WTO 31 January 2013

Trade in Services Division

THE GENERAL AGREEMENT ON TRADE IN SERVICES

AN INTRODUCTION



The General Agreement on Trade in Services (GATS) is a relatively new agreement. It entered into
force in January 1995 as a result of the Uruguay Round negotiations to provide for the extension of
the multilateral trading system to services.
All Members of the World Trade Organization are signatories to the GATS and have to assume the
resulting obligations. By the same token, they are committed, pursuant to Article XIX of the GATS,
to entering into subsequent rounds of trade liberalizing negotiations. The first such Round started in
January 2000 and was integrated later into the wider context of the Doha Development Agenda
(DDA). So, regardless of their countries' policy stances, trade officials need to be familiar with this
Agreement and its implications for trade and development. These implications may be far more
significant than available trade data suggest.

Hopefully, this introduction will contribute to a better understanding of the GATS and the challenges
and opportunities associated with commitments under the Agreement. For users who are familiar with
the General Agreement on Tariffs and Trade (GATT) and the underlying concepts, similarities and
differences will be pointed out where relevant.

The following text is based on a more comprehensive training module on the GATS which is
available on the WTO website (www.wto.org). An Annex contains a glossary of the most frequently
used terms, for ease of reference.
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1. BASIC PURPOSE AND CONCEPTS
1.1 Historical Background
The General Agreement on Trade in Services (GATS) is the first multilateral trade agreement to cover
trade in services. Its creation was one of the major achievements of the Uruguay Round of trade
negotiations, from 1986 to 1993. This was almost half a century after the entry into force of the
General Agreement on Tariffs and Trade (GATT) of 1947, the GATS' counterpart in merchandise
trade.

The need for a trade agreement in services has long been questioned. Large segments of the services
economy, from hotels and restaurants to personal services, have traditionally been considered as
domestic activities that do not lend themselves to the application of trade policy concepts and
instruments. Other sectors, from rail transport to telecommunications, have been viewed as classical
domains of government ownership and control, given their infrastructural importance and the
perceived existence, in some cases, of natural monopoly situations. A third important group of
sectors, including health, education and basic insurance services, are considered in many countries as
governmental responsibilities, reflecting their importance for social integration and regional cohesion,
which should be tightly regulated and not be left to the rough and tumble of markets.

Nevertheless, some services sectors, in particular international finance and maritime transport, have
been largely open for centuries - as the natural complements to merchandise trade. Other large sectors
have undergone fundamental technical and regulatory changes in recent decades, opening them to
private commercial participation and reducing, even eliminating, existing barriers to entry. The
emergence of the Internet has helped to create a range of internationally tradable product variants -
from e-banking to tele-health and distance learning - that were unknown only two decades ago, and
has removed distance-related barriers to trade that had disadvantaged suppliers and users in remote
locations (relevant areas include professional services such as software development, consultancy and
advisory services, etc.). A growing number of governments has gradually exposed previous monopoly
domains to competition; telecommunication is a case in point.

This reflects a basic change in attitudes. The traditional (monopoly) framework of public service
increasingly proved inappropriate for operating some of the most dynamic and innovative segments of
the economy, and governments apparently lacked the entrepreneurial spirit and financial resources to
exploit fully existing growth potential.

Services have recently become the most dynamic segment of international trade. Since 1980, world
services trade has grown faster, albeit from a relatively modest basis, than merchandise flows.
Defying wide-spread misconceptions, developing countries have strongly participated in that growth.
Whereas their share of world services exports, on a Balance of Payments (BOP) basis, amounted to
about 20% in 1980, it had risen to 24.5% by 2000 to reach 31% in 2010. And this share would be far
higher, in the order of 50%, if world trade was measured in net terms, disregarding imported content
and considering only the value added (and traded) by individual economies.

Given the continued momentum of world services trade, as a result, not least, of the proliferation of
international supply chains, the need for internationally recognized rules became increasingly evident.

1.2 Basic Purpose
As stated in its Preamble, the GATS is intended to contribute to trade expansion "under conditions of
transparency and progressive liberalization and as a means of promoting the economic growth of all
trading partners and the development of developing countries". Trade expansion is thus not seen as an
end in itself, as some critical voices allege, but as an instrument to promote growth and development.
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The link with development is further reinforced by explicit references in the Preamble to the objective
of increasing participation of developing countries in services trade and to the special economic
situation and the development, trade and financial needs of the least-developed countries.

The GATS' contribution to world services trade rests on three main pillars: (a) ensuring increased
transparency and predictability of relevant rules and regulations, (b) providing a common framework
of disciplines governing international transactions, and (c) promoting progressive liberalization
through successive rounds of negotiations. Within the framework of the Agreement, the latter concept
is tantamount to improving market access and extending national treatment to foreign services and
service suppliers across an increasing range of sectors. It does not, however, entail deregulation.
Rather, the Agreement explicitly recognizes governments' right to regulate, and introduce new
regulations, to meet national policy objectives and the particular need of developing countries to
exercise this right.

