loss of 

efficiency and added costs in supply-chain management and financial transactions. 

Information !lows therefore have a basic lack of security and predictability; and 

though the Internet is quite new and Internet-based trade is developing rapidly, in 

the absence of a commitment to free flows of information, trade of this sort is likely 

to be much smaller and less powerful a driver of growth and innovation than it 

should be - not just in this decade as the world looks for a way to recover from the 

damage of the crisis, but for the next generation. 

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V. CONCLUSION: TOWARDS AN AGENDA 

A survey of services and their place in trade, then, shows facts, reveals an 

opportunity, and illuminates a large policy challenge. Services are the largest 

segment of the global economy. In principle, therefore, they can be a powerful 

driver of recovery from the crisis as exporters and investors. 

The advance of information technology provides a necessary foundation for that 

role. The steady pace of satellite and fiber-optic deployment, 4G wireless serviced 

deployment, cloud computing, and Internet links among individuals, devices and 

firms all make trade in services steadily cheaper, faster, and simpler. In the right 

circumstances, services providers will be able to tap a gigantic pool of pent-up 

demand in the coming years for information, entertainment, financial services, 

health care, education and more tailored to families and communities of all types. 

The result can be a powerful support for growth, the creation of jobs, and an 

accelerated reduction of poverty. 

But just as the invention of container shipping in the 1950s required the ambitious 

policy reforms of the Kennedy Round of the GATT system in the 1960s to match its 

potential two generations ago, so the world of services trade needs support from 

policy today. The edifice of services-trade policy built over the last two decades has 

done much, but remains a limited accomplishment. It has clarified issues and 

defined concepts through the GATS; experimented with broad agreements in Basic 

Telecommunications and Financial Services; and created smaller-scale precedents 

for more sweeping approaches through free trade agreements and WTO accessions. 

But these accomplishments remain limited, well short of a broad opening of 

markets, and falling behind real-world needs as cross-border trade shifts to the 

digital world. 

The long-term weaknesses of the policy regime, meanwhile, are matched by an 

urgent real-world need for a source of growth. The crisis of 2008-2009 has faded. 

But economies remain weak almost everywhere in the world, sources of potential 

instability are apparent to all, and the demand necessary to drive investment is 

scarce. In such circumstances, the practical and psychological effects of an 

ambitious effort to open markets and tap demand can be powerful. 

An ambitious services agenda that embraces all the regional and bilateral efforts to 

create open and fair services markets, would be greatly facilitated by a services free 

trade agreement - an International Services Agreement (ISA) - opening markets 

across sectors. An element of an ISA could be a binding agreement on data flows 

that would bar arbitrary blockages of data or requirements of forced localization of 

data infrastructure within a country, but reserve the right to regulate under agreed 

guidelines for public safety, privacy, public morals, and national security for 

example. The ISA would overarch and incorporate the services provisions of existing 

FTAs and the Trans Pacific Partnership, and new initiatives stemming from the EUUS High Level Dialogue, for example. 

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An International Services Agreement would be a next generation, powerful advance 

in the glohal trading system, helping to meet the immediate need for growth 

through exports and investment in a fragile post-crisis world economy, and to 

create a more efficient global economy with higher living standards in the long term. 

In these circumstances, services trade policy reform can be both a basis for longterm growth, and a way to bolster the world's fragile recovery from crisis. There 

could be few better times to begin than now. 

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97 

U.S. Chamber of Commerce 


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ON: 

TO: 

BY: 

DATE: 

100 Years Standing Up Tor American Enterprise ..................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 

U~S~ CHAMBER OF COMMERCE 

Benefits of Expanding U.S. Services Trade Through an International 

Services Agreement 

Hearing of the House Ways and Means Subcommittee on Trade 

U.S. Chamber of Commerce 

Thursday, September 20, 2012 
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The U.S. Chamber of Commerce is the world's largest business 

federation, representing the interests of more than three million businesses of all 

sizes, sectors, and regions, as well as state and local chambers and industry 

associations. 

More than 96 percent of the Chamber's members are small businesses 

with 100 or fewer employees, 70 percent of which have 10 or fewer employees. 

Yet, virtually all of the nation's largest companies are also active members. We 

are particularly cognizant of the problems of smaller businesses, as well as issues 

facing the business community at large. 

Besides representing a cross section of the American business community 

in terms of number of employees, the Chamber represents a wide management 

spectrum by type of business and location. Each major classification of American 

business manufacturing, retailing, services, construction, wholesaling, and finance 

- is represented. Also, the Chamber has substantial membership in all 50 states. 

