International Trade in Services.pdf - DSpace at Khazar University

Building Empires Overseas 181
In addition, the construction service sector is one of the sectors that is most
susceptible to the effects of cycles in the world economy. For example, between
1997 and 1999, during the economic crisis in Indonesia, the share of the construction
sector in total workforce employment dropped from 10.2 to 6.8 percent
(UNCTAD 2000b). This cyclical behavior arises because of the private sector’s
tendency to invest heavily in construction if interest rates are low or if the economy
is expanding. Trade may help alleviate some of these fluctuations in two
main ways. First, it allows domestic investors to tap into foreign supply during
periods of economic boom when local companies are operating at full capacity.
Second, it allows domestic construction service companies to offer some of their
surplus capacity abroad in times of economic downturn at home.
What Is the Situation of and What Are the
Prospects for Trade in Construction Services
Construction services are intensively traded through two major modes of supply.
The choice of mode is closely linked to the nature of the service. For example, an
online betting service can be delivered electronically to any corner of the world,
whereas a haircut requires perfect proximity between customer and hairdresser if a
transaction is to take place. The General Agreement on Trade in Services (GATS) of
the World Trade Organization (WTO) defines four modes of supply. These are
crossborder supply (Mode 1), consumption abroad (Mode 2), commercial presence
(Mode 3), and temporary movement of natural persons (Mode 4). Construction
services are almost exclusively provided through the latter two modes, as follows:
• Commercial presence (Mode 3): such as when a construction company in
country A establishes a subsidiary in country B to provide construction services
locally; for example, a Turkish company with a commercial presence in
Kazakhstan is awarded a government contract and builds a motor highway in
that country.
• Temporary movement of natural persons (Mode 4): such as in the entry and temporary
stay in a client’s territory of foreign individuals to supply a service; for
example, a contractor based in the United Arab Emirates brings in South Asian
construction workers to help build a fertilizer factory.
Because of the requirement of the physical presence of labor, capital, and various
material inputs in construction projects, trade through crossborder supply and
consumption abroad makes up a small component in the construction service
sector. The business is based on domestic production. While the production
process can be imported, the physical work in its entirety must be carried out in