1.3 Definition of Services Trade and Modes of Supply
The definition of services trade under the GATS is four-pronged, depending on the territorial presence
of the supplier and the consumer at the time of the transaction. Pursuant to Article I:2, the GATS
covers services supplied

(a) from the territory of one Member into the territory of any other Member
(Mode 1 - Cross-border trade);

(b) in the territory of one Member to the service consumer of any other Member (Mode 2
Consumption abroad);

(c) by a service supplier of one Member, through commercial presence, in the territory of any
other Member (Mode 3 - Commercial presence); and

(d) by a service supplier of one Member, through the presence of natural persons of a Member in
the territory of any other Member (Mode 4 - Presence of natural persons).

Box A gives examples of the four modes of supply.

Box A: Examples of the Modes of Supply (from the perspective of an "importing" Member A)

Mode 1: Cross-border
Users in A receive services from abroad through the telecommunications or postal network. Such
supplies may include consultancy or market research reports, tele-medical advice, distance
training, or architectural drawings.

Mode 2: Consumption abroad
Nationals of A have moved abroad as tourists, students, or patients to consume the respective
services.

Mode 3: Commercial presence
The service is provided within A by a locally-established affiliate, subsidiary, or office of a
foreign-owned and -controlled company (bank, hotel group, construction company, etc.)

Mode 4: Movement of natural persons
A foreign national provides services within A as an independent supplier (e.g., consultant, health
worker) or employee of a foreign service firm (e.g. consultancy, hospital, construction company).

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1.4 Scope and Application
Article I:1 stipulates that the GATS applies to measures by Members affecting trade in services. It
does not matter in this context whether a measure is taken at central, regional or local government
level, or by non-governmental bodies exercising delegated powers. The relevant definition covers any
measure, "whether in the form of a law, regulation, rule, procedure, decision, administrative action, or
any other form, ... in respect of:

the purchase, payment or use of a service;
the access to and use of, in connection with the supply of a service, services which are
required by those Members to be offered to the public generally;
the presence, including commercial presence, of persons of a Member for the supply of a
service in the territory of another Member.

This definition is significantly broader than what governmental officials in trade-related areas may
expect. It is thus important to familiarize staff at all levels with basic concepts of the GATS to prevent
them from acting, unintentionally, in contravention of obligations under the Agreement and enable
them to negotiate effectively with trading partners.

For purposes of structuring their commitments, WTO Member have generally used a classification
system comprised of 12 core service sectors (document MTN.GNS/W/120):

Business services (including professional services and computer services)
Communication services
Construction and related engineering services
Distribution services
Educational services
Environmental services
Financial services (including insurance and banking)
Health-related and social services
Tourism and travel-related services
Recreational, cultural and sporting services
Transport services
Other services not included elsewhere

These sectors are further subdivided into a total of some 160 sub-sectors. Under this classification
system, any service sector, or segments thereof, may be included in a Member's schedule of
commitments with specific market access and national treatment obligations. Each WTO Member has
submitted such a schedule as required by the Agreement (Article XX:1).

There is only one sector-specific exception to the Agreement's otherwise comprehensive coverage.
Under the GATS Annex on Air Transport Services, only measures affecting aircraft repair and
maintenance services, the selling and marketing of air transport services, and computer reservation
system (CRS) services have been included. Measures affecting air traffic rights and directly-related
services are excluded. This exclusion is subject to periodic review.

Another blanket exemption applies to "services supplied in the exercise of governmental authority
(Article I:3b). The relevant definition specifies that these services are supplied neither on a
commercial basis, nor in competition with one or more service suppliers (Article I:3c). Typical
examples may include police, fire protection, monetary policy operations, mandatory social security
systems, and tax and customs administration.

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1.5 General Transparency and Other "Good Governance" Obligations
Sufficient information about potentially relevant rules and regulations is critical to the effective
implementation and operation of an Agreement. Article III ensures that Members publish promptly all
measures pertaining to or affecting the operation of the GATS. Moreover, there is an obligation to
notify the Council for Trade in Services at least annually of all legal or regulatory changes that
significantly affect trade in sectors where specific commitments have been made. Members are also
required to establish enquiry points which provide specific information to other Members upon
request. However, there is no requirement to disclose confidential information (Article IIIbis).

Given strong government involvement in many service markets as a regulator and sometimes also as a
participant, the Agreement seeks to ensure the smooth operation of relevant policy schemes. Thus,
each Member is required to ensure, in sectors where commitments exist, that measures of general
application are administered impartially and in a reasonable and objective manner (Article VI:1).
Service suppliers in all sectors must be able to use national tribunals or procedures in order to
challenge administrative decisions affecting services trade (Article VI:2a).

1.6 Most-Favoured-Nation Treatment
The most-favoured-nation (MFN) principle is a cornerstone of the multilateral trading system
conceived after World War II. It seeks to replace the frictions and distortions of power-based
(bilateral) policies with the guarantees of a rules-based framework where trading rights do not depend
on the individual participants economic or political clout. Rather, the best access conditions that have
been conceded to one country must automatically be extended to all other participants in the system.
This allows everybody to benefit, without additional negotiating effort, from concessions that may
have been agreed between large trading partners with much negotiating leverage.

In the context of the GATS, the MFN obligation (Article II) is applicable to any measure that affects
trade in services in any sector falling under the Agreement, whether specific commitments have been
undertaken or not. Exemptions could have been sought at the time of entry into force of the
Agreement (for acceding countries: date of acceptance). They are contained in country-specific lists,
and their duration must not exceed ten years in principle.

