Services trade liberalization in GATS

1. Services trade liberalization in GATS Mia Mikic TID, ESCAP mikic@un.org This presentation is based on materials prepared by WTO for the WTO/ESCAP TA Programme Capacity Building for Free Trade Agreement Negotiation organized under ESCAP/DTN/ITD MoU Bangkok, 20-24 August 2012

2. Outline In this presentation we introduce: - Main features of GATS - Scheduling commitments GATS

3. GATS- an introduction of the main features GATS

4. GATS as a latecomer to MTS • Part of Uruguay Round (1986-1993) signed by 128 members and in force since 1995 • Why so late? Because services were considered: • Intangible = nontradable • Government monopolies (turf) • Important only for rich countries • Not fit for GATT-type disciplines • Uruguay Round was not without challenges (sector definition, transactions, role of MFN, permissible policy instruments, remedies and regulatory disciplines?) GATS

5. Main features • Scope, coverage, definition • Measures affecting trade in services at all government levels • All services (except government services and measures affecting air traffic rights) • Four modes of supply 1. Cross border 3. Commercial presence 2. Consumption abroad 4. Presence of nat. persons - Application to BOTH services and services suppliers GATS

6. GATS

7. GATS and national schedules A Member’s obligations are defined by and GATS provisions including Annexes Its schedule of specific commitments GATS

8. GATS and individual sectors Three possible scenarios: I. Not covered (recall that Governmental services and large segments of air traffic are not included) II. Covered - but no access obligations III. Access obligations (“Specific Commitments”) GATS

9. Scenario I • Excluded from coverage are “services provided in the exercise of governmental authority” = services supplied “neither on a commercial basis, nor in competition…” (Article I:3) • Financial services: Competition as the sole criterion (Annex on Financial services) GATS

10. Scenario II Unconditional obligations • Most-Favoured-Nation Treatment • Transparency requirements • Some other “good governance” provisions (availability of legal remedies, opportunity for consultations, etc.) Note: There is no obligation to open markets (that is, to liberalize)! Favour one, favour all = non-discrimination GATS

11. Permissible departures from MFN • Annex on Art. II Exemptions • Economic Integration (Art. V) & Labour markets integration agreements (Article Vbis) • Mutual recognition (Art. VII) • Elimination of regulation-based restrictions (licenses, certificates, etc) • Other • General and Security Exceptions (Art. XIV and XIVbis) • Prudential carve-out in financial services GATS

12. Scenario III Three basic concepts • Market Access (Art. XVI) • National Treatment (Art. XVII) • (Additional Commitments, Art. XVIII) • Schedule binds a level of access (MA) and standard of treatment (NT) GATS

13. Schedules of specific commitments: General structure of a schedule Schedules specify the extent of liberalization a Member guarantees in designated sectors which are based on the positive listing approach: GATS

14. Market Access and National Treatment: Main elements • MARKET ACCESS (Art. XVI) • Absence of quota-type and similar restrictions • NATIONAL TREATMENT (Art. XVII) • Non-discrimination with regard to all measures • affecting the supply of a service Any limitations must be inscribed in Schedules under the relevant mode(s). GATS

15. Role of Additional Commitments (Art. XVIII) Scheduling of measures NOT falling under Art. XVI or Art. XVII. Such measures may relate to qualifications, standards, licenses, competition disciplines, etc. (see also S/CSC/W/34) GATS

16. Conditional obligations • Art. III:3 (add. transparency requirements) • Art. VI:1 (administration of measures) • Art. VI:5 (regulatory disciplines) • Art. VIII (compliance of monopolies) • Art. XI:1 (current transactions) • Art. XI:2 and fn 8 to Art. XVI (capital transfers) • Annex on Telecommunications GATS

17. Application of GATS obligations across the services economy GATS

18. Must GATS obligations (and commitments) be respected at all costs? No. Members may intervene for overriding health and other policy reasons (Art. XIV), because of security concerns (Art. XIVbis), to protect the balance of payments (Art. XII), or to defend the integrity and stability of the financial system (‘prudential carve-out’ in financial services). Also, they may want to re-negotiate commitments (Art. XXI) or seek a waiver (Art. XIX:3 of WTO Agreement) GATS

19. Policy space: Relationship between Specific Commitments and actual market conditions • Commitments guarantee minimum levels of MA and NT • Members remain free to offer better conditions (subject to MFN principle) • Commitments may be upgraded at any time to reflect the improved conditions GATS

20. Measures/policies not affected by Specific Commitments • Non-discriminatory domestic regulation (standards, licensing requirements, etc) • Government procurement • Non-discriminatory subsidies • Non-discriminatory measures promoting or restricting exports • Requirement of a visa etc • Barriers not associated with government measures (eg private decisions or natural persons limitations – no availability of space, etc.) GATS

21. Scheduling – an introduction GATS

22. Basic obligations (I) • “Each Member shall set out in a schedule the specific commitments it undertakes under Part III of the Agreement.” (Art. XX:1) Note: Structure of schedules, number of commitments, sectors covered or levels of liberalization are not defined in GATS. GATS

23. Recall: Scope and coverage of specific commitments • Article XVI (Market Access) • All measures, whether discriminatory or not, falling under one of six categories • Article XVII (National Treatment) • All (other) measures discriminating against services or service suppliers of any other Member. • Article XVIII (Additional Commitments) • Non-discriminatory measures not falling under Article XVI or XVII. GATS

24. How Schedules of Commitments are structured GATS

25. How to describe services sectors? • There is no compulsory system – Members can use their own classification system – only requirement: greatest possible degree of clarity! • There are two reference instruments: – Services Sectoral Classification List (W/120) – UN Central Product Classification List (CPC)There is no compulsory system GATS

