Technical Comments on the WTO's "GATS – Fact and Fiction" Paper

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By Vicente Paolo B. Yu III
Friends of the Earth International WTO Program Officer

Glossary

What the WTO Says

What the WTO Does Not Say

"There is complete freedom [for countries] to choose which services to commit" p. 2

"… there is no obligation to make commitments under the GATS ... " p. 5

GATS Art. XIX(1) creates an internal dynamic among delegations to provide increased sectoral liberalization commitments by requiring "progressively higher levels of liberalization." Furthermore, negotiating pressure from Northern countries on developing countries to liberalize market access and provide national treatment in specific sectors often cause individual developing countries to open up sectors that they otherwise would not have liberalized.

"Growth in this period [past 50 year] was not uniformly shared, but there is no doubt that those countries which chose deeper involvement in the multilateral trading system through liberalization benefited greatly from doing so" p. 4

Rich countries became richer as poor countries became poorer, in relative terms. Countries that, in the past 50 years (i.e. Japan, Korea, Singapore, Taiwan, Western Europe, Australia, NZ), managed to become industrialized did so through protectionist economic regimes that nurtured domestic industries, and only started liberalizing once domestic industries became strong enough to penetrate foreign markets and compete effectively against new foreign entrants in the domestic market. Benefits from liberalization accrued only to countries whose industries can gain trading advantage over foreign competitors due to strong domestic base.

"If commitments are made, they can be subject to the six types of limitations specified in the agreement, … In addition any type of national treatment limitation – conditions applying only to foreign suppliers – can be scheduled" p. 5

"Moreover, the GATS allows Governments to impose on foreign service providers any conditions they wish, including those pertaining to local employment or technology transfer" p. 6

"there are … no restrictions on the numbers or types of conditions which may be attached to national treatment commitments" p. 7

Under GATS Art. XVI(2), if a country, for any reason, fails to specify a market access limitation (which would provide less favorable market access treatment to a foreign as opposed to a like domestic service or services supplier), or indicate any or all modes of supply as "Unbound" on its Schedule, it can no longer impose such market access limitation or impose any regulation that would limit market access later on if it finds that imposing such limitation or regulation would be necessary for its people’s or economy’s welfare.

National treatment under GATS Art. XVII(1) is subject to the national treatment conditions and limitations specified by a country in its Schedule. GATS Art. XVII does not impose any restriction or limitation on the extent, nature, scope, or type of national treatment limitation that may be listed. A country may also, if it so chooses, indicate for any or all modes of supply that its national treatment limitations are "Unbound", thereby allowing it to impose any limitation on national treatment in the future. National treatment limitations allow a country to provide more favorable treatment to domestic services and service suppliers compared to their foreign counterparts.

However, the selection of national access limitations are, like market access limitations, a one-time exercise made by a country with other WTO Members during its WTO accession negotiations. Once such limitations have been specified, or if no limitations were specified (i.e. the "None" option), a country can no longer, in the future, impose any national treatment limitations that would modify the conditions of competition in favor of domestic as opposed to like foreign services and service suppliers, unless such country is willing to compensate for such modified conditions in other ways.

"Market access commitments do not affect the right to regulate services and they do not imply an obligation to permit the entry of unlimited numbers of services suppliers … These are questions of domestic regulation, not market access, and foreign suppliers operating on the basis of a market-access commitment are subject to exactly the same domestic regulations as national suppliers; they have no right to exemption from … any … kind of regulation" p. 7

Market access commitments provide the parameters within which foreign services and service suppliers gain market access to a country’s services sectors. Provided a country listed market access restrictions in its Schedule, market access can be as restrictive or as liberal as the country wishes. However, listing of such restrictions in its Schedule is a one-time exercise done during the WTO accessions negotiations phase prior to a country’s entry into the WTO. Failure to list a particular market access restriction means that the country can no longer impose such restriction in the future.