1.7 Conditional Granting of Market Access and National Treatment
The GATS is a very flexible agreement that allows each Member to adjust the conditions of market
entry and participation to its sector-specific objectives and constraints. Two sets of legal obligations
governing, respectively, Market Access and National Treatment are relevant in this context. As
already noted, Members are free to designate the sectors, and list them in their schedules of
commitments, in which they assume such obligations with regard to the four modes of supply.
Moreover, limitations may be attached to commitments in order to reserve the right to operate
measures inconsistent with full market access and/or national treatment.

The market access provisions of GATS, laid down in Article XVI, cover six types of restrictions that
must not be maintained in the absence of limitations. The restrictions relate to

(a) the number of service suppliers

(b) the value of service transactions or assets

(c) the number of operations or quantity of output

(d) the number of natural persons supplying a service

(e) the type of legal entity or joint venture
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(f) the participation of foreign capital

These measures, except for (e) and (f), are not necessarily discriminatory, i.e. they may affect national
as well as foreign services or service suppliers. The operation of the quota-type measures falling
under (a) to (d) may be made contingent on an economic needs tests (ENT).

National treatment (Article XVII) implies the absence of all discriminatory measures that may modify
the conditions of competition to the detriment of foreign services or service suppliers. Again,
limitations may provide cover for inconsistent measures, such as discriminatory subsidies and tax
measures, residency requirements, etc. It is for the individual Member to ensure that all potentially
relevant measures are listed; Article XVII does not contain a typology comparable to Article XVI.
(Examples of frequently scheduled national treatment restrictions are given in Attachment 1 to
document S/L/92.) The national treatment obligation applies regardless of whether or not foreign
services and suppliers are treated in a formally identical way to their national counterpart. What
matters is that they are granted equal opportunities to compete.

The purpose of commitments, comparable to tariff concessions under GATT, is to ensure stability and
predictability of trading conditions. However, commitments are not a straitjacket. They may be
renegotiated in exchange for compensation of affected trading partners (Article XXI); and there are
special provisions that allow for flexible responses, despite existing commitments, in specified
circumstances. Under Article XIV, for example, Members may take measures necessary for certain
overriding policy concerns, including the protection of public morals or the protection of human,
animal or plant life or health. However, such measures must not lead to arbitrary or unjustifiable
discrimination or constitute a disguised restriction to trade. If essential security interests are at stake,
Article XIVbis provides cover. Article XII allows for the introduction of temporary restrictions to
safeguard the balance-of-payments; and a so-called prudential carve-out in financial services permits
Members to take measures in order, inter alia, to ensure the integrity and stability of their financial
system (Annex on Financial Services, para. 2).

Commitments must not necessarily be complied with from the date of entry into force of a schedule.
Rather, Members may specify in relevant part(s) of their schedule a timeframe for implementation.
Such "phase-in commitments" are as legally valid as any other commitment.

2. MAIN BUILDING BLOCKS: AGREEMENT, ANNEXES AND SCHEDULES
2.1 Unconditional General Obligations
Each Member has to respect certain general obligations that apply regardless of the existence of
specific commitments. These include MFN treatment (Article II), some basic transparency provisions
(Article III), the availability of legal remedies (Article VI:2), compliance of monopolies and exclusive
providers with the MFN obligation (Article VIII:1), consultations on business practices (Article IX),
and consultations on subsidies that affect trade (Article XV:2). In several cases, the same Article
contains both unconditional and conditional obligations.

Most-Favoured-Nation Treatment

As already mentioned before, the MFN principle applies across all sectors and all Members. However,
under the Annex on Article II Exemptions, there is a possibility for Members, at the time of entry into
force of the Agreement (or date of accession), to seek exemptions not exceeding a period of ten years
in principle. Some 90 Members currently maintain such exemptions, which are mostly intended to
cover trade preferences on a sectoral or modal basis between two or more Members. The sectors
predominantly concerned are road transport and audiovisual services, followed by maritime transport
and banking services.
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The Annex on Article II Exemptions provides for a review of all existing measures that had been
granted for periods of more than five years. The review is intended to examine whether the conditions
that led to the creation of the exemptions still prevail. Three reviews have been conducted thus far,
and the fourth one will be launched no later than the end of 2016.

More importantly, the Annex also requires that MFN exemptions be subject to negotiation in any
subsequent trade round. Concerning the current Round, the Hong Kong Ministerial Declaration of
December 2005 commits Members to removing or reducing their exemptions substantially and to
clarifying the scope and duration of remaining measures.

Transparency

Under Article III, each Member is required to publish promptly "all relevant measures of general
application" that affect operation of the Agreement. Members must also notify the Council for Trade
in Services of new or changed laws, regulations or administrative guidelines that significantly affect
trade in sectors subject to Specific Commitments. These transparency obligations are particularly
relevant in the services area where the role of regulation as a trade protective instrument and/or as a
domestic policy tool tends to feature more prominently than in most other segments of the economy.

Members also have a general obligation to establish an enquiry point to respond to requests from
other Members. Moreover, pursuant to Article IV:2, developed countries (and other Members to the
extent possible) are to establish contact points to which developing country service suppliers can turn
for relevant information.