26. How to reduce sector coverage?(Exclusion of public services segments) GATS

27. Basic obligation (II) • Where commitments are undertaken, each schedule shall specify: “terms, limitations and conditions on market access“ (Art. XX:1(a)) Note: Focus is on measures limiting market access rather than on implementation mechanisms (e.g. licensing requirements) or relevant laws and regulations. GATS

28. Art. XVI: Exhaustive list • All measures falling under any of the categories listed in Article XVI must be scheduled, whether or not they represent a national treatment violation. • Quantitative restrictions can be expressed numerically, or through economic needs tests. GATS

29. Six types of Market Access Limitations (Art. XVI:2) • . limits on number of suppliers* • . limits on value of transactions or assets* • . limits on number of operations or the quantity of output* • . limits on number of persons that may be employed in a sector or by a supplier* • . measures that restrict or require specific types of legal entity or joint venture • . limits on the participation of foreign capital *or an economic needs test having the same effect GATS

30. Examples of Art. XVI measures • Number of suppliers (a) – The number of licenses for cosmetology schools is limited to 48 total licenses • Value of transactions or assets (b) – Foreign banks limited to 30 percent of total domestic assets of all banks • Number of operations or quantity of output (c) – Restrictions on broadcasting time available for foreign films GATS

31. Examples of Art. XVI measures • Number of persons employed (d) – In any artistic production given in a public place, the proportion of national performers shall not be less than 80 % • Specific types of legal entity (e) – Foreign companies are required to establish subsidiaries • Participation of foreign capital (f) – Foreign investors can hold up to 49 % of capital GATS

32. Economic Needs Test (ENTs) • The quantitative limit is not expressed as a specific number or amount. Instead, is determined by a market analysis (supply/demand) • Can be performed by government authorities or it can be required of the license applicant • Authorities may use the test to apply a quota that they adjust periodically or it can be determined on a case-by-case basis • The main criteria help determine the level of binding, so should be indicated in the schedule • Not refer to the quality of the service or the ability of the supplier GATS

33. Basic obligation (III) • Where commitments are undertaken, each schedule shall specify: “conditions and qualifications on national treatment“ (Art. XX:1(b)) GATS

34. National Treatment Column Definition: Article XVII Unless relevant limitations are specified in the schedule: • Each Member shall accord to services and services suppliers of any other Member treatment no less favorable than that it accords to its own like services and service suppliers • No discrimination in favour of national suppliers on a de jure or de facto basis • Applies to alldiscriminatory measures This is considered an “open ended” definition GATS

35. Typical National Treatment limitations • Discriminatory subsidies and other fiscal measures • Nationality and residency requirements (mode 3) • Discriminatory licensing/registration/qualification/ training requirements • Technology transfer requirements • Prohibitions on land/property ownership • Limitations on insurance portability, education grants See also S/L/92, Attachment 1 GATS

36. Discrimination de jure • Domestic suppliers of audiovisual services are given preference in the allocation of frequencies within the national territory (Explicit discrimination on the basis of the origin of the service supplier) GATS

37. Discrimination de facto • A three-year period of prior residency is required in order to obtain a license to supply veterinary services – There is no formal distinction based on the origin of the supplier, but foreign suppliers are less likely to meet the requirement – Case-by-case evaluation GATS

38. To sum up Market Access and National Treatment obligations are incurred only • In scheduled sectors; and • to the extent that no limitations have been inscribed. Also important: • Measures inconsistent with both Art. XVI and XVII shall be listed in the market access column only GATS

39. Market access or national treatment? • Eligibility for subsidies reserved for nationals • Licenses for new hospitals based on an economic needs test with the following criteria: ... • Foreign companies are required to establish subsidiaries • Skilled foreign employees are required to provide training to locals GATS

40. Possibility of AdditionalCommitments (Article XVIII) • Scheduling of measures not falling under Articles XVI or XVII. Such measures may relate to qualifications, standards, licenses, competition disciplines, etc. See also S/CSC/W/34 GATS

41. How Schedules of Commitments are structured: Case B. GATS

42. Horizontal commitments • Apply to trade in services in all scheduled sectors unless otherwise specified; • Aims at avoiding repetition • Takes the form of a limitation or of a positive undertaking GATS

43. Role of Horizontal Limitations (example) GATS

44. Development-oriented access conditions Examples • Training requirements; • joint venture requirements; • re-investment of profits; • use of local inputs; • universal service obligations (=> regional access, social equity); etc. GATS

45. Essentials NOT to ignore GATS

46. Commitments are legally binding access guarantees Nevertheless, the GATS allows for departures in specified circumstances - protection of life & health, public morals, etc. - security concerns - prudential concerns (financial services) - Balance of Payments problems and • renegotiation of commitments against compensation (Article XXI) GATS

47. If commitments are too demanding => Modifications of schedules (Art. XXI) • Normally after three years only • After compensation of affected Members on an MFN basis • Subject to renegotiation and arbitration (on request) GATS

48. Cornerstone of the WTO system: MFN treatment* • “… each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country” (Article II:1) • *Except in the “excluded” services GATS

49. Permissible departures from MFN- relevant provisions • Annex on Article II Exemptions • Economic Integration (Article V) Elimination of barriers relating to National Treatment (Art. XVII) • Recognition (Article VII) Elimination of regulation-related restrictions (licenses, certificates, etc.) • Other • Labour Markets Integration Agreements (Article Vbis); • General and Security Exceptions (Art. XIV and XIVbis); • Prudential carve-out in financial services. GATS

50. SCHEDULING PROBLEMS (I) • No clear specification of sector coverage • Mismatch between sector name and CPC number • Scheduling of non-defined «Other» services • Inconsistencies between sectoral and horizonzal entries • Non-exclusion of public sector segments, where • necessary (e.g. health and education) GATS