Market access commitments may affect a country’s right to regulate foreign services and services suppliers entering the domestic market under such market access commitments. Any domestic regulation (not necessarily limited to the six limitations identified in GATS Art. XVI(2)(a) to (f)) which would have the effect of restricting market access and making the conditions for such access "less favorable" than those provided for in the restrictions indicated in the Schedule would be a violation of GATS Art. XVI(1). Note that in the EC Bananas Case, the WTO Appellate Body stated that the GATS is intended to have a "broad reach" and that there is "no legal basis for an a priori exclusion of measures … from the scope of the GATS."

Furthermore, Footnote 8 to GATS Art. XVI(1) itself prohibits a country from imposing restrictions or regulating the transfer of capital when such country made market access commitments on the supply of a service under Modes 1 ("cross-border" provision of service) and 3 (provision of service across borders through establishment of "commercial presence" or foreign direct investment). This means that financial regulatory action restricting the free flow of capital across borders in relation to foreign service suppliers obtaining domestic market access under Mode 1 or Mode 3 market access commitments is effectively prohibited. Considering that the Asian financial crises in the late 1990s was triggered precisely by unhindered capital flows, the restriction on this particular type of regulatory action will hamper a country’s ability to protect its economy from adverse capital flows.

"Governments … may also withdraw and renegotiate commitments" p. 6

What the WTO does not say is that withdrawal of commitments is a stringent and difficult procedure under the GATS. Modifying or backtracking on the commitments (i.e. should a country wish to make its services regulatory regime more strict) can only be done: (a) after 3 years from entry into force of those commitments; and (b) negotiate and provide compensatory adjustments (i.e. liberalized commitments in other sectors) to its trading partners (GATS Art. XXI(1) and (2))

"governments may take exemptions, in principle limited to 10 years duration, from the MFN principle …" p. 6

Paragraph 6 of the Annex to Article II requires that the MFN exemption listed by a country in its schedule of specific commitments "in principle … should not exceed a period of 10 years" but that "in any event, they shall be subject to negotiation in subsequent trade liberalizing rounds." This means that the Uruguay Round MFN exemptions listed by countries in 1994 will automatically be subject to renegotiation in the current GATS 2000 negotiations – 5 years after such exemptions were taken and well before the 10 years’ expiration period thereof.

"The GATS has no implications for the funding or subsidy of services provided in the exercise of governmental authority … because these are simply outside the scope of GATS" p. 8

GATS Art. I(3)(c) defines "a service supplied in the exercise of governmental authority" as "any service which is supplied neither on a commercial basis, nor in competition with one or more service suppliers." This definition is ambiguous and crafted as to provide the exception created by the definition with very limited scope. According to this definition, any service provided by government in the exercise of its authority – i.e. protection of private property through the presence of police, education, provision of water services, sanitation and waste disposal – in which: (a) the fees charged by the government agency for such service is on a commercial or market rate basis (as opposed to purely cost-recovery); or (b) there are concurrent private sector suppliers for such service – i.e. private security agencies, private schools, private water companies, private sanitation and waste disposal companies, will make such service no longer, by definition, be a "service supplied in the exercise of governmental authority." The effect of this is that the general obligations of MFN (GATS Art. II) and transparency in regulations (GATS Art. III) will be applicable to the service concerned, even in the absence of any specific market access or national treatment commitments thereon.

"WTO Member Governments and dispute settlement panels have consistently held that it is for Governments to choose the level of protection they want to achieve (for instance when regulating for the protection of public health or the environment) and that this prerogative is not open to challenge" p. 10

"The only circumstances in which a country could be asked to demonstrate that a given measure is not more trade-restrictive than necessary would be in the event of a dispute with another Member. Only then would the necessity or the trade restrictiveness of a measure become an issue" p. 11

The necessity test included in the provisions of the various WTO agreements (i.e. GATT and GATS) themselves limit the ability of governments to choose the level of protection they wish to achieve to only those levels that: (a) are in pursuit of legitimate objectives (i.e. those objectives listed in the exceptions); (b) do not or only minimally (relative to other measures) restrict trade; (c) can be scientifically justified; and (d) do not discriminate against like foreign goods, services, or service suppliers. Scientific justifiability, especially with respect to GATT Art. XX(b) and the SPS and TBT Agreements, means that the regulatory measure must be based on scientific principles and/or be backed by scientific evidence or data. Social or cultural considerations (such as lack of community consent, violation of community traditions, etc.) would not be considered as sufficient "scientific justification" to allow countries to use GATT Art. XX(b) to justify restrictions on imports. Neither does "scientific justifiability" leave much scope within the context of the GATS or GATT exceptions for the application of the precautionary principle or approach.