Domestic Regulation

Under Article VI:2, Members are committed to operating domestic mechanisms (judicial, arbitral or
administrative tribunals or procedures") where individual service suppliers may seek legal redress. At
the request of an affected supplier, these mechanisms should provide for the "prompt review of, and
where justified, appropriate remedies for, administrative decisions affecting trade in service.

Monopolies

Article VIII:1 requires Members to ensure that monopolies or exclusive service providers do not act in
a manner inconsistent with the MFN obligation and commitments. Article XXVIII(h) specifies, in
turn, that a "monopoly supplier" is an entity that has been established by the Member concerned,
formally or in effect, as the sole supplier of a service.

Business Practices

Article IX refers to business practices other than those falling under the monopoly-related provisions
of Article VIII that restrain competition and thereby restrict trade. The Article requires each Member
to consult with any other Member, upon request, with a view to eliminating such practices.

Subsidies

Members that consider themselves adversely affected by subsidies granted by another Member may
request consultations under Article XV:2. The latter Member is called upon to give "sympathetic
consideration" to such requests.

2.2 Conditional General Obligations
A second type of general obligations applies only to sectors listed in a Member's schedule of
commitments.
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Domestic Regulation

Pursuant to Article VI:1, measures of general application are to be administered "in a reasonable,
objective and impartial manner". If the supply of a scheduled service is subject to authorization,
Members are required to decide on applications within a reasonable period of time (Article VI:3).

Article VI:5 seeks to ensure that specific commitments are not nullified or impaired through
regulatory requirements (licensing and qualification requirements, and technical standards) that are
not based on objective and transparent criteria or are more burdensome than necessary to ensure
quality. The scope of these provisions is limited, however, to the protection of reasonable expectations
at the time of the commitment. Article VI:4 mandates negotiations to be conducted on any necessary
disciplines that, taking account of the above considerations, would prevent domestic regulations from
constituting unnecessary barriers to trade. These negotiations, which were launched after the
completion of the Uruguay Round, have since been integrated into the services negotiations under the
DDA.

Article VI:6 requires Members that have undertaken commitments on professional services to
establish procedures to verify the competence of professionals of other Members.

Monopolies

The GATS does not forbid the existence of monopolies or exclusive service suppliers per se (Article
VIII). However, as noted above, government-mandated monopolies or exclusivity arrangements are
subject to the unconditional MFN obligation. Moreover, under Article VIII:2, Members are required
to prevent such suppliers, if these are also active in sectors beyond the scope of their monopoly rights
and covered by specific commitments, from abusing their position and act inconsistently with these
commitments.

In addition, Article VIII:4 requires Members to report the formation of new monopolies to the
Council for Trade in Services if the relevant sector is subject to specific commitments. The provisions
of Article XXI (Modification of Schedules, see following section) apply.

Payments and Transfers

GATS Article XI requires that Members allow international transfers and payments for current
transactions relating to specific commitments. It also provides that the rights and obligations of IMF
Members, under the Articles of Agreement of the Fund, shall not be affected. This is subject to the
proviso that capital transactions are not restricted inconsistently with specific commitments, except
under Article XII (see below) or at the request of the Fund. Footnote 8 to Article XVI further
circumscribes Members' ability to restrict capital movements in sectors where they have undertaken
specific commitments on cross-border trade and commercial presence.

2.3 Other General Provisions
Economic Integration Agreements

Like GATT (Article XXIV) in merchandise trade, the GATS also has special provisions to exempt
countries participating in integration agreements from the MFN requirement. Article V permits any
WTO Member to enter into agreements to further liberalize trade in services on a bilateral or
plurilateral basis, provided the agreement has "substantial sectoral coverage" and removes
substantially all discrimination between participants. Recognizing that such agreements may form part
of a wider process of economic integration well beyond services trade, the Article allows for the
above conditions to be applied in this perspective. It also provides for flexibility in the event of
developing countries being parties to such agreements.
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While Economic Integration Agreements must be designed to facilitate trade among participants,
Article V also requires that the overall level of barriers is not raised vis--vis non-participants in the
sectors covered. Moreover, should parties to an agreement intend to withdraw or modify the
commitments they had scheduled under the GATS, appropriate compensation must be negotiated with
the Members affected. Such situations may arise, for example, if the new common regime in a sector
is modelled on the previous regime of a more restrictive participating country.


Article Vbis relates to, and provides similar legal cover for, agreements on labour markets integration.
The main condition is that citizens of the countries involved are exempt from residency and work
permit requirements.

Recognition

Notwithstanding the MFN requirement, Article VII of the GATS provides scope for Members, when
applying standards or granting licenses, certificates, etc., to recognize education and other
qualifications a supplier has obtained abroad. This may be done on an autonomous basis or through
agreement with the Member concerned. However, recognition must not be exclusive, i.e. other
Members are to be afforded an opportunity to negotiate their accession to agreements or, in the event
of autonomous recognition, to demonstrate that their requirements should be recognized as well.
Article VII:3 requires that recognition not be applied as a means of discrimination between trading
partners or as a disguised trade restriction.