The Chamber's international reach is substantial as well. It believes that 

global interdependence provides an opportunity, not a threat. In addition to the 

U.S. Chamber of Commerce's 116 American Chambers of Commerce abroad, an 

increasing number of members are engaged in the export and import of both 

goods and services and have ongoing investment activities. The Chamber favors 

strengthened international competitiveness and opposes artificial U.S. and foreign 

barriers to international business. 

Positions on national issues are developed by a cross section of Chamber 

members serving on committees, subcommittees, and task forces. More than 

1,000 business people participate in this process. 
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The U.S. Chamber ofCommcrcc 1S plcascd to submit th1s statement for the record to the 

House \\lays and Means Subcommittee on Trade for its hearing on "The Benefits of Expanding 

U.S. Services Trade Through an International Services Agreemenl.'· The U.S. Chamber is the 

·world's largest business federation, representing the interests of more than three million 

businesses of all sizes, scctors, and regions, as well as state and local chambers and industry 

associations. 

No pliority facing our nation is more important than putting Americans back to \york. 

More than 8 percent of the U.S. \vorkforce is unemployed - a figure that soars to ncarly 15 

percent \Vllen those \VI1O have stopped looking for jobs and the millions of part-time workers \VI1O 

want to \vork rul! time arc included. A:-. a nation, the biggest policy challenge \ve face is LO l:reate 

the 20 million jobs needed in this decade to replace the jobs lost in the recent recession and to 

meet the needs of America's growing workforce. 

World trade must playa central role in reaching Ihis job-creation goal. After all, outside 

our borders are markets that represent 80 percent of the \,vorld's purchasing power, 92 percent of 

its economic grov,,1h, and 95 percent of its consumers.. The rcsu1t1ng opportunities arc immense, 

and many Americans l.lre already seizing them: One in three manufacturing jobs depends on 

exports. and one in three acres on American farms is planted for hungry consumers overseas. 

Hmvcver, the international playing field is often unfairly tilted against American \vorkers 

and companies. While the U.S. market is largely open to imports, many other countries continue 

to levy steep lariffs on U.S. exports, and !ixeign governments have erected other kinds of 

baniers against U.S. goods and services. 111 recent years, new ronns of protectionism have 

emerged, including discriminatory- industrial policies, an enhanced role for state-owned 

enterprises, local content rules, subsidies, and other measures that discriminate against U.S. 

products, serv'lces, and companies. 

The bottom line is simple: Without a pro-active and determined trade agenda, American 

,yorkers and businesses will miss out on huge opportwlities. U.S. companies and the workers 

they cmploy will be shut out off()rcign markets by unfljr forcign trade barriers. Our standard of 

living and our standing in the world \-vill sufTer. 

The Key Role of Services 

The challenges and the opportunities \ve face on the trade agenda are perhaps greatest Jor 

our service industries. These sectors generate approximately 75 percent of U.S. economic outpm 

and about 80 percent of U.S. private sector employment. In fact, according to the Bureau of 

Labor Statistics, service industries employ about 95 million of America's 111 million plivate 

sector \vorkers. Moreover, the service sector employs more than 75 percent ofthe \vorkers in 

every Congressional distdct across the country. 

Not unlike agriculture and manufacturing, the service sector is highly dependent on 

access to overseas markets. In 201 I, U.S. services exports reached S605 billion \-vhile the United 

Slates enjoyed a services trade surplus of more than $179 billion, In fact, services exports now 

account for almost 30 percent oru.s. exports and about 15 percent of U.S. imports. The United 
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States is homc to large numbers of world-leading services firms in such scctors as audiovisual, 

banking, energy services, express delivery, information technology, insurance, and telecom. 

However, U.S. services exports should be much larger glven that the U.S. expOlts less 

than 3 percent of America's $16 trilllon in gross services output. By comparison, manufacturing 

exports run at 18 percent of U.S. gross output, and agricultur~'s figure is closer to 30 percent, 

according to Ed Gresser from the Global Works Foundation. 

Trade Liberalization in Services 

Since services dominate the glohal economy, initiatives that help services grow can pla:y 

an outsized role in generating economic grmvth and jobs. In fact, the World Bank's annual 

World Development Indicators survey reports that services account for 70 percent ohvorld 

output, up !j:om approximately 59 percent in 1990. 

