The last round of World Trade Organization (WTO) trade talks, the Uruguay Round, broke new ground by broadening the scope of world trade rules to cover areas never before subject to multilateral disciplines, and the services sector was without doubt where such broadening was most significant in economic terms. Nonetheless, some twenty years after the Uruguay Round was launched, the framework of rules governing services trade globally - the General Agreement on Trade in Services (GATS) - remains incomplete.

In trying to craft new disciplines for the services sector, the trade policy community faces formidable challenges, due to the regulatory complexity, sectoral diversity, public good sensitivity, and ubiquitous nature of services as inputs into much of what societies produce, market and export. Within this scenario, the matter of subsidy disciplines for services trade, one of the unfinished areas of GATS rule-making, is proving to be a hard nut to crack.

Article XV of the GATS directs WTO Members to develop multilateral disciplines necessary to reduce the distortive effects subsidies may have on trade and investment in services. Alongside discussions on emergency safeguard measures, government procurement for services and the trade effects of non-discriminatory domestic regulation, subsidy talks form part of the GATS' so-called "built-in agenda" that since 2001 has been subsumed under the Doha Round of negotiations.

But when the Doha Round trade talks ground to a halt last summer over tariffs and subsidies to agriculture and market access for industrial goods, little progress had been made in the services negotiations. What energy had been spent focused more on market access and parameters for domestic regulation than on subsidy disciplines.

In the absence of multilaterally agreed disciplines, WTO Members' subsidy practices in services are currently subject only to the GATS' general obligations. These include its most-favoured nation treatment obligation, which prohibits discrimination among trading partners, and its national treatment obligation in sectors where liberalization commitments are scheduled (i.e., formally notified). National treatment in respect to subsidies means that a subsidy that can be used by domestic service providers must be available to foreign service providers as well.

Information on the nature, extent and economic impacts of subsidy practices in services is generally scant. With the exception of the European Union's highly developed regime on state aids, a general lack of information is the norm. This is true both nationally and internationally, as efforts to collect and disseminate cross-country information on services-related subsidy practices at the OECD and the WTO have to date revealed. The GATS imposes a general transparency obligation relating to "all relevant measures of general application which pertain to or affect the operation" of the Agreement (Article III), including subsidies. However, the number of countries that have notified the WTO of subsidies affecting trade in services can be counted on one hand.

Nevertheless, the little evidence that has become available indicates that sectors such as transportation, tourism, audio-visual services, energy services, finance and, most recently, IT-related business process outsourcing, tend to benefit from subsidies. The policy rationales behind such measures are typically multi-dimensional. These include the desire to promote infant industries, to help secure the achievement of universal access objectives (e.g. health, education, and sanitation), to encourage more sustainable patterns of production or consumption (e.g. in energy and transport), as well as the more general need to respond to market failures and their potentially undesirable social and developmental consequences.

That service subsidies may also have distortive effects on international trade and investment akin to what one observes in goods trade is also not in dispute. Subsidies affecting trade in services can be classified into three broad categories, depending on how their distortive effects are most likely to be felt. These are: export subsidies; import-displacing subsidies; and production subsidies that can materially affect the price and quantity of services available for export or for competition in domestic markets (in the case of investment-related subsidies).

The lack of progress registered in some twelve years of post-Uruguay Round discussions, and the absence of new subsidy disciplines in the proliferating spaghetti bowl of preferential trade agreements covering services, suggest a collective preference for inaction. Yet as the intensity of competition in services heightens, pressure may build for a more comprehensive set of disciplines to respond better to the potentially distortive effects of domestic support measures on patterns of cross-border trade and investment.

In developing such disciplines, negotiators will likely need to adapt and learn from the rules designed to discipline subsidy practices in goods trade (manufacturing and agriculture). In so doing, they will need to ensure that any new disciplines respond to the more complex ways in which trade in services occurs (e.g. the need for factor mobility - the cross-border movement of capital and labour), the considerable public sensitivity over subsidies to a number of key sectors, and the difficulty of finding 'one size fits all' rule-making solutions for a sector as diverse as services.

Negotiators will also need to contend with more complex definitional challenges in mapping the scope of possible new disciplines in view both of data weaknesses (which will complicate attempts at determining the extent of injury driving from alleged subsidization) and of the greater degree of regulatory intensity present in services trade. Finally, negotiators will need to consider the operational feasibility and ultimate desirability of countervailing mechanisms in a sector where border measures (i.e. tariffs and duties) are of limited relevance as possible instruments of contingent protection. The above discussion suggests that such a rule-making journey is likely to prove arduous.

Pierre Sauvé is a faculty member and non-resident Senior Research Fellow at the World Trade Institute, in Berne, Switzerland, and a Visiting Fellow and Research Associate in the International Trade Policy Unit at the London School of Economics and Political Science, in London, U.K. Contact: pierre.sauve@wti.org