Exceptions

Part II of the GATS (General Obligations and Disciplines) further contains exception clauses for
particular situations. Regardless of relevant GATS obligations, Members are allowed in specified
circumstances to restrict trade in the event of serious balance-of-payments difficulties (Article XII) or
of health and other public policy concerns (Article XIV), or to pursue essential security interests
(Article XIVbis).

2.4 Specific Commitments
In addition to respecting the general obligations referred to above, each Member is required to assume
specific commitments relating to market access (Article XVI) and national treatment (Article XVII) in
designated sectors. The relevant sectors as well as any departures from the relevant obligations of
Articles XVI and XVII are to be specified in the Member's Schedule of Commitments.

Article XVI (Market Access) and XVII (National Treatment) commit Members to giving no less
favourable treatment to foreign services and service suppliers than provided for in the relevant
columns of their Schedule. Commitments thus guarantee minimum levels of treatment, but do not
prevent Members from being more open (or less discriminatory) in practice; the MFN requirement
must be respected, of course.

At first sight, it may be difficult to understand why the national treatment principle under the GATS is
far more limited in scope - confined to scheduled services and subject to possible limitations than
under the GATT where it applies across the board. The reason lies in the particular nature of services
trade. Universal national treatment for goods does not necessarily imply free trade. Imports can still
be controlled by tariffs which, in turn, may be bound in the country's tariff schedule. By contrast,
given the impossibility of operating tariff-type measures across large segments of services trade, the
general extension of national treatment could in practice be tantamount to providing free access. And
virtually no Member may be ready to fully liberalize services trade across all sectors and modes of
supply.

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Additional Commitments

Members may also undertake additional commitments with respect to measures not falling under the
market access and national treatment provisions of the Agreement. Such commitments may relate to
the use of standards, qualifications or licenses (Article XVIII). Additional commitments are
particularly frequent in the telecommunications sector where they have been used by some 70
Members to incorporate into their schedules certain competition and regulatory (self-)disciplines.
These disciplines are laid out in a so-called Reference Paper, which an informal grouping of Members
had developed during the extended negotiations in this sector.

Content of Schedules

Article XX requires each Member to submit a schedule of commitments, but does not prescribe the
sector scope or level of liberalization. Thus, while some Members have limited their commitments to
less than a handful of sectors, others have listed several dozens.

Further, the Article specifies some core elements to be covered in each Member's schedule. It also
provides that the schedules form "an integral part" of the GATS itself.

Modification of Schedules

Article XXI provides a framework of rules for modifying or withdrawing specific commitments. The
relevant provisions may be invoked at any time after three years have lapsed from the date of entry
into force of a commitment. (In the absence of an emergency safeguard mechanism, which is still
under negotiation, this waiting period is reduced to one year under certain conditions). It is thus
possible for Members, subject to compensation, to adjust their commitments to new circumstances or
policy considerations. At least three months' notice must be given of the proposed change. The
compensation to be negotiated with affected Members consists of more liberal bindings elsewhere that
"endeavour to maintain a general level of mutually advantageous commitments not less favourable to
trade" than what existed before. Application must be on an MFN basis.

Should no agreement be reached, Article XXI allows for arbitration. If the arbitrator finds that
compensation is due, the proposed changes in commitments must not be put into effect until the
compensatory adjustments are made. Otherwise, in the event that the arbitrator's findings are ignored,
affected countries have the right to retaliate by withdrawing commitments.

In 1999, the Council for Trade in Services enacted detailed procedures for the modification of
schedules pursuant to Article XXI (document S/L/80). Improvements to schedules, i.e. inscription of
new sectors or removal of existing limitations, are subject to more streamlined procedures, laid down
in document S/L/84.

2.5 How Schedules are Structured
As noted above, the obligations of any WTO Member under GATS consist of the provisions of the
Agreement and its Annexes as well as the specific commitments contained in the national schedule.
The schedule is a relatively complex document, more difficult to read than a tariff schedule under
GATT. While the latter, in its simplest form, lists one tariff rate per product, a schedule of
commitments contains at least eight entries per sector: the commitments on market access and
national treatment with regard to the four modes of supply.

The services schedule of "Arcadia", an imaginary WTO Member, displays the normal four-column
format (Box B). While the first column specifies the sector or sub-sector concerned, the second
column sets out any limitations on market access that fall within the six types of restrictions
mentioned in Article XVI:2. The third column contains any limitations that Arcadia may want to
place, in accordance with Article XVII, on national treatment. A final column provides the
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opportunity to undertake additional commitments as envisaged in Article XVIII; it is empty in this
case.
Any of the entries under market access or national treatment may vary within a spectrum whose
opposing ends are full commitments without limitation ("none") and full discretion to apply any
measure falling under the relevant Article ("unbound"). The schedule is divided into two parts. While
Part I lists "horizontal commitments", i.e. entries that apply across all sectors that have been
scheduled, Part II sets out commitments on a sector-by-sector basis.

Arcadia's horizontal commitments under mode 3, national treatment, reserve the right to deny foreign
land ownership. Under mode 4, Arcadia would be able to prevent any foreigner from entering its
territory to supply services, except for the specified groups of persons. Within the retailing sector,
whose definitional scope is further clarified by reference to the United Nations provisional Central
Product Classification (CPC), commitments vary widely across modes. Most liberal are those for
mode 2 (consumption abroad) where Arcadia is bound not to take any measure under either
Article XVI or XVII that would prevent or discourage its residents from shopping abroad.

