This article is part of our special report Free Trade for Growth.

SPECIAL REPORT / As EU countries are struggling to fully transpose a controversial services directive helping firms trade across borders, the 27 EU nations and a group of global ‘friends’ are eyeing an International Services Agreement to open up global services markets, bypassing the deadlocked Doha negotiations.

“Services are a key component of our economies and a driver for competitiveness. This is why efforts should be made to negotiate in an open manner, encompassing as many WTO members as possible and with ambition,” WTO chief Pascal Lamy said last week in Washington, winking at a deal being discussed by the so-called group of ‘Really Good Friends of Services.'

Most members of the 'Really Good Friends' group are top global economies which account for the bulk of world trade, with the EU and the US representing 40%.

Besides the EU and United States, the others are Australia, Canada, Chile, Chinese Taipei, Colombia, Hong Kong China, Japan, Korea, Mexico, New Zealand, Norway, Pakistan, Switzerland, and recently Peru, Costa Rica, Israel, Turkey, and Panama.

For the OECD countries, the services represent 60-70% of GDP and for developing countries they still account on average for over half of national output, with great differences from country to country.

Discussions are still at an exploratory stage and no final decision has been taken so far as to whether and if so when discussions would move towards genuine negotiations, said a European Commission spokesperson.

But across the Atlantic, there is much hope that negotiations can start soon. The Obama administration is moving 'full speed' to advance ambitious trade objectives with respect to services, said Ron Kirk, US trade representative.

“Services make up the biggest share of global economic output and employ the largest number of workers worldwide,” James Quigley, co-chair of the Transatlantic Business Dialogue, said recently. “Yet progress in reducing barriers to services trade and investment has been painfully slow.”

Analysts concur that in the past years services trade has become hostage of institutional deficiencies in the General Agreement on Trade in Services (GATS), which entered into force in 1995, and of political dissent over the broader Doha agenda, encompassing more than 20 topics.

Consolidating current services deals

Since the GATS deal, more than 100 bilateral or regional trade agreements have bloomed. But even if many of these agreements have improved and found responses to new issues, the policy backdrop surrounding global services trade looks somewhat “like a patchwork quilt right now,” Kirk told the Global Services Summit in Washington last month.

The prospect of a services liberalisation pact has gained momentum in past weeks and the idea is to examine achievements made so far with bilateral and regional deals and consolidate the most effective elements into one single framework, sidelining objections of big emerging economies like China, Brazil and India.

Supporters believe barriers can be reduced in sectors including banking, telecommunications, insurance and construction. Among these sectors, existing elements for regulatory cooperation are already in place on financial services and ICT. But any agreement would need to be comprehensive without any “a priori exclusion of any sector or mode of supply,” the group said.

“Most participants have already concluded several trade agreements covering services. The new initiative will allow to pool, revamp and improve what has been achieved so far as well as to enhance the coherence of the regimes governing global trade in services,” Ambassador Didier Chambovey, a Swiss trade negotiator, said in an interview.

In or out of the WTO

Despite the economic interest of services liberalisation, how any such deal would operate remains a dilemma.

A first option is to negotiate the agreement within the WTO system, in a way that is similar to the Government Procurement Agreement, negotiated among 28 countries and covers less than 90% of all public procurement in the world.

The alternative would be an agreement outside the WTO, which is viable under the GATS (Article V) – a multiparty free-trade agreement like the Trans-Pacific Partnership.

“It is an attractive second-best alternative,” explains Hosuk Lee-Makiyama, director at the European Centre for International Political Economy, who also sees the option of carving sectoral agreements when feasible – in financial and ICT services, for example.

The deal itself, regardless whether it is concluded inside or outside the WTO, will scale down relatively moderate barriers on existing trade between already open economies.

Lee-Makiyama said the EU should show leadership by presenting a roadmap on the future of services liberalisation after Doha.

Companies want a deal quickly

Business organisations comprising the Global Services Coalition said last month that they expect governments to commit promptly to the formal launching in Geneva of services negotiations.

"Governments have been meeting in Geneva and talking about a plurilateral approach to services negotiations for eight months. Business now wants to see governments shift gear and begin the substantive negotiations by the end of the year," said Peter Allgeier, president of the Coalition of Service Industries of the United States, stressing negotiations should be ambitious and take no more than one year.

US services companies such as Citibank, UPS and Verizon strongly support the proposed pact, which could tackle difficult new issues such as government restrictions on the cross-border data flows over the Internet.

A way to rebuild multilateralism

The services agreement also offers a means of building international consensus on trade rules that someday could be introduced into the WTO.

This is a significant feature, because the WTO’s central role as a cornerstone of the multilateral trading system depends on its capacity to advance creative and ambitious approaches to trade liberalisation, said Mike Froman, the White House deputy national security advisor for international economic affairs.

“Now it is time to focus on direct, substantive negotiations. We don’t need more process. We don’t need more formulas. We need everyone to roll up their sleeves and get to work,” said Froman.

The downside, notes Chambovey, is that not all key players, especially among emerging markets, have joined this project.