GATS Liberalization of Life

GATS –Liberalization of Life

By

Lutfiyah Hanim, The Institute for Global Justice[1]

Yanuar Nugroho, The Business Watch Indonesia[2]

Supported by the field researchers:

Dominika Oktavira Arumdati

Tima Santita Ngesti Rahayu

Jakarta, September 2003

THE CONTENT

Prologue: A story of Indonesian Shipping – A leaky ship sailing in the free market ocean

1. About GATS (General Agreements on Trade in Services)

1.1.  GATS: The result of agreement ?

1.2.  GATS – One rule for all nations

1.2.1.  The scope of GATS

1.2.2.  General Obligations in GATS

1.2.3.  Liberalization in Stages

1.2.4.  Specific Commitment

1.2.5.  An exception of general obligations

2.  GATS and Indonesia

2.1.  Trade in Services in Indonesia

2.2.  An overview of five sectors in Indonesian Schedule of Specific Commitment

2.2.1.  Services in Telecommunication

2.2.2.  Services in Maritime Transportation

2.2.3.  Services in Finance

2.2.4.  Services in Tourism

2.2.5.  Services in Industries

3.  The Implications of GATS for Indonesia

3.1.  In Telecommunication Sector

3.2.  In Maritime Transportation Sector

3.3.  In Financial Services Sector

3.3.1.  Banking Sector

3.3.2.  Taxation Sector

3.4.  In Tourism Sector

4. GATS and developing countries

Behind GATS

Epilogue: What Indonesia should do?

Bibliography

Appendix: Case Study on GATS and Indonesia: Divestment of PT Indosat Tbk – Privatization of Telecommunication Services in Indonesia

Prologue: A Story of Indonesian Maritime – A Leaky Ship sailing in the Ocean of Free Market

The success of traditional ships ‘Phinisi’ and ‘ Borobudur’ sailing around the world were quite old stories. Indonesia with the thousands islands and as a maritime country, does not have a strong maritime any longer. Now, to transport goods from one island to other islands in Indonesia by the sea, local ships can only transport less than 50 percent of 170 millions tons of goods, oil, and others per year,[3]while the others are transported by foreign shipping companies. For Export – Import, the condition of Indonesian maritime looks really bad as well. Indonesian ships can only transport 3.5 percent to 4 percent out of 360 millions tons of goods, while the other 96 percent is transported, again, by foreign shipping companies.

Barens TH Saragih, the head of INSA (Indonesian National Shipowners Association) said that the number of national shipping companies is still limited. Even to export the Pertamina oil, it is only a small part that has been performed by the national shipping. Indonesian ships which sail abroad, only go as far as ASEAN countries, East Asia and Australia.

The maritime transport is really important for Indonesia to support the export and import sectors. The data of the Central Bank of Indonesia has shown that every year Indonesia must pay a lot of money. In 1997, the transportation fee was 4.6 billion dollars, the following year it was 3 billion dollars.

The government is forced to use tankers owned by foreign companies for exporting as well as importing oil. As the result, the national tankers can only gain some 10 percent of the total order from the total expense for oil shipment service worth 10 trillion rupiah[2].

The lacking number of fleet owned by Indonesian maritime service companies makes exporters depend on foreign maritime fleet –even over these past two years, both Indonesian exporters and importers have been inflicted in loss by international maritime service companies imposing Terminal Handling Cost (THC). The THC, which is totally about 676 million US dollars or 6.08 trillion rupiah is imposed on the exporters and importers which are to send goods through the agents of foreign maritime service companies. But strangely, it is only the shipment of goods from and to Indonesia, which is imposed of the cost, while from and to China and Vietnam such practice is not found. The imposition has been of detriments for exporters because the price of goods becomes higher. Even the export of furniture and handicraft product is forced to be delayed due to the higher freight cost and THC than the price of goods[3].

As a maritime country, profession in the maritime field is actually not a brand new thing. But, why is not this sector flourishing considering that there is market potency and opportunity for export-import is still widely open?

