Post Date : 99-09-06
MODE 3 – COMMERCIAL PRESENCE(Based on the WTO Secretariat’s Background Notes)

Mode 3 is one of the four modes of supply through which services may be supplied under the GATS. GATS Article I:2(c) defines mode 3 trade as “the supply of a service by a service supplier of one [WTO] Member, through commercial presence in the territory of any other [WTO]Member”. Establishing a commercial presence in a foreign territory is the primary way in which many services are traded internationally. Proximity and direct interaction are often preferred in many service sectors, even when cross-border supply is technically feasible. Presence in the local market often makes it easier to respond to consumer preferences. Otherwise, a wider range of factors cause service suppliers to expand their businesses beyond their national boundaries. For example, the desire to (1) compete on the same footing as operators established within the territory; (2) take advantage of opportunities in terms of acquisition of or participation with established enterprises; (3) seize opportunities presented by the sale of government assets or investment policy reforms; (4) build or develop network infrastructures abroad; (5) achieve benefits from geographic diversification and/or increased specialization; (6) avoid trade barriers that exist in other modes of supply; (7) reduce costs of labor transportation or other inputs; or (8) draw on the host’s economic skills, labor costs or technology with a view to setting up a base to export services to foreign markets (or sometimes to the supplier’s home market).
To understand the scope of Mode 3 in GATS, refer to Article XXVIII in GATS, which provides key explanations of the Mode. In Article XXVIII, “commercial presence” is defined as “any type of business or professional establishment within the territory of a Member for the purpose of supplying a service, including through: (i) the constitution, acquisition or maintenance of a juridical person, or (ii) the creation or maintenance of a branch or a representative office within the territory of a Member for the purpose of supplying a service.”
According to Magdeleine and Maurer’s data (2008), which were quoted by the Secretariat, more than one-half of world trade in services is estimated to take place through commercial presence. In recent years, the development of computer technology, communications and transportation has reduced the need for a service supplier to establish a commercial presence in foreign markets. However, in many service sectors providing services through commercial presence is still a more commercially attractive way to operate. The trends in Mode 3 can be observed in Foreign Affiliates Statistic (FATS) and Foreign Direct Investment (FDI).
FATS are a new statistical domain and regarded as providing the closest and best available approximation for Mode 3, but the data remain sparse. FATS describe the activities of an economy’s affiliates based abroad (outward FATS) as well as contribution made by foreign affiliates resident in that economy (inward FATS). From the GATS perspective, the most relevant information collected through FATS data is that on output or sales. Nevertheless, data availability is still low and mainly compiled by developed countries and then, only for recent years. Furthermore, the coverage of service activities is not always complete. Foreign Direct Investment (FDI) is a useful complement for analyzing commercial presence. FDI statistics do not measure sales or operations of foreign affiliates, but rather transactions between direct investors in one economy and enterprises resident in another economy, as well as investment positions. A key trend of FDI in services has been the surge in recent years.
Generally, openness to trade under Mode 3 contributes to economic growth and development through a variety of channels. Mode 3 suppliers may provide services that current domestic suppliers do not or cannot provide, in addition to transfer of knowledge, technology and finance that may be unavailable in the host country. Knowledge spillovers particularly related to technologies, management skills, working methods or human capital can boost productivity. Investment in services can help develop or improve basic service infrastructure, which other sectors of the economy rely upon. More efficient producer services (e.g. financial, managerial, engineering, and marketing) generate important productivity gains for domestic firms that use them. In addition, since services play an important role in cross-border supply chains (e.g. distribution services, transport, logistics, courier and express delivery, business services), liberalization serves to further integrate economies and boost trade.