Entries into schedules should remain confined to measures incompatible with either the market access
or national treatment provisions of the GATS and to any additional commitments a Member may want
to undertake under Article XVIII. Schedules would not provide legal cover for measures inconsistent
with other provisions of the Agreement, including the MFN requirement under Article II or the
obligation under Article VI:1 to reasonable, objective and impartial administration of measures of
general application. MFN-inconsistent measures, that have not been included in the relevant list, need
to be rescinded and the same applies to any inconsistencies with Article VI. The trade-impeding
effects associated with non-discriminatory domestic regulation qualification requirements for
teachers, lawyers, or accountants; minimum capital requirements for banks; mandatory liability
insurance for doctors; etc. do not call for scheduling per se. As noted before, the Agreement clearly
distinguishes between, on the one hand, trade liberalization under specific commitments and, on the
other hand, domestic regulation for quality and other legitimate policy purposes. By the same token,
there is no need to schedule access restrictions, such as sales bans on arms or pornographic material
and the like, that fall under the General Exceptions of Article XIV or prudential measures aimed to
ensure the stability and integrity of the financial services sector.

Box B: Sample Schedule of Commitments: Arcadia

Modes of supply: (1) Cross-border supply; (2) Consumption supply; (3) Commercial presence; (4) Presence of natural
persons
Sector or sub-sector

Limitations on market access Limitations on national
treatment
Additional commitments

I. HORIZONTAL COMMITMENTS
ALL SECTORS
INCLUDED
IN THIS SCHEDULE

(4) Unbound, other than for
(a) temporary presence, as intra-
corporate transferees, of essential
senior executives and specialists
and
(b) presence for up to 90 days of
representatives of a service
provider to negotiate sales of
services.
(3) Authorization is required for
acquisition of land by foreigners.

II. SECTOR-SPECIFIC COMMITMENTS
4. DISTRIBUTION
SERVICES

C. Retailing services
(CPC 631, 632)

(1) Unbound (except for mail
order: none).
(2) None.
(3) Foreign equity participation
limited to 51 per cent.
(4) Unbound, except as indicated
in horizontal section.
(1) Unbound (except for mail
order: none).
(2) None.
(3) Investment grants are available
only to companies controlled by
Arcadian nationals.
(4) Unbound.

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3. A CLOSER LOOK AT DOMESTIC REGULATION
3.1 Purpose and Effects of Regulation
As noted before, the GATS makes a clear distinction between domestic regulation and measures
subject to trade liberalization. On the one hand, the Agreement explicitly recognizes the continued
right (and, possibly, the need) of Members to enforce domestic policy objectives through regulation.
On the other hand, it promotes the objective of progressive liberalization, consisting of expanding
and/or improving existing commitments on market access and national treatment.

Effective regulation or re-regulation can be a pre-condition for liberalization to produce the
expected efficiency gains without compromising on quality and other policy objectives. For example,
the opening of a hitherto restricted market may need to be accompanied by the introduction of new
licensing mechanisms and public service obligations for quality and social policy reasons. Since many
services contracts involve customized, not yet existing products (medical intervention, legal advice,
etc.), the need for regulatory protection is particularly evident.

It is thus widely understood that regulatory measures are necessary to correct market distortions,
minimise externalities and information problems, ensure appropriate access to and supply of essential
services, and address income-related and other inequalities.
Examples of public policy objectives that might require regulatory support:

Equitable access, regardless of income or location, to a given service
Consumer protection (including through information and control)
Job creation in economically depressed regions
Labour market integration of disadvantaged persons
Reduction of environmental impacts
Macroeconomic stability
Avoidance of market dominance and anti-competitive conduct
Avoidance of tax evasion, fraud, etc.

Governments remain free under the GATS to pursue such policy objectives even in sectors where they
have undertaken full commitments on market access and national treatment. Nevertheless, while
exercising their right to regulate, it may be in Members' common interest to reduce excessive
diversity, simplify/clarify cumbersome or opaque criteria, and curtail administrative "red-tape".
1


3.2 Disciplines on Domestic Regulation
Because of the importance of the domestic regulatory environment as a context for trade, the Council
for Trade in Services has been given a particular negotiating mandate in Article VI:4. It allows the
Council to develop, in appropriate bodies, any necessary disciplines to prevent domestic regulations
(qualification requirements and procedures, technical standards, and licensing requirements and
procedures) from constituting unnecessary barriers to trade. The Working Party on Domestic
Regulation (WPDR) has been established for that purpose.

The disciplines envisaged under Article VI:4 are intended to ensure that domestic regulations are,
inter alia:

a) based on objective and transparent criteria, such as competence and the ability to supply the
service;


1
For a broader discussion see document S/WPDR/W/48 ('Regulatory Issues in Sectors and Modes of
Supply').
Page 13


b) not more burdensome than necessary to ensure the quality of the service;

c) in the case of licensing procedures, not in themselves a restriction on the supply of the service.