It seems to us that the maritime transportation sector in Indonesia is facing several serious obstacles. First, due to the funding for business. Banks in Indonesia are still reluctant to give a loan to finance the ship manufacturing. In case loan is available, the entrepreneur has to pay the money for collateral around as much as 150 percent of the price of ship. This is impossible to do because the collateral may not be provided, even when manufacturing the ship, the loan has still to be looked for. That is why the growth in number of ship in Indonesia is still low. In point of fact, according to Barens, Indonesia can and has a right to apply a principle of sabotage, which means that the domestic shipment of goods is only allowed to be organized by ships from origin country. However, the principle is still hard to do because the number of ship cannot accommodate that principle.

Second, the problem in taxation. Decree of Director General of Taxation number 370/PJ/2002 establishes that the freight cost of domestic shipment and maritime, exclusive of containers, is imposed of 10 percent tax including for, among others, the service of ship maintenance, port service, and ship purchasing. The tax imposition will burden entrepreneurs of domestic maritime service because such imposition is not given to foreign maritime service companies running the same kind of business in Indonesia. Besides, the amount of money that the government will receive will not be sufficiently much because the number of Indonesian ships is less than one owned by foreign companies.

Meanwhile, the impacts which will come up will inhibit the competitive power of national maritime field. International agreement on tax relief (Tax Treaty), which eliminates certain tax when a ship enters a territorial waters of another country, is regarded as unhelpful to make the condition better[4].

The third, what has a role in the bankruptcy of Indonesian shipping sector is called fiscal policy, Free on Board (FOB), in which goods from Indonesia are exported and the price is paid only until an Indonesian port of entry. So, the cost of ship and insurance is born by the buyers. It seems to give an advantage to the exporter, but the result is that the foreign buyers can choose which shipment and insurance company they will use, and most probably not Indonesian companies[5]. On the other hand, when importing, foreign buyers use the pattern of CIF (Cost Insurance and Freight), in which the sellers bear the cost of freight and insurance. As a result, there is only few Indonesian ships serving export-import activities because most of Indonesian ships do not gain the allotment of load.

Minister of Transportation, Agum Gumelar says that one of the contributing factors to the recession of maritime business is Presidential Instruction number 9 year 1985. The main goal of this Presidential Instruction is to increase the earning of foreign exchange out of non oil and gas export by giving foreign ships a release to drop their anchor in all Indonesian seaports as long as they help export activities run well. Consequently, Indonesian maritime business cannot be the master in its own country. The Director General of Sea Transportation, Tjuk Sukardiman also admits that due to the mastery of foreign maritime business doers on Indonesian national maritime sector, the deficit in shipment sector ever reached up to 9.6 billion dollars[6].

The existence of regulation obliging foreign ships to cooperate with Indonesian companies does not help national maritime transportation arise either, because the joint venture that foreign maritime companies have done is a mere falsehood. In its practice, those foreign maritime companies only register to the government on the basis of the identity card of the driver, which they claim as the ‘local owner’. Those foreign companies also have most of the ownership shares, frequently up to 95 percent, and their local partners only have 5 percent. In such a ‘joint venture’ the foreign company will then be treated equally to the local company, for instance, in serving inter-insular shipment.

Just like a ship, Indonesian maritime transportation sector goes through a leakage in many parts. But before the leakage is patched, ships from other countries come along, compelling the leaky ship to be sailed on the ocean of free market.

1.  ABOUT GATS (General Agreement On Trade In Services)

In the economic and political perspective of global trade, the tragic story of Indonesian maritime mentioned above cannot be released from its relation to GATS. What is GATS, in fact?

GATS (General Agreement on Trade in Services) is one part of world’s trade agreement in WTO, which has been applied since January 1995. WTO, as an organization, has a strictly different character from GATT (General Agreement on Trade and Tariffs), its predecessor. GATT only regulated the international trade of goods by decreasing tariff barrier to make the flow of export-import run smoothly, while WTO does not only regulate the traffic of trade of goods, but also establishes the rules for the trade in services (GATS) and the protection of Trade Related Intellectual Property Rights (TRIPs). The ratification of GATS has become the new episode-in the internationalization and institutionalization of service provision.

