GATS and Domestic Regulation

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Clare Joy, World Development Movement

Unpacking GATS Article VI.4 on domestic regulation exposes possibly the single most controversial item on the current negotiating agenda, and also one of the greatest threats that GATS poses to democracy. Concern is all the greater because it is not clear whether rules developed in the current negotiations on Article VI.4 will apply to all service sectors or only those where specific commitments have been made.

Regulations in the services sector are complex and can relate to core government policy goals. They are often designed to meet 'non-economic' goals such as environmental or social objectives. Such regulations vary from country to country and also within countries, where local governments and municipalities are often in charge of implementing regulations.

Many of these regulations remain outside the scope of GATS articles related to specific commitments (Article XVI, Market Access and Article XVII, National Treatment). They escape these GATS rules because they neither discriminate against foreign suppliers (thus treating domestic and foreign firms equally), nor impose quantitative restrictions (numerical limitations on the number of suppliers in a sector). The regulations in question include those associated with qualification requirements and procedures, technical standards and licensing requirements, as outlined in Article VI.4.

None of the above terms are precisely defined in GATS. Yet WTO Secretariat reports shed some light on how such regulations can be considered 'trade-restrictive'. Qualification requirements, for example, clearly refer to professional accreditation and educational requirements. Licensing requirements could include authorisation regulations for the setting up of retail stores (often affected by zoning and planning restrictions). Technical standards include a much broader range and according to the Secretariat would encompass regulations affecting the rules according to which the service must be performed. This could, for instance, apply to quality regulations in the water industry.

To deal with such regulations, Article VI.4 negotiations are developing a 'necessity test'. Under this, WTO member states would first have to prove that their regulations were necessary in order to achieve a WTO-sanctioned legitimate objective. Second, they would have to show that no alternative measure was available which would achieve the same objective and be less trade-restrictive. So even if a goal such as environmental protection is considered a 'legitimate objective', technical standards on those trading in that sector may not be considered the least trade-restrictive way of achieving that objective, and would therefore fall foul of the necessity test.

In some countries, for example, companies face regulations on the use of ozone-depleting chemicals. This is a technical standard regulating the way they perform their service. However, industry might argue that a greater emphasis on economic incentives rather than government controls would be a less trade-restrictive way of achieving the same environmental objective - such as an emissions fee requiring firms to pay a tax on their pollution equal to the level of external damage.

The necessity test is deeply problematic, as there is almost always the possibility of there being a less trade-restrictive alternative to a particular policy choice. Moreover, when they are implemented, less trade-restrictive measures are not always the most effective way of meeting social or environmental policy objectives. In the above case, for example, companies will continue to pollute if it is a price worth paying.

Many government regulations which could be threatened by Article VI.4 are tools through which citizens and affected communities can challenge the activities of service companies operating in their local area. Complex judgements decide the appropriateness of domestic regulations in the services sector, ensuring a balance between public interest and commercial considerations. These judgements must not be allowed to pass from elected governments to WTO disputes panels.

GATS already leaves government regulations open to a WTO disputes challenge through market access and national treatment commitments (under Articles XVI and XVII - see 'GATS and the Right to Regulate', below). Current negotiations threaten to extend the mandate of trade rules beyond simply non-discrimination, and directly challenge the crucial role that local and national governments play in regulating services.

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