While it is difficult to predict the outcome of current work, there is already some sort of precedent
which may provide guidance: The Disciplines on Domestic Regulation in the Accountancy Sector
(document S/L/64), approved by the Services Council in December 1998. The relevant Council
Decision (document S/L/63) provides that the "accountancy disciplines" are applicable only to
Members who have scheduled specific commitments on accountancy. The disciplines are to be
integrated into the GATS, together with any new results the WPDR may achieve in the interim, at the
end of the current Round. A core feature of the disciplines is their focus on (non-discriminatory)
regulations that are not subject to scheduling under Articles XVI and XVII.

Measures in scheduled sectors that entail restrictions or discriminations in the sense of Articles XVI
or XVII would need to be covered by limitations.

Pending the entry into force of the disciplines under Article VI:4, Members are required not to apply
their domestic regulations in a way that would: nullify or impair specific commitments; be
incompatible with the three above criteria; and could not have reasonably been expected at the time
when the relevant commitments were made.

4. OTHER RULE-MAKING AREAS
Apart from disciplines on domestic regulations, the GATS contains additional negotiating mandates in
three rule-making areas: emergency safeguards (Article X), government procurement (Article XIII),
and subsidies (Article XV). The negotiations are conducted in the Working Party on GATS Rules
(WPGR). Although relevant work started relatively soon after the Uruguay Round, progress in all
three areas has remained limited to date.

Emergency Safeguards

Emergency safeguards in services are intended by the proponents to allow for the temporary
suspension of the commitments that Members may have assumed in individual sectors. The relevant
scenario, inspired by the mechanism in goods trade (Agreement on Safeguards), may consist of an
unforeseen surge in imports that causes, or threatens to cause, serious injury to domestic suppliers of
like or directly competitive services. Any such mechanism, should it be agreed to by Members, would
need to be based on the principle of non-discrimination. It would complement existing provisions
under the GATS that already allow for temporary or permanent departures from general obligations or
specific commitments, such as Article XII if a Member experiences serious balance of payments and
external financial difficulties; Article XIV in the event of overriding policy concerns, including
protection of life and health or of public morals; and Article XXI if a Member intends to withdraw or
modify a commitment on a permanent basis.

There are two main schools of thought among Members. One group is not convinced that such a
mechanism is desirable, given the scheduling flexibility under the GATS and the risk of undermining
the stability of existing commitments through new emergency provisions. The sceptics also point to
the scarcity of reliable trade and production data in many sectors, and the technical complexities
associated with the multi-modal structure of the GATS. In turn, the proponents expect that the
availability of safeguards in the event of unforeseeable market disruptions would encourage more
liberal commitments in services negotiations. In their view, abuse could be avoided through strict
procedural disciplines, and data problems should not be exaggerated, given the existence in many
sectors of professional associations, regulators and licensing bodies that compile relevant information.

Page 14


Government Procurement

The share of government purchases of services from postal and communication services, to
construction, transport and financial services is significant in many markets, and so are the trade
effects that may result from access restrictions. The GATS imposes no effective disciplines, however,
on governments use of such restrictions.

Article XIII provides that the MFN obligation (Article II) and any existing commitments on market
access and national treatment (Articles XVI and XVII) do not apply to the procurement of services for
governmental purposes. It is thus for the individual Member to balance the fiscal cost and structural
inefficiencies that may arise from purchasing restrictions and/or preferences with their expected
contributions to whatever policy objectives. While Article XIII provides for negotiations to be
conducted under the GATS, it does not offer further guidance.

The only current procurement disciplines under WTO provisions are those contained in the
Plurilateral Agreement on Government Procurement, whose scope is confined to a limited number of
mostly economically advanced Members. The Agreement applies to purchases of goods and services
and provides for transparency and, in specifically listed sectors, non-discrimination in the award
process among signatories.

Subsidies

Like other measures affecting trade in services, subsidies are already subject to the GATS. The
unconditional general obligations, including MFN treatment, thus apply. In scheduled sectors, these
are complemented by the national treatment obligation, subject to any limitations that may have been
inscribed, and a variety of conditional obligations. Article XV nevertheless provides for negotiations
on disciplines that may be necessary to avoid trade-distortive effects. The appropriateness of
countervailing measures shall also be addressed.

The WTO Agreement on Subsidies and Countervailing Measures Agreement was developed for
goods trade. In services, Governments may want to retain broader scope for granting subsidies in the
pursuit of social, cultural, or developmental objectives. While Article XV:1 of the GATS also
provides for an information exchange on subsidies, only limited information has been submitted to
date and Members are at pains to agree on the future course of the negotiations.

5. COMPLEXITY AS A CHALLENGE
The GATS is structurally more complex than the GATT. Among the most conspicuous differences are
the existence of four modes of supply and of two negotiable parameters, market access and national
treatment, determining the conditions of market entry and participation. This relatively complex
structure of the Agreement is intended to enable Members to accommodate sector- or mode-specific
constraints they may encounter in the scheduling process and to progressively liberalize their services
trade in line with their national policy objectives and levels of development. Complexity can thus be
viewed, in part, as a precondition for effectiveness and flexibility.

Nevertheless, national administrations, in particular in small developing countries, may harbour
doubts. From their perspective, the complexity of the Agreement implies a formidable negotiating
challenge. It not only complicates internal decision-making and consultation procedures with other
Ministries and the private sector, but commands more attention (and resources) in the interpretation of
requests received from, and the preparation of offers to be send to, trading partners.