Unfortunately, liberalization of services trade has been stuck in the long-dormant Doha 

Round of World Trade Organization (WTO) negotiations for more than a decade. Tn fact, the 

services sector received vel)' little attention even ill the Doha Round as areas such as agriculture 

and manufacturing trade consumed all of the oxygen in the room. The most atle11lion services 

rec·ei"ved during the Doha Round was the "signaling conference" that took place in July 2008 in 

Geneva, S\vitzerJand. Unfortunately, only one-third of ~,'TO member countries presented initial 

or revised services oilers dLU-ing the Doha Round. 

Since the WTO's General Agreement on Trade in Services (GA TS) entered into force in 

1995, countries have largely achieved services trade liberalization through bi!atera! or regional 

trade agreements. In most instances, those agreements have simply locked in the status quo [or 

access to local sen'lces markets while S0111e go further in selected sectors. Most recently, the 

U.S.-Korea Free Trade Agreement (KORlJS) contains some ofthe most ambitious and far~ 

reaching services commitments ever negotiated by the United States. HQl..vever, little progress 

has been achieved at the multilateralleve! to liberalize services trade since the GATS came into 

ctlcct. 

International Services Agreement ([SA) 

Fortunately, a growing number of both developed and developing WTO member 

countries - including Australia, Canada, Colombia. Costa Rica, Israel, Japa.n, l\.1exico. Pakistan, 

and the United Slates as well as the European Union, among others - have been exploring 

different negotiating approaches aimed at liberalizing services. These discussions arc aimed at 

launching negotiations for an lnternational Services Agreement (JSA) among a coalition of 

interested parties and have been taking place in Geneva since the beginning of the year. 

Such initiatives among a "coalition of the willing" are not ne,v lo the WTO. The 

Govemment Procun:ment Agreement (OPA) and lnfom1ation Technology Agreement (ITA) are 

good examples of highly successfUl agreements reached among an ambitious subset ofWTO 

members. Even WTO Director-General Pascal Lamy has argued the plurihneral approach is not a 

new concept in the WTO, saying he was amazed by the "theological and Byzantine" debate 

3fOlmd the topic. 
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According to a joint ~tatem~nt released by the participating ISA countries on July 5, 2012: 

• Over lhe past several month!-. a number of WTO Members have been exploring diff~rent 

negotiating approa<.:hes aimed at progressing the Iiherali/.ation of trade in sen ices. 

• We have found that the 'l\'TO General Agreemenl on Trade in Services (GATS) provides 

a strong foundation. At the same time, there have been considerable developments in 

ad\ancingthe liberalization of trade in sen.-ices in the sixteen years since its conclusion. 

• A significant number of MCI11 bers have made great advances in opening up thei.r markets, 

both autonomously as \vell as through more than 100 services trade agreements notified 

to the WTO, Many of these agreements have broken ne\'i" b'Tound both in tenus of market 

access and in the development of improved services trade ruJes. 

• We helieve it is time to bring this progress back to Geneva \vith the ultimate aim of 

reinforcing and strengthening the rules-based multilateral trading system. 

• We plan to move our exploratory discussions lo a new phase aimed at clearly defining the 

contours of an ambitious agreement on trade in services to allmv us to undertakl! any 

necessary consultations or procedures prior to any negotiations. 

• Any such agreement \\·ould build upon the achievements of the GATS and the 

devciopments mentioned above. Such an agreement would aim to capture a substantial 

part of the liberalization achieved in other negotiations 011 trade in services. The 

outcomes of the agreement could then be brought into the multilaleral system. 

Any such agreement should: 

Bc comprehensive in scope, induding substantial sectoral cm'crage \V·ith no a priori 

exclusion of any sector or mode of supply; 

Through negotiation, include market access commitments that correspond as closely 

as possible to actual practice and provide opportunities for improved market access; 

and 

Contain new and enhanced rules developed through negotiations. 

We encourage other WTO Members who share a high level of ambition for the 

liberalization of trade in services, including these objectives, to take part in this effort. 

We arc considering how to TI.n1hcr broaden participation of developing countries and 

how to take into aceOU11l the intere~ts oCleast-developed countries. 

Vic plan to intcnsi(y our \\ork irom S<.!ptember LO d(:;ve1op these concepts further and 

begin working on the mechallic~ for achieving our shared objectives. 

More than anything, it is clear that the ISA is a result of bath the impasse in the Doha 

Round and the pent up demand by interested WTO member COlmtries to liberalize services that 

has not come to fruition since the founding of the GATS. In the weeks and months ahead, 

participating member cowltries w·ill have ample opportunity to talk about both the architecture 

and the scope of such an agreement. 
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