Before the item ‘services’ was negotiated and then became a part of WTO, the production, provision, and trade of service have been widely carried out in every country. Service being put into the framework of GATS has production, distribution, and trade done in accordance with the principal framework and rules of WTO, such as the existence of a comprehensive conflict resolution system and an obligatory agreement.

‘Services’ in a broad sense is defined as, “The product of human intangible activities done by human needs”[7]. Many of service products ‘adhere to’ goods in such a way they are intangible[8], e.g. the provision of electrical services, water, gases and beauty parlour. A few service products are related to the provision of service after the goods is manufactured from the factory, such as the service of car repair, computer reparation, goods distribution and retail service. Some other kinds of services belong to the intangible ones, like banking services, nurse’s services, insurance services, doctor’s services, and radio broadcasting services. Some other service products are related to the public services, such as fire extinction, police, provision of basic health, drinking water, and education. Just like products of goods, everyone from their birth to death needs service products.

Thus, the market potency for trade of service all over the world is 6 billion lives, which is the total population of the world. In Indonesia itself, the market potency for service products is 200 million people.

1.1  GATS: The result of agreement?

The derivation of agreement on trade in services was in a meeting of ministers of GATT’s contracting party in 1982. Then, in the 1986, the issue on trade in services was officially put into Uruguay Round. An observer of negotiation, Charkaravary Raghavan[9] judges that the success of negotiation on service sector becoming GATS in 1994 was affected by many factors. A few to mention, minimum available information caused less awareness amongst many politicians, the parliament and people of developing countries, while information are influential on the negotiated subject and the implication which will come up. Only very few people are directly involved in quite intensive debate about negotiation on service.

Besides, the un-transparent negotiation, which is only done by a few countries to be the fundament for ‘common decision’, becomes frequently-happening phenomena. The negotiation also uses the system of single undertaking, in which each country cannot disagree one of the issues but agrees another issue. An Indonesian diplomat[10] says, “That comes all in a package. The negotiators are faced with a choice. Take it or leave it.”

Some Indonesian diplomats ever took part in the negotiation on service in Uruguay Round say that a few developing countries were basically in the position of refusing the negotiation on service, Intellectual Property Rights, and investment. Even generally, the negotiator of developing countries, inclusive of Indonesia, did not have sufficient comprehension of Intellectual Property Rights and service. But on the other side, developing countries was very much concerned with market access for their agricultural products and textile negotiation amongst developed countries. Therefore, in the beginning developing countries hoped that there would be ‘an exchange of interest’ in which developing countries ‘submitted’ the issue of service and Intellectual Property Rights to come to accord, and on the other hand, developed countries open their market for agricultural and textile products from developing countries. Would this hope come true?

The former Indian ambassador for GATT, Baghirath Lal Das says that the signing of GATS and TRIPs is a defeat for developing countries because they do not gain the expansion of market for their two products of excellence; textile and agricultural products. The market for agricultural products of developing countries is even still closed now, while they have to sign two agreements of which their content and implication are unknown.

What Das says seems to be reasonable. The data issued by WTO in the trade of commercial service in 1999 shows that exporters of the trade in services are the developed countries. The United States of America exports 251.7 billion dollars every year or it means that the country dominates 18.8 percent and England gains 7.6 percent or 101.4 billion dollars. On the other hand, most of developing countries and all least developed countries are the importers of service. Developing countries and least developed countries do not have capacity to produce service for their own people, so that they have to import it 12.7 billion dollars.

In a much different condition in which a negotiation is done by some net importers and the minority is exporters who wants to expand the market, the issue of service is put in. The result is predictable that the negotiation does not go in balance. In addition, big countries have economic and political power to impose a pressure on their counterparts. A country with severe debt like Indonesia meets difficulties to have a maneuver in negotiation[11]. There are only two choices; We will say yes or we’ll find another way to say yes.