The Agreement seeks to address such concerns. First, it expressly recognizes the situation of
developing countries and provides individual Members with "appropriate flexibility" for opening
fewer sectors and liberalizing fewer types of transactions in line with their development situation.
While these provisions in Article XIX:2 may have been intended mainly to protect developing
Page 15


countries from overly ambitious commitments that, especially in the absence of appropriate regulatory
frameworks, may cause excessive adjustment pains, they also protect from undue negotiating pressure
across too wide a range of sectors and policy areas. Moreover, Article XXV of the GATS expressly
recognizes the need for the WTO Secretariat to provide technical assistance to developing countries.
The Article needs to be read in conjunction with the emphasis repeatedly placed by Members on the
role of technical cooperation and capacity building, including in the context of the Doha and the Hong
Kong Ministerial Declarations.

6. TRADE LIBERALIZATION UNDER THE GATS: FROM DOHA TO HONG KONG
TO ?

It is commonly accepted that, as far as services are concerned, the Uruguay Round marked a
breakthrough insofar as it resulted in the creation of a completely new agreement. However, this also
implied that Members' attention was almost entirely absorbed by definitional, structural and
institutional issues, and little time and resources were left to negotiate liberalizing commitments
within the newly created framework. In turn, this might have prompted the 'founding fathers (and
mothers)' to inscribe a trade-liberalizing mandate directly into the GATS.

Pursuant to Article XIX:1, WTO Members are committed to enter into successive rounds of
negotiations, the first of which was to start "not later than five years from the date of entry into force
of the WTO Agreement". Accordingly, the negotiations commenced, with relatively little impetus,
shortly after an inconclusive WTO Ministerial Meeting in Seattle, in January 2000. Guidelines and
Procedures for the services negotiations, a two-page document (S/L/93), were approved only in March
2001, and some months later the negotiations were integrated into the wider context of the Doha
Development Agenda (DDA). Over the years, 71 initial and 31 revised offers were submitted (one
each for EC 25). Their content, in terms of new sector inclusions and improved levels of access,
remained quite shallow, however, due in part to frictions in other areas, in particular agricultural and
non-agricultural market access (NAMA).
The Hong Kong Ministerial Declaration of December 2005 reaffirmed key principles of the services
negotiations and called on Members to intensify these in accordance with the objectives, approaches
and timelines set out in an Annex (Annex C). It contained a more detailed and ambitious set of
objectives than any previous such document and envisaged that the negotiations, hitherto conducted
predominantly in a bilateral request/offer mode, be pursued on a plurilateral basis as well. The
Declaration also acknowledged that LDCs are not expected to undertake new commitments in this
Round.
In July 2008, interested Members met for an informal 'Signalling Conference' during a 'Mini-
Ministerial' in Geneva to foreshadow what they might be able to come up with in the future course of
the services negotiations. Based on subsequent statements and press reports, it appears that
participants were generally satisfied with the indications provided. Nevertheless, the Mini-Ministerial
foundered over disagreement on certain elements of the draft agricultural modalities.
The market access negotiations in services then continued at a slow pace until Easter 2011 when they
effectively came to a halt. While the mandate in Article XIX remained unchanged, the stalemate in
other areas of the DDA, in particular agriculture and NAMA, had taken its toll. More recent
discussions in services have been mainly of a conceptual and definitional nature, in the subsidiary
bodies, with a view to exploring, and adding clarity to, issues surrounding the application of the
GATS and the classification of sectors under conditions of rapid technical and regulatory change.
The concluding statement of the Eighth Ministerial Conference, in December 2011, frankly
acknowledged that the negotiations were "at an impasse". To facilitate swifter progress, Members
were called upon "to more fully explore different negotiating approaches while respecting the
principles of transparency and inclusiveness". At least one group of Members has since sought to
Page 16


explore new avenues, regularly reporting back at meetings of the Council for Trade in Services. At the
time of writing, discussions within the group were still ongoing.
In addition, acting upon previous declarations, Members decided on a waiver that allows for the
extension of preferential treatment to services and service suppliers of least-developed countries
(WT/L/847). The focus is on measures falling under Article XVI (market access), while other
measures would need to be approved by the Council for Trade in Services.


Annex
Glossary


Term/Acronym Meaning
BOP Balance of Payments
CPC United Nations Central Product Classification
CRS Computer and related Services
CTS Council for Trade in Services
DDA Doha Development Agenda
DR Domestic Regulation
DSU Dispute Settlement Understanding
EIA Economic Integration Agreement
ENT Economic Needs Tests
FTA Free Trade Agreement
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
LDCs Least-developed countries
MA Market Access
MFN Most-Favoured Nation
MRA Mutual Recognition Agreement
NT National Treatment
PTA Preferential Trade Agreement
Reference Paper Document on regulatory principles in telecommunications
RTA Regional Trade Agreement
S/L/92 Guidelines for the scheduling of specific commitments in document S/L/92
UR Uruguay Round
W/120 Services Sectoral Classification in document MTN.GNS/W/120
WPDR Working Party on Domestic Regulation

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