Furthermore, the necessity test effectively create a freezing and self-review and self-regulatory effect on national regulatory actions. Why would governments impose measures that do not comply with the necessity test, knowing that such measures can be brought before the WTO’s dispute settlement process, be declared non-compliant, and run the risk of having to pay compensation or have authorized retaliatory trade sanctions imposed on its exports?

"Member Governments are not required to submit any legislation or regulation for review by their trading partners" p. 11

Paragraph C(ii) of Annex 3 to the WTO Agreement – setting up the Trade Policy Review Mechanism (TPRM) – states that "the trade policies and practices of all Members shall be subject to periodic review" at intervals of every 6 years for developing countries and 2-4 years for bigger economies. Although Paragraph A(i) of Annex 3 indicates that the review is not "intended to serve as a basis for the enforcement of specific obligations under the Agreements or for dispute settlement procedures, or to impose new policy commitments on Members," the fact remains that Members’ legislation or regulations are required to be reviewed under the TPRM.

In various WTO dispute settlement cases, the measures or regulations that have been decided as falling within the scope of various WTO agreements have not been purely trade policies, regulations, or measures, but included measures that affect the "conditions of competition" between domestic and like foreign goods, services, or service suppliers. Hence, the scope of the TPRM will apply to all regulations and measures that will impact on the conditions of competition between domestic and like foreign goods, services, or service suppliers.

"in case of need, the General Exceptions in Article XIV of the GATS can be invoked, were it is necessary to act to protect major public interests, including safety, human, plant or animal life or health, national security, or public morals. These exceptions override all other provisions in the Agreement entitling a Government to violate or withdraw its own commitments if necessary" p. 12

The necessity test in GATS Art. XIV restricts the utility of these exceptions to only those measures which: (a) are in pursuit of legitimate objectives (i.e. those objectives listed in the exceptions); (b) do not or only minimally (relative to other measures) restrict trade; (c) can be scientifically justified; and (d) do not discriminate against like foreign services, or service suppliers. The trend of WTO dispute settlement cases have placed a high bar on governments in order to meet this test.

Furthermore, the absence of a GATT Art. XX(g) exception in GATS – allowing the adoption or enforcement of measures "relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption" – which provision does not impose the necessity test (as GATT Art. XX(b) or GATS Art. XIV(b) does), makes it more difficult for countries to adopt and justify an environmental or natural resources measures that restricts trade in environmental or natural resources services in violation of its GATS commitments if the measure is brought to the WTO dispute settlement.

In any event, the chapeau (introductory paragraph) of GATS Art. XIV creates an additional barrier to the adoption and enforcement of measures that violate a country’s GATS commitments by requiring that such measures must not be "applied in a manner which would constitute a means or arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services." This means that even if the measure has met the necessity test, if it does not also meet the requirements of the chapeau, such measure will still be considered GATS-inconsistent and the country will still be liable to change the measure or else pay compensation or suffer retaliatory sanctions.

Glossary:

GATS – General Agreement on Trade in Services

SPS Agreement – Agreement on Sanitary and Phytosanitary Measures

TBT Agreement – Agreement on Technical Barriers to Trade

MFN (Most Favored Nation treatment) - essentially means that WTO members should not discriminate among and should treat the goods and services of all other WTO members the same way

National Treatment – essentially means that WTO members should provide the same or more favorable treatment to "like" (i.e. same or similar) foreign services or service suppliers that they provide to their own domestic services